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From Banking and Finance Law Daily, October 1, 2018

House subcommittee examines technological innovation opportunities in financial industry

By Colleen M. Svelnis, J.D.

The rapid pace of technological expansion in financial technology (FinTech) has brought both new opportunities and challenges for the regulatory structure. The House of Representatives Financial Services Subcommittee on Financial Institutions and Consumer Credit has held a hearing to examine new opportunities for technological innovation to develop new products and services consumers across the financial lobe need. The hearing, entitled "Examining Opportunities for Financial Markets in the Digital Era," heard witness testimony examining the current regulatory landscape, including the need to amend or modernize the regulatory framework to use FinTech to deliver new products and services to consumers. Subcommittee Chair Blaine Luetkemeyer (R-Mo) stated that "We can’t address innovation and growth without addressing the security of" consumer data.

The hearing also expanded on the recommendations of a Treasury Department report examining innovations in financial technology that was issued in July 2018. The report identified prospective "improvements to the regulatory landscape" to enable U.S. firms to adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency. The report made over 80 recommendations, including setting a national data security and breach notification standard. The recommendations are designed to: embrace the efficient and responsible use of consumer financial data and competitive technologies; streamline the regulatory environment to foster innovation and avoid fragmentation; modernize regulations for an array of financial products and activities; and facilitate experimentation to promote innovation (see Banking and Finance Law Daily, July 31, 2018).

Regulatory structure needs updating. Testifying at the hearing, Aaron Cutler, a partner at Hogan Lovells LLP, discussed the Treasury report. Cutler urged Congress to address the recommendations in the Treasury's report, stating that many of the FinTech products on the market provide consumers with "greater access, choice, and empowerment for financial planning and decision making." According to Cutler, the United States will miss out on opportunities to realize the benefits from innovative FinTech development "if it fails to take measures to improve its current regulatory structure."

Scott B. Astrada, Director of Federal Advocacy for the Center for Responsible Lending, testified about opportunities and challenges posed by FinTech in the financial services marketplace, the current regulatory and consumer protection landscape, and "the need to ensure that emerging products and players best serve consumers rather than trapping them in unaffordable or abusive debt." Astrada stressed that innovation of product delivery is distinct from innovation of product. According to Astrada, the products that are being utilized and offered as expanding access to credit and financial growth through financial technology are still the same products and services, like loans and mortgages, that have always been offered. He urged Congress to "ask the question ‘is this a traditional product or service in new packaging?’ and use that as a baseline in determining how ensure that appropriate consumer protections are applied."

Dion Harrison, Director of Bank Products at Elevate, a provider of tech-enabled credit products for non-prime consumers, testified about his experience in this emerging sector. According to Harrison, in order to build a safer, more inclusive financial system, the industry should focus on three guiding principles:

  • regulation should be pro-consumer and enable innovation;
  • encourage partnerships between banks and FinTech companies; and
  • embrace diversity.

Harrison expressed confidence that the opportunity and promise of FinTech will continue. He stated that FinTech companies are delivering safer, more transparent, and more convenient financial services and products to meet consumers' demands for simple solutions that address common yet complex financial situations of American families." According to Harrison, FinTech could "empower smaller community banks without expertise in underwriting the non-prime consumer to reach a broader consumer base and help non-prime consumers gain more control over their financial circumstances." Harrison concluded that the industry should "continue to be regulated in a manner in which spurring innovation is the guiding principle, and consumer protection remains the top priority."

T. Michael Price, President and Chief Financial Officer of First Commonwealth Financial Corporation, testified on behalf of the Pennsylvania Bankers Association, stating that new technologies are "quickly changing the ways all businesses connect with their customers." Price stated that using FinTech "can lower costs, making financial services more affordable for consumers across the country. It provides added convenience and efficiency, giving customers the ability to manage their finances day or night from the palm of their hand. Technology can also lower the fixed costs for providing credit to small businesses, leading to greater capital access that spurs economic growth." Price stated that innovation in financial services has the ability to benefit consumers across the country and drive growth in our economy.

Price said that banks have always embraced innovation, but warned that technology is not a replacement for a community presence. "We must not lose sight of the tremendous value community banks offer to their local communities. Additionally, Price stated that banks must ensure "that the benefits of innovation are delivered responsibly so that customers receive consistent treatment regardless of their provider."

Stuart Rubinstein, President of Fidelity Wealth Technologies, focused his testimony on financial data aggregation services and ways to make data sharing safer and more secure. Rubinstein stated that the cybersecurity environment has significantly changed over time and asserted his company’s responsibility "to protect the very sensitive personal financial data and assets of our more than 30 million customers from misuse, theft, and fraud." According to Rubinstein, current data aggregation practices make this challenging, because they rely on consumers providing their financial institution log-in credentials to third parties.

Rubinstein discussed ideas for creating better data sharing solutions and continuing challenges. He noted that the Treasury report recommends that Congress enact a federal data breach notification law that would preempt state data breach laws "In order to reduce the complexity of complying with 50 unique state data breach notification laws."

Companies: Center for Responsible Lending; Elevate; Fidelity Wealth Technologies; First Commonwealth Financial Corporation; Hogan Lovells LLP; Pennsylvania Bankers Association

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