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Vol. 10: New CFPB director faces Congress, States look to lure fintechs

Welcome to the newest 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
October 29, 2021

3 Things on Our Radar

CFPB Investigates Big Tech Use of Payment Data

-Last week the CFPB ordered a number of leading US tech companies (Amazon, Apple, Facebook, Google, PayPal, and Square) to provide information on how they use personal payment data collected on their platforms so that the “CFPB [can] better understand how these firms use [that data] and manage data access to users so the Bureau can ensure adequate consumer protection.”

-The CFPB issued these orders under its broad authority set out in the Dodd-Frank Act to “monitor for risks to consumers in the offering or provision of consumer financial products or services, including developments in markets for such products or services.” The order seeks to gather information on data harvesting, monetization, access restrictions, and consumer choice.

-We see the CFPB’s actions in this order as fact finding related to their Section 1033 rulemaking. Section 1033 in part enables many of the payment services that are subject to the recently announced payments data order. We think that part of the motivation for this order is that the CFPB is gathering information that will help inform the contours of the 1033 rule it proposes.

-The CFPB order is interesting in light of the fintech implications of Apple v. Epic Games, which we highlighted previously in our blog. The CFPB’s inquiry into access restrictions and consumer choice is particularly relevant here. As we noted in our prior blog, platform embedded payments integrations (like what the CFPB is looking at in this order) could lead to preferential treatment or exclusive access for particular methods and/or products could create conditions sufficient to give rise to “incipient” antitrust violations similar to that found by the court in Apple v. Epic. We will watch to see if the CFPB follows this line of analysis.

State Fintech Regulatory Sandboxes

-Two weeks ago North Carolina enacted a law that will allow qualifying financial technology companies to operate and receive a waiver from certain specific regulatory requirements in exchange for oversight by an “Innovation Council” consisting of members appointed by several governmental bodies, including banking regulators.

-North Carolina is the 10th State to establish this kind of program, joining Arizona, Florida, Hawaii, Kentucky, Nevada, Utah, Vermont, Wyoming, and West Virginia.

-The North Carolina law succinctly states the regulatory conundrum that their program (and others like it) are looking to solve: “Existing legal and regulatory frameworks are restricting innovation because these frameworks were established largely at a time when technology was not a fundamental component of industry ecosystems….[I]nnovators require a flexible regulatory regimen to test new products, services, and emerging technologies, such as blockchain technology.”

-In assessing applicants to the program, the Innovation Council will look at:

  • Nature of the product/service and risk to consumers
  • Consumer protection and complaint process offered by the company
  • Company business plan
  • Company management expertise
  • Criminal history related to financial or securities fraud

-Successful applicants are granted the innovation waiver for 24 months, subject to compliance with certain conditions depending on the product or service offered. This may include a commitment to limit the number of customers and/or post some sort of financial assurance.

Next Up in Congress

This week the House Financial Services Committee announced a number of interesting hearings upcoming in early November that we’ll be tracking:

On November 2, the Task Force on Technology will hold a hearing entitled, “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products”.

On November 3, the Subcommittee on Consumer Protection and Financial Institutions will hold a hearing entitled, “Cyber Threats, Consumer Data, and the Financial System”.

On November 9, the Subcommittee on Diversity and Inclusion will hold a hearing entitled, “There's No Pride in Prejudice: Eliminating Barriers to Full Economic Inclusion for the LGBTQ+ Community”.

One Big Thing

Chopra Speaks to Congress

-As we previewed two weeks ago, newly confirmed Director of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra, testified before the House Financial Services Committee and the Senate Banking Committee this past week. During the hearings Chopra shed light on likely priorities for the CFPB in the coming months.

-A wide array of high profile topics were covered during the hearings:

  • 1033 rulemaking and open banking
  • Big tech and consumer data
  • Stablecoins, crypto, and payments
  • Small business lending and the 1071 rulemaking (data collection)
  • Regulation through enforcement
  • Short-term lending
  • Credit reporting
  • Student lLoan sServicing
  • Credit access

-Chopra fielded a number of questions on the CFPB’s recently announced initiative to gather information from large tech platforms (Facebook, Google, etc.) about data harvesting and monetization, access restrictions and user choice, and compliance with consumer protection laws. Senator Sherrod Brown (D-OH), the Chairman of the Senate Banking Committee, said that he expects the CFPB will “work to prevent big tech companies from wreaking havoc on the financial system.”

-Chopra expressed concern with the ability of these companies to control and limit competition through their platforms, especially as it relates to the payment landscape. Chopra noted that in addition to the companies that received the orders, the CFPB intends to study the practices of Chinese tech giants including WeChat and Alipay. Chopra tied the Bureau’s effort on big tech to a likely proposed rule implementing Section 1033 of the Dodd-Frank Act. Chopra believes Section 1033 can help facilitate additional competition, ensure consumers have greater choice, while maintaining sufficient privacy protections.

-Chopra was pressed by a number of members of Congress (House and Senate) on the idea of the CFPB regulating through enforcement and potentially targeting smaller companies with limited compliance resources. In response, Chopra said he intends to “move toward a system where the law and the rules are easy to understand, easy to follow, easy to enforce.” Chopra said he is concerned about what he believes is a two-tiered system where federal agencies treat some small businesses more harshly, while large companies that may be repeat offenders are less impacted by enforcement actions.

-On the topic of a government-run credit bureau (an idea endorsed by then-candidate Biden), Chopra demurred, saying such an idea “would be an enormous undertaking” and that he is much more focused on whether credit reporting agencies are “investigating disputes” that new types of CRAs are adhering to the law.

-When asked about what the CFPB is doing to combat bias in artificial intelligence and machine learning, Chopra said that he is committed to holding accountable actors who use discriminatory algorithms. According to Chopra, it is a myth that algorithms can take the bias out of a transaction and that in reality algorithms can make that bias “go on steroids.” The CFPB recently joined the Department of Justice on a new initiative to combat redlining that (among other priorities) will target “discriminatory algorithms.”

What We’re Reading

Citibank Innovation Chief Supports Open Banking

An American Banker interview with Citibank Chief Innovation Officer, Vanessa Colella; Colella discusses her views on technology change and adoption in banking, noting that “100% of big banks understand that we need to partner with fintech and tech companies.”

FTA View on Bank-Fintech Partnerships

The Financial Technology Association’s (of which Truework is a member) response to the Federal Reserve, FDIC and OCC request for comment on proposed guidance for banks to manage third-party relationships.

State of Fintech Q3 2021

Published by CB Insights, a good snapshot of the current fintech market, with particular emphasis on investment trends and market highlights in payments, banking, digital lending, and the emerging SMB fintech space.

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