The U.S. Senate Committee on Banking (the "Committee") considered testimony from industry experts on the challenges, benefits and potential future development of FinTech.
At the hearing, Senator Mike Crapo (R-ID), Chair of the Committee, set a broad agenda. He lauded the potential for FinTech to bring improvements in the financial sector. He pointed to marketplace lending, digital payments and currencies, wealth management and insurance as areas on the front lines. He also highlighted the uncertainty and risks around data security and proper regulatory treatment.
Senator Sherrod Brown (D-OH), the ranking Democrat on the Committee, focused on data protection. He highlighted the recent breach at Equifax and the trend toward collection of increasing volumes of data that may be sensitive. Senator Brown asked for views as to how Congress can improve federal oversight of data collection and data security to protect the public. He also expressed interest in hearing how Congress can encourage FinTech innovation to facilitate community banking, cut down on red tape, and service communities that are underserved by the traditional banking system.
Eric W. Turner, a research analyst for S&P Global Market Intelligence, provided an overview of the growing impact of FinTech. He focused on digital lending, mobile payments, digital investment management, insurance technology and distributed ledger technology. According to Turner, thirteen of the largest digital lenders have originated a cumulative $68.75 billion in loans. He described the structure of this market sector and underscored the ability of digital lenders to offer competitive rates and speedy funding for small businesses. Despite the positive market impacts, Mr. Turner said that questions have arisen about the credit quality of loans offered by digital lenders. He cited the lack of clear regulation as the most significant challenge, and asserted that many FinTech companies are in favor of new regulation to create a clear framework in which to operate. Regarding mobile payment technology, Mr. Turner discussed trends in the adoption and integration of the sector with traditional banking, noting security risks as the primary challenge. These trends include potential benefits in lowered fees, but also in identified risks, including bad model assumptions leading to substantial investor losses, investor crowding into similar investments, and loss of the investor education function. Mr. Turner concluded that regulation has been unevenly applied to the sector as a whole and advocated for the introduction of clear regulatory frameworks as a means to further boost innovation.
Lawrence Evans, Financial Markets Director for the U.S. Government Accountability Office ("GAO"), considered in detail the GAO's April 2017 report on the FinTech industry. He (i) described the methodology of the report, (ii) discussed marketplace lending, mobile payments, digital wealth management and distributed ledger technology, (iii) identified potential risks (including data security, use of alternative data in credit decisions, operational risk for human error, and insufficient information for customers), (iv) noted developing trends toward partnerships with traditional service providers, creation of hybrid products, and self-regulation efforts, and (v) considered various regulatory approaches.
University of Maryland Professor Frank Pasquale expressed a number of reservations about FinTech innovation, argued against federal interventions that would effectively deregulate areas of rigorous state oversight, and advocated for federal data gathering and empowerment of agencies such as the Consumer Financial Protection Bureau and the Office of Financial Research. Professor Pasquale divided FinTech innovation into two distinct categories: "incrementalist FinTech," or the use of new data and automated decision-making to provide classic services (lending and investment advice), and "futurist FinTech," which was largely a discussion of blockchain and smart contracts. Professor Pasquale warned of the risks to borrowers of using big data in lending decisions, rebutted arguments that artificial intelligence approaches to credit underwriting are too complex to regulate, advocated for greater regulation of data brokers and argued against special bank charters by the Office of the Comptroller of the Currency. Professor Pasquale also warned of the risks of over-reliance on software code.
Commentary / Joseph V. Moreno
Senator Brown's remarks, coming on the heels of the Equifax breach which affected millions of Americans, should be read as a warning to firms that fail to protect their customers' personal information. While hacked firms may view themselves as the victim of cybercrime, it is likely they themselves will come under intense scrutiny and possibly face enforcement action if their cybersecurity measures and public disclosures are deemed to have been inadequate. Expect additional legal and regulatory efforts to continue as legislators grapple with how to address this issue at the federal level.
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