House Financial Services Hearing Warns of Regulatory ‘Ambiguity’ Governing FinTech-FI Partnerships

Prudent regulation is needed in helping to define the risks and rewards in emerging partnerships between financial institutions and banks — but current regulatory efforts may be too vague, critics charged at a Congressional hearing held Friday (July 12).

A “field hearing” held by the House Financial Services Subcommittee on Financial Institutions and Monetary Policy — “field” hearings take place outside of Washington, D.C., and in this case was held in Kentucky — included testimony from banking and FinTech executives who noted that the partnerships have the potential to transform financial services and boost financial inclusion.

The hearing was titled ““Financial Institution-Fintech Partnerships: Leveraging Third-Party Relationships to Increase Access to Financial Services.”

Offering up examples of the ways in which technology can help foster that inclusion, Kirk Chartier, chief strategy officer at online lender Enova, said in his remarks that machine learning and analytics have enabled the company to facilitate $55 billion in loans to consumers and businesses — with significant activity serving customers with credit scores of about 600 and average personal income of $40,000 annually — as it also acts as a service provider to community banks.

But according to his testimony, “the ability to continue this pace of product innovation and improvements for our customers is hampered today. There is an increasing patchwork of state laws and regulations that are not keeping up with changes in technology, data and analytics that allow Enova to tailor credit products to individuals with lower credit scores and growing small businesses with limited assets to use as security for loans.”

The executive said that Enova’s tech platforms and data/analytics have been “independently verified through regular and recurring audits and assessments … Banks seek us out for these services to expand their lending to new populations they couldn’t otherwise lend to.”

But, he said, the “advantages for consumers and small businesses from competitively priced bank-offered loans is at risk in several states as out-of-state activists work with novel legal theories to interfere with a bank’s right to offer its products and services. This interference also creates uncertainty about the risks Enova takes on in offering services to banks, as well as making it uncertain for banks, causing many of them to avoid offering loans to riskier customers.”

And, he said, there have been examples of regulatory “overreach” by agencies, such as the Consumer Financial Protection Bureau (CFPB). Enova, he told the Committee, has urged Congress to enact the CFPB Transparency and Accountability Reform Act “to provide certainty to the agency and the industry that will allow them to work more effectively to deliver innovation and high-quality financial services to consumers and small businesses.”

Barr’s Remarks

In remarks delivered by Chairman Andy Barr, Ky.-R, the Representative noted that the joint efforts between financial institutions (FIs) and FinTechs “can allow more efficient provision of financial services to consumers and businesses of all sizes.”

But, he added, “risk management and due diligence are important,” and stressed a balance between innovation and safety. He cited arguments that the joint recommendations from the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC) and Federal Reserve may be in fact creating ambiguity for banks on assessing risk and overseeing their relationships with third parties – and which activities should be permitted (or not).

“The guidance was too vague to provide an executable roadmap discerning what activities regulators would find acceptable or not,” contended Barr, which may ultimately stifle innovation.

Mutually Beneficial Relationships

Later in the hearing, Steve Trager, executive chair of Republic Bank & Trust Company, said in his testimony that the bank offers small-dollar consumer credit products marketed and serviced by FinTech program managers, including installment and line of credit loans, as well as medical debt financing products.

Within the Banking-as-a-Service construct, he said, “each party benefits from the strengths of the other party. This is a very collaborative process and has created a great deal of innovation in the marketplace urging competitors to offer better and less expensive consumer services,” and allows Republic to offer programs on a national basis while it competes with larger FIs.

“Consumers can be assured the products offered through joint bank/FinTech programs comply with consumer protection laws including credit reporting, debt collection, privacy, and electronic funds transfers,” he said.  The FinTechs, he added, benefit from the banks’ backend infrastructure and oversight experience.

Asked by Barr how the third-party relationships help improve the operations of smaller banks, Trager said that Republic’s 47 branches serve roughly 120,000 customers that are not typically served by larger firms, but without the FinTech joint efforts, Republic would not have the reach into a client base of 3 million customers that it currently has.

Mike de Vere, CEO of AI-underpinned lender Zest AI, said in his testimony to lawmakers that “the way to increase access to equitable lending is together. While regulators can ask more of lenders and vendors when it comes to promoting transparency, fairness and compliance, we would like to ask a few things of our regulators and decision makers. We ask that you invest in ideas and visions that are built with the purpose of bringing about a collective good. We ask that our leaders promote rules that both protect people and encourage innovation. We ask that compliance and fairness become more than a box to check and that governance uplifts those pursuing fairness as an outcome, not just as a by-product.”

Karen Harbin, president and CEO of Commonwealth Credit Union, detailed that in partnering with Zest AI, as much as 83% of all consumer loan decisions have been automated, allowing the firm to compere with other lenders, having approved more than $372 million in consumer loans in the past three years, and where loan delinquency is lower than the industry metrics.

“A stringent [regulatory] stance on AI usage in the financial sector could disproportionately harm credit unions and smaller institutions while benefiting the largest incumbents,” she told the committee.

Amy Roberti, head of global policy at Stripe, said that her firm’s partnerships with banks “enable us to jointly extend the reach of financial services to underserved businesses.”

Those partnerships and data, she said, enable better underwriting of business loans. With  the loans in hand via Stripe Capital, businesses processing less than $100,000 per year saw revenue growth of 140 percentage points over their peers. Only 5.5% of Stripe Capital users had previously obtained a loan from a traditional lender.

The Stripe/bank partnerships also facilitate Stripe’s processing of $1 trillion in payment volume, equivalent to 1% of global GDP.

“We recognize the challenges in distinguishing where the bank’s role ends and a partner’s begins,” she told lawmakers. “We believe these concerns can be effectively addressed through thoughtful regulation and industry cooperation. Industry can collaborate more with regulators to increase consistency in supervisory expectations. We can help develop best practices and standards that aid examiners, banks and partners.”

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