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Vol. 3: Biden's Executive Order, Emerging Privacy Laws, Fintech Boom

Welcome to the third installment of Fintech News and Notes! A thoughtful summary of the most important trends and updates across fintech, written by our very own Eric Weingarten.

Eric Weingarten
Published
July 22, 2021
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3 Things On Our Radar:

Emerging Privacy Laws

-The passage last year of the California Privacy Rights Act spawned a number of similar comprehensive State consumer privacy laws. Virginia’s Consumer Data Protection Act was passed and signed into law in March 2021, Colorado passed the Colorado Privacy Act in June 2021 (signed into law early July). Ohio just introduced similar legislation last week.

-While the details and divergent approaches of these various laws are interesting and worth closer inspection on their own, we find the broader, bi-partisan privacy trends more pragmatically instructive. Privacy matters to people, increasingly so, regardless of party lines. States are acting to protect their consumers where the Federal government has not. While there are a variety of Federal laws that address privacy in specific contexts - e.g., the Federal Trade Commission Act, the Fair Credit Reporting Act, the Graham-Leach-Bliley Act and the Health Insurance Portability and Accounting Act - no one comprehensive privacy scheme exists at the Federal level.

-These are the gaps which States are seeking to address with their comprehensive schemes. This leaves a patchwork of laws that - while each well intended on its own - add to business compliance costs in light of their divergences. While comprehensive Federal data privacy legislation has been proposed in the past, there is some belief in Washington that these State challenges may finally incentivize Federal legislators to act. It will be interesting to see how these efforts take into consideration and potentially harmonize the variety of other Federal laws that already address consumer privacy and data rights (including Section 1033 of the Dodd-Frank Act). More to come here, no doubt.

US Legislators Tackle Privacy in Digital Verification

-Accelerated by the COVID-19 pandemic, transactions of all sorts are rapidly moving on-line, from the mundane (paying the babysitter), the convenient (buying a pizza), the innovative (defi investing), the vital (sending money to relatives in another country), to the complex (applying for a mortgage). In all of these transactions verification of identity is a fundamental component to a product, whether to comply with the law, fight fraud, or assist in account recovery. In a marketplace where the best consumer experience increasingly wins, it is unacceptable if that verification creates any transactional friction. In order to support the otherwise instantaneous nature of these transactions, a variety of new digital methods of identity verification have emerged.

-On July 16 the House Financial Services Committee held a hearing investigating this trend and how consumer data privacy is being impacted. In the hearing the Committee focused their inquiry on: the use of AI in financial services, identity profiling, authentication, issues of privacy and AI bias, the potential for inclusion based on use of digital identification, mobile driver’s licenses, use of blockchain technology, and recent proposals and regulatory activity on digital identity verification.

-While there was broad agreement on the value of digital identity to assist in fraud reduction, there was no alignment on which specific technology or system might be favored in any legislative solution (including the currently proposed bipartisan supported Improving Digital Identity Act). The committee was split on the potential value of blockchain and AI. There were starkly contrasting views on whether government or private industry should direct establishment of standards and/or be responsible for administering any corresponding system. Questions were raised on whether consent-based frameworks are sufficient on their own to adequately protect consumer interests. All that said, there was recognition from both sides of the aisle for the need to build a digital identity framework that operates like necessary infrastructure upon which the economy can grow.

Exponential Investment in Fintech

-Investment in fintech companies in the first half of 2021 has been frenzied to say the least. There are a number of great articles that summarize the level of investment, the types of companies, and the variety of investors making these investments (see the Economist article linked above for an example). What is most interesting to us about this development is that it appears to be validating the assertion that one day - likely sooner than we all think - every company will become a fintech company. As digital commerce simply becomes commerce, digital payments just payments, financing just a checkout flow, products that deftly integrate more and more of these functions seamlessly within one simple easy to use interface are more likely to win. Consumers have increasingly come to expect and prefer products that integrate on-demand and instant financial functionality. We’ve seen a number of examples (e.g., food ordering, shopping, mortgages) where consumers will choose based on reduced financial friction to close as opposed to pure cost considerations. In that world “fintech” just becomes “tech” and soon just an integral part of doing business in any product market.

-No action item here other than - watch this happen, because it already is happening. How does it impact you, your business, your customers, or your constituencies? How will this change how you view and interact with the marketplace?

One Big Thing

President Biden’s Executive Order Promoting Competition

-TLDR: The administration is making a concerted and coordinated effort to make financial services markets more competitive and protect consumers.

-Per the order, the White House established a "Competition Council", setting out a "whole-of-government competition policy" seeking to better coordinate the various agencies that handle competition related issues and the disparate tools of regulation (e.g., review, enforcement, litigation, rule making, legislation).

-We see the Competition Council as the difference maker because competition policy typically is difficult to implement in light of the highly dispersed channels in which it occurs. This is no more demonstrated by the number of markets and agencies addressed by the executive order. Attempting to coordinate these activities centrally signals the administration’s seriousness with which it intends to follow through on them.

-The order threads together a fascinating three-dimensional narrative about the current state of financial services markets in the US, how we got there, and how the administration intends to fix the situation. -The order argues that multiple decades of corporate consolidation (not just in financial services but throughout the US economy) - and the policies that have allowed this to occur - have resulted in higher consumer costs, fewer choices, increased switching costs, and lower access.

-The order is emphatically pro-small business and seeks to promote the growth of small businesses throughout the US economy using a variety of procompetitive regulatory tools.

-With respect to financial services specifically, the order:

  1. References "steep and often hidden fees" that consumers pay in the financial services sector due to industry consolidation;
  2. Notes that "excessive [bank] consolidation raises costs for consumers; restricts credit for small businesses, and harms low-income communities"; and
  3. Identifies that "[e]ven where a customer has multiple options, it is hard to switch banks partly because customers cannot easily take their financial transaction history data to a new bank, [which] increases the cost of the new bank extending you credit."

-The administration proposes four workstreams, which we expect to be implemented in concert:

  1. Merger reviews under the bank holding company act, including reviewing (and possibly overturning) prior mergers
  2. Implementation of strong data portability rules under Dodd-Frank Section 1033
  3. CFPB enforcement of existing laws prohibiting unfair, deceptive, or abusive acts or practices in consumer financial products or services
  4. Treasury Department assessment of how non-traditional (including tech) new market entrants may promote competition in financial services

What We’re Reading

-Financial Services Unchained - one the better deep-dives we’ve read on the current status of open banking efforts around the world, including market analysis, emerging products and services, customer preferences, competitive strategies, and predictions.

-How a Privacy Layer Can Fix the Web - we believe that decentralization will be a transformative force that re-empowers individuals in a variety of ways, particularly in finance. Adjacent, but absolutely related to this impact is how decentralization will transform data privacy. This article sets out how that will happen.

-Payroll Data + Fintech - a good overview of the evolving payroll data marketplace and how it is rapidly becoming one of the leading edges of fintech.

-Stripe: Thinking Like a Civilization - Stripe is inspirational to us here at Truework in a number of ways, particularly their developer-friendly products, uncanny ability to solve acute customer problems with ease of use, and their high-EQ company culture. This article is a fascinating deep dive into a next generation tech leader.

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