KT Fintech Blog

The KT Fintech Blog provides insights into how the emergence of fintech is fundamentally changing virtually every aspect of the financial services landscape and how traditional businesses navigate this rapidly evolving industry.

Category: Mobile Banking

Posted on Wednesday, December 13 2017 at 8:25 am by
Where Do Consumers Fit in the Fintech Stack?

Written by Eamonn K. Moran

Federal Reserve Board Governor Lael Brainard recently delivered a speech entitled “Where Do Consumers Fit in the Fintech Stack?” at “FinTech Risks and Opportunities: An Interdisciplinary Approach,” a conference sponsored by the University of Michigan.

Governor Brainard likened the new generation of fintech tools to the “financial equivalent of an autopilot.” According to Brainard, “[the powerful new fintech tools represent the convergence of numerous advances in research and technology – ranging from new insights into consumer decision making to a revolution in available data, cloud computing, and artificial intelligence (AI). They operate by guiding consumers through complex decisions by offering new ways of looking at a consumer’s overall financial picture or simplifying choices, for example with behavioral nudges.”

While she highlighted how fintech tools offer the potential to help consumers manage their “increasingly complicated financial lives,” she cautioned about the risks posed that will need to be carefully managed as the marketplace matures. “Consumers need to know and decide who they are contracting with, what data of theirs is being used by whom and for what purpose, how to revoke data access and delete stored data, and how to seek relief if things go wrong. In short, consumers should remain in control of the data they provide. In addition, consumers should receive clear disclosure of the factors that are reflected in the recommendations they receive. If these issues can be appropriately addressed, the new fintech capabilities have enormous potential to deliver analytically grounded financial services and simplified choices, tailored to the consumers’ needs and preferences, and accessible via their smartphones,” stated Brainard.

Brainard noted that consumers face complex financial choices. Given the complexity and importance of these decisions, she finds it encouraging to see the fast-growing development of “advanced, technology-enabled tools to help consumers navigate the complex issues in their financial lives.” She stated that these tools “build on important advances in our understanding of consumer financial behavior and the applications, or ‘app,’ ecosystem.” Read the rest of this entry »

Posted on Monday, September 18 2017 at 9:00 am by
Senate Banking Committee Holds Fintech Hearing

Written by Eamonn Moran

The Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Examining the Fintech Landscape” on September 12, 2017. The witnesses were: Lawrance Evans, Director, Financial Markets, U.S. Government Accountability Office (GAO); Eric Turner, Research Analyst, S&P Global Market Intelligence; and Frank Pasquale, Professor of Law, University of Maryland Francis King Carey School of Law.

The hearing focused on the opportunities fintech may bring, the various ways fintech is interacting with and impacting the financial system, how these new technologies can help Americans who are currently underserved by the traditional banking system, and the current regulatory supervision of the fintech industry. Given the recent data breaches, particular issues such as data security, data collection, and the proper regulatory treatment to ensure that consumers and the financial system are safeguarded were emphasized.

Mr. Evans’ testimony was based on the GAO’s April 2017 report that provides a high-level look at four commonly referenced fintech sub-sectors – marketplace lending, mobile payments, digital wealth management and distributive measured technology. He noted that the GAO is currently undertaking work that will support congressional efforts to strike the appropriate balance in ensuring an effective regulatory framework while not creating barriers to entry for innovative firms with “socially beneficial products.”

Mr. Turner’s testimony focused on the five key areas that his firm has identified as fintech’s impact on consumers in the financial industry today. These include digital lending, mobile payments, digital investment management, insurance technology and distributed ledger technology, which includes Blockchain.  According to Mr. Turner, “the industry is still young and challenges remain.  Regulation has been unevenly applied to the sector and in many ways the introduction of a clear regulatory framework could help boost innovation.”

Mr. Pasquale focused his testimony on the consumer protection issues associated with fintech, and express reservations about deregulation and legislative or regulatory efforts to federally preempt state laws now applying to fintech. He also stressed that improving financial cyber security should be “an essential goal of fintech policy.” According to Mr. Pasquale, “we should be very worried about the ability of technology alone to solve much larger social problems of financial inclusion, opportunity and non-discriminatory credit provision.”

The witnesses were asked to address what are some of the most significant fintech risks that Congress should evaluate. Mr. Turner opined that “the biggest risk right now is a fractured regulatory system.” He observed that fintech companies “have looked for regulation wherever they can and right now it seems that they’re just trying to fit themselves into a system that wasn’t made for them.” Mr. Pasquale highlighted cybersecurity and the “opaque algorithms being used to access credit” and the “many different types of data sources” that could play a role in credit decision-making. In light of recent data breaches, there was widespread agreement that consumers should know exactly how their data is being used.

The witnesses seemed generally supportive of a “regulatory sandbox” approach that has been implemented in the United Kingdom which allows firms to operate on a limited basis to test different ideas while under regulatory supervision, but without needing to comply with the full regulatory enforcement regime.

The witnesses agreed that the best opportunity posed by fintech is enhanced and sustained financial inclusion, with the potential downside of certain “bad actor” companies gaming the system as a means to market high-cost loans to individuals. Going forward, Mr. Turner emphasized the need for fintech companies to have a framework that allows them to decide whether to be a deposit-taking institution and be like a real bank, or have some sort of defined regulatory structure specific to fintech companies. He also stressed the need for Congress and regulators to think long and hard about the scope of any definitions they formulate (such as what a digital lender is and what a peer-to-peer payment company is), as a means to help ensure a proper regulatory framework and level playing field across the lending industry.

Senator Brian Schatz (D-HI) noted that it would be helpful to have a dedicated innovation office within the federal government that is thinking comprehensively about the many different issues and questions that pertain to fintech. As he observed, “[t]his could be a one-stop shop in the government for fintech businesses to figure out which regulations apply to them and a mechanism for coordinating among the regulators. It will be a wild West without some attempt to coordinate.  You already have regulators with varying degrees of aggressiveness in this space and enthusiasm for this space. But we need someone who is thinking around a few corners, rather than just sort of narrow questions of compliance for particular companies.” Senator Mark Warner (D-VA) and the witnesses agreed that this is something that should strongly be considered, especially given the problem of interagency cooperation.

Given the strong bipartisan interest in fintech issues, we anticipate additional congressional hearings in the months to come.

Posted on Thursday, September 14 2017 at 9:00 am by
CFPB Issues First No-Action Letter To Marketplace Lender

Written by Eamonn Moran

On September 14, 2017, the Consumer Financial Protection Bureau (CFPB or Bureau) issued its first no-action letter to Upstart Network, Inc., a company based in San Carlos, California that provides an online lending platform for consumers to apply for personal loans, including credit card refinancing, student loans, and debt consolidation. Upstart evaluates consumer loan applications using traditional factors such as credit score and income, and incorporates alternative data (non-traditional sources of information) such as education and employment history in making credit and pricing decisions.

According to the CFPB, the objective of the no-action letter program is to “facilitate consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services.” The CFPB’s Project Catalyst, an initiative designed to encourage consumer-friendly developments in the consumer financial marketplace, facilitates the no-action letter program.

Under the terms of the no-action letter issued by Bureau staff, Upstart will regularly report certain information to the CFPB regarding the loan applications it receives, how it decides which loans to approve, and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations. The CFPB states that it “expects that this information will further its understanding of how these types of practices impact access to credit generally and for traditionally underserved populations, as well as the application of compliance management systems for these emerging practices.” The no-action letter expires three years from its issuance, but the company may seek a renewal.

From a compliance perspective, the CFPB’s no-action letter signifies that Bureau staff has no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, as they specifically relate to the company’s model for underwriting and pricing applicants as described in the company’s application materials. The CFPB cautions that this no-action letter is specific to the facts and circumstances of Upstart and “does not serve as an endorsement of the use of any particular variables or modeling techniques.”

This action marks an additional step in the CFPB’s exploration of the use of alternative data to help make credit more accessible and affordable for consumers who are credit invisible or lack sufficient credit history. In February 2017, the CFPB issued a request for information to solicit information concerning the use of alternative data (which could include things such as bill payments for mobile phones and rent, electronic transactions such as deposits and withdrawals, and other information that may be less closely tied to a person’s financial conduct), modeling techniques in the credit process, and the use of emerging technologies for underwriting.