Penny Lee, a 25-year veteran of political campaigns and legislative battles and now the new head of the Financial Technology Association, has a message for federal banking agencies and Congress: “Please engage with us to craft forward-leaning regulations."
Lee says “digitally native” companies are eager to engage with policymakers to develop clear guidelines on how to operate in the rapidly evolving fields of online lending, open banking and an innovation called "buy now, pay later."
“These companies are obviously already operating in highly regulated areas,” Lee told CQ Roll Call. “And what they are trying now to say is, ‘We want to work with regulators; we want to work with members of Congress to find the right framework to guarantee certainty'" for protecting consumers while simultaneously granting people greater access to capital and financial services “in a responsible manner.”
FTA, formed in March and headed by Lee since late July, aims to be the leading organization representing growing technology-centered financial services companies. Its members include fintech data network Plaid Inc.; buy now, pay later service Afterpay Ltd; venture capital firm Ribbit Capital; and credit underwriter and financial software company Zest AI.
Buy now, pay later services allow financing of a purchase over time but at the point of sale function more like a mini-loan than a credit card. Credit cards typically require a minimum payment and charge interest if a balance is not paid in full. For consumers using buy now, pay later services, the interest is already set in full at the time of the purchase. The payback period may be weeks or months.
The nonprofit FTA’s stated mission is to educate regulators, policymakers, members of Congress and industry stakeholders on the value of technology-centered financial services. It advocates for the modernization of financial regulation to support innovation and consumer protection.
Lee draws on long-standing political experience: She was a senior aide to prominent Democrats such as former Senate Majority Leader Harry Reid, former Pennsylvania Gov. Ed Rendell, and former Democratic National Committee chairman and current Virginia gubernatorial candidate Terry McAuliffe.
The FTA and the financial technology companies it represents aren't looking to avoid oversight, Lee says.
“They are already adhering to regulations that are on the books,” she said. But because some of their products and services are so novel, the rules may need to be modernized to keep up.
FTA's heavy hitters
To help educate and convince policymakers on the need to update and refine the current regulatory framework, Lee and the FTA have assembled a powerhouse advisory board made of Washington heavy hitters. They include J. Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission; former Rep. Ben McAdams, D-Utah, who was a founding member of the House Financial Services Task Force on Financial Technology; and Jo Ann Barefoot, a former deputy comptroller of the currency and Senate Banking Committee staff member who now leads the Alliance for Innovative Regulation in Washington.
The FTA is already making its voice heard. In July, it was one of the groups that responded to a multiagency request for information on banks’ use of artificial intelligence, including machine learning, in financial services such as credit underwriting.
It said companies that responsibly build around such technologies "can ultimately offer consumers and market participants enhanced and safer products and service offerings, and expand access to financial services to consumers from traditionally underserved communities.”
As long as the enterprises are "subject to appropriate human oversight," innovation can replace inefficient, manual, costly, time-consuming and subjective processes. The public comments were sought by banking agencies — the Federal Reserve, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and National Credit Union Administration — as fintech becomes more integrated into the financial system.
Lee says FTA will be releasing a policy paper in the next few days on open banking, a broad term that covers data sharing between banks, fintech firms and nonbank payment companies. The group has said open banking “can serve as a catalyst that gives consumers, including those in underserved communities, greater access to their bank data and to additional financial products.”
Lee will run into resistance to the idea that financial technology is always a good thing for consumers.
“Some of these fintechs may have built a better mousetrap, but that doesn’t mean that they have built one that poses fewer risks to customers, investors and financial stability," said Phillip Basil, director of banking policy at Better Markets, a nonprofit focused on consumer financial issues. He said modernization and innovation can't “be smokescreens used to justify eliminating critical regulations that protect the public interest," adding that “fintechs need to be properly regulated, regardless of product or delivery system, however modern they might be.”
Another issue is the granting of federal bank charters to fintech firms. The Conference of State Bank Supervisors and the New York State Department of Financial Services both say these charters infringe on states’ authority to oversee fintechs operating within their boundaries.
Lee said FTA supports the concept of “optionality,” allowing for businesses to determine the best path forward, whether it be a national bank charter from the comptroller's office or state-issued industrial loan company license.
That's opposed by CSBS.
"We do not support institutions trying to obtain privileges of a national bank charter free of the associated obligations," a CSBS spokesperson wrote in an email to CQ Roll Call. "That is not an option which Congress has enabled. That’s arbitrage, not optionality."
A hot issue that FTA is bypassing is cryptocurrency. Lee said there are already many other organizations devoted to the regulation of digital assets, while there are other significant fintech areas, such as payments and chartering, that are just as important and haven’t gotten the attention they deserve.
“For now, we are letting the other groups take the lead on all things crypto-related,” she told CQ Roll Call.