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.
-Last week OCC Acting Comptroller Michael Hsu spoke at the 2021 American Fintech Council Fintech Policy Summit, giving a speech entitled “Leveling Up Banking and Finance”.
-Comptroller Hsu addressed the rapidly evolving US financial services sector, particularly what has occurred during the pandemic. Hsu noted that, “[i]ncreasingly, the three cornerstones of banking—taking deposits, making loans, and facilitating payments—are being reassembled functionally and digitally outside of the bank regulatory perimeter by certain firms.” Hsu’s remarks then focused on how best to grapple with this rapid evolution and ensure that consumers remain protected and the banking system remains secure.
-Hsu emphasized the regulatory problems precipitated by these technological advancements. He focused on the resulting regulatory fragmentation that today governs fintech, neobanks, bank partnerships, and cryptocurrency, calling for more stringent regulations and greater regulatory coordination.
-Regulators are finding it difficult to apply existing laws, established on technological presumptions that may no longer hold true. Rohit Chopra (at the CFPB) and Lina Kahn (at the FTC) are grappling with the same problems, and are sending similar messages with their targeted efforts to better understand the impacts of, and better regulate big tech. The growth and future regulation of fintech should be viewed in that broader context. Nothing exists in a vacuum.
-Last week a Presidential working group consisting of the US Treasury, Federal Reserve, SEC, CFTC, FDIC and OCC, released a new report asking Congress to regulate stablecoins.
-In its report, the Working Group asks Congress to pass new laws regulating stablecoin issuers like banks, requiring that they hold specific amounts of reserves so as to ensure they can meet withdrawal demands of consumers. While the report acknowledges existing regulations that could be used to partially effectuate these ends, it identifies several gaps that the Working Group believes require new legislation.
-Public reaction to the report has been mixed. Some critics are concerned that it will take too long for Congress to act in light of the perceived systemic risk and potential consumer harm. These advocates would rather see the various agencies use existing laws to ensure consumer protection and systemic safety. On the other side of the debate, others are concerned that the proposed legislation will stunt innovation, push capital offshore, and leave the United States, and possibly the US Dollar, behind.
-Similar to our observation on the OCC Acting Comptroller’s recent remarks, we see the regulatory challenge that stablecoins (and crypto more broadly) present as grappling with the broader difficulty of applying old regulatory paradigms to new technological circumstances.
-The issue is less so a debate about regulatory north stars - i.e., consumer protection, eradication of bad actors, and system safety/soundness. Most constituencies agree on these goals, including fintech innovators. Rather, the discussion centers around what regulation can best solve for these goals in light of fundamental technological change. As we note above, nothing exists in a vacuum. Every law emerges from specific historical context and time. Has that context changed? If so, does the law need to be changed in some way to serve these ends? If so, can existing laws be adapted as written, or do they need to be modernized? If so, how do you modernize in a way that accommodates technological change and the benefits it might bring yet at the same time solving for robust consumer protection AND financial system soundness today? These are not easy questions to answer.
-As we previewed two weeks ago, last week the House Financial Services Committee Task Force on Technology held a hearing entitled, “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products”.
-There has been intense interest in Washington, DC over the rapid emergence of BNPL products during the pandemic. During this hearing House members explored a number of aspects of BNPL including credit reporting, repayment rates, interest rates, usage rates, and how this payment mechanism compares to others, including credit cards, payday lending, and earned wage access.
-The ability to repay was a specific focus of the hearing along with related credit reporting of BNPL transactions. In his opening statement, Chairman Lynch noted that many BNPL companies do not report BNPL transaction history to credit bureaus, which he described as “a missed opportunity to help consumers build creditworthiness.” Contrasting that view, one of the consumer advocate witnesses noted that while “not all the BNPL providers will pull credit to determine a consumer’s ability to pay, … those that do will also report missed payments to a credit bureau so these products can lead to damaged credit.” Penny Lee, CEO of the Financial - -Technology Association participated as a witness and noted that the FTA is actively working with credit bureaus to help them assess and analyze BNPL data:
Overall, views were split. There were dramatic differences of opinion on whether existing regulatory structures and which one(s) (e.g., credit cards, traditional consumer lending, payday lending, earned wage access, installment sales, or some other structure) are most appropriate in order to ensure consumer protection.
Some lawmakers were concerned that regulators don’t have a strong enough understanding of how these products operate and how they impact consumers’ financial lives. Their concern is that this lack of understanding could lead to consumers being more easily harmed, falling behind on payments and more easily finding themselves in debt. Other lawmakers see promise in the industry, arguing that it provides flexibility beyond that afforded by traditional credit cards and financing options.
Industry representatives that spoke at the hearing argued there are a number of regulations already in place that can be used to protect consumers. The key question they say is to better understand - using real world transactional data - how best to apply these laws. To that end, Lee urged regulators to work with BNPL market participants to better understand how these products operate, how consumers are impacted, and modernize existing regulation based on that knowledge.
Continuing the public policy thread we identify above, BNPL is yet another technology driven product that is confounding policy makers and regulators alike. The technological change that underpins BNPL, the ability to instantly provide credit on an item by item basis, is powerful. This power is challenging all constituencies to reassess their notions of how best to use the law to ensure the promise of this technological change - financial access, equity, and empowerment - actually occurs and occurs in a way that ALL consumers are robustly protected.
By Protocol, a quick access guide to all you need to know about BNPL to be the smartest person in whatever room you’re in (even if that room is at a BNPL).
Published by the Financial Technology Association (of which Truework is a founding member) a high-level summary of important facts related to BNPL products and usage.
This article - published in Protocol - asks senior leaders at a number of leading BNPL companies “*[w]hat kind of regulatory move could have the biggest effect on the BNPL market?*”