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Jo Ann Barefoot explores how to create fair and inclusive consumer financial services through innovative ideas for industry and regulators

One Way Street


One Way Street

Jo Ann Barefoot

I made fifteen speeches last fall on how technology is disrupting consumer finance and the huge regulatory challenges created by this transformation. My travels included moderating a panel at Money 20/20, the largest financial conference in the United States and maybe globally.  Over 10,000 people gathered in Las Vegas to explore the frontiers of fintech.

Nearly every session I saw there mentioned regulatory challenges. The same was true at the Milken Institute London Summit a few weeks earlier, which tackled technology issues ranging from finance to health, and at the Emerge conference last summer in Austin, and every tech-focused venue I attended.

It got me thinking: Why do innovation conferences talk constantly about regulation, while regulatory conferences barely mention innovation?

There are exceptions of course, but the contrast is still striking. Money 20/20 (which has a full regulatory track) drew a record audience. I’ve never seen 10,000 people assembled in one flat-floored room before (as opposed to stadium seating). You could hardly see the back of the room. Everyone was working on fintech: payments, mobile, digital currency and block chain, online lending, mortgage lending models, savings and investment tools, alternative data, cybersecurity, privacy, financial inclusion and access, global consumer empowerment, the millennial market, and on and on. Startups pitched ideas. Huge companies unveiled initiatives. The exhibit hall’s glitz rivaled the Vegas strip. Three thousand people saw a show. Hallways were jammed. Parties were everywhere. The energy was palpable.

Regulatory conferences have been setting records too – thousands of people are attending them.  Appropriately, they talk about regulations. Compliance experts, lawyers, regulators, and consultants explain what’s changing, how to interpret it, how to comply, what’s ahead. They all offer valuable insight, but they rarely address fintech, much less hail from that world. Most have not yet plugged into the innovation energy surge.

They need to, because innovation is revolutionizing financial services generally, and compliance specifically. Here’s why.

Disruption: Financial services is the first industry to face technology-driven disruption while also being pervasively regulated. This means that the disruption of the industry will disrupt the regulatory system too.

Speed: Financial people underestimate the speed and size of the coming transformation because the critical changes are happening outside their field of vision -- in technology, not finance.

For instance, people in finance think of “mobile” as being about mobile payments, but payments are actually just a tiny sliver of how mobile technology is remaking our lives, including our money lives. Financial people view Bitcoin and the blockchain as a payment issue too, while this technology will actually restructure huge swaths of the economy, business models, and even internal operations. Financial people address privacy by complying with Regulation P’s requirements for handling their customers’ information, while privacy is meanwhile being deeply rethought as big data and artificial intelligence revolutionize finance and everything else. Financial people think of consumer credit regulatory issues in terms of rules like the Equal Credit Opportunity, Fair Housing Act, or Fair Credit Reporting Act, while innovators are using alternative data and new data analytics to invent new models for underwriting and pricing, opening huge frontiers of both business and regulatory change. Finance people see “robo-investing” as an exotic new issue, missing how “machine learning” and artificial intelligence will revolutionize every aspect of how people invest, save, spend, borrow, and manage their money.

And that list doesn’t even include innovations that have barely reached the financial industry’s radar at all.  One is breakthroughs in natural voice technology that, combined with big data and machine learning, will completely change financial “education” and how consumers are coached to make money choices. Another is what will happen as people easily and automatically receive ratings of financial companies and products in their phones. Another is the movement into finance by “Big Tech.” Google, Facebook, Apple, Amazon and others already offer consumer financial services and are likely to expand them. These companies are deeply embedded in the daily activities of hundreds of millions of people. They could provide more financial products and/or become an intermediating layer – a filter or advisor -- standing between their customers and traditional providers, changing the very structure of the market.

Surprise: A third reason the financial industry underestimates these changes is that the huge tech trends driving it – big data, artificial intelligence, mobile, the block chain and voice technology – are converging. As they merge, everything will escalate and accelerate.

Lagging regulatory guidance: Fourth, innovation-related issues will bring high spikes in regulatory risk because their novelty and rapid evolution will outpace policy-making. This will force the industry into a regulatory wilderness with few guideposts and unfamiliar dangers lurking everywhere, as regulators decide after the fact that new activities are causing consumer harm.

Aging regulatory tools: One more blind spot is that, despite conventional wisdom, some innovators actually have compliance advantages. This is partly because their products tend to be simple and transparent, and partly because some startups use clean, new high-tech compliance tools that are both effective and efficient. The widespread assumption that startups will be hobbled by regulatory barriers is partly true but flawed. They may even raise the bar for everyone.

The traditional industry already faces dilemmas sparked by these shifts. Compliance and risk staffs find themselves trying to protect their companies against regulatory risks that cannot be clearly assessed, amidst pressure from business units pursuing innovation. The compliance profession has evolved around expertise in implementing detailed technical rules, not navigating regulatory ambiguity, especially on the unfamiliar terrain of high-tech new products, channels and partnerships.  

Legal and compliance staffs are already confronting questions like these:

  • Can our bank partner with an innovator, or buy one, or provide it with banking services?
  • How can we assure such third parties satisfy regulators’ rules on third-party risk including on cybersecurity, privacy, AML, and reputation risk?
  • Can/should we, or our third-party partner or vendor, use alternative data and data analytics to evaluate and price consumer loans, without risk fair lending violations, especially on disparate impact? If we don’t, could we eventually face criticism for not using these inclusive alternatives?
  • Should we allow/prevent our customers from letting personal financial management (PFM) and other providers, including small startups, access and help manage their accounts?
  • Can we implement a mobile banking or payment service and get disclosures right?
  • Do we have the holistic data needed to know whether consumer outcomes raise UDAAP risks?    
  • Should we explore helping our customers access robo-investing options and if so, what are the regulatory challenges?
  • How much should we communicate with customers by text, on what subjects?
  • Can we close or repurpose branches in lower-income neighborhoods, since most of our banking has shifted to being online? And can/should we design special mobile services for lower-income customers?
  • Can we offer technology-based services in languages other than English, without triggering discrimination risks if we cannot automate and deliver every phase of the product life-cycle in the alternative language?
  • Can we strengthen our AML and security protocols for non-loan products by requiring higher-risk customers to send us a picture of their photo ID and a selfie, without risking fair lending violations?
  • Can we make our services appeal more to millennials without violating rules that add complexity, delay, and low utility compared to innovative competitors?
  • How would payments system innovations, including real-time processing, impact our business and regulatory models for services like overdrafts or money transmission?
  • How should we view the move by some banks to create open platforms, so innovators can write apps on their systems?

Regulation and technology are the top challenges facing traditional financial companies. The two seem different, even unmixable. In reality, they increasingly are two sides of the same coin.

Partnering is especially crucial. One Money 20/20 speaker said startups used to believe they would overthrow the banks, but now just want to partner with them. One person said to me, “Everyone has to pair off -- choose a partner and go to the dance.”

What does it take to do that well, for the traditional company and the innovator? That seems like great topic for regulatory conferences in 2016.

Or, how about inviting tech innovators to talk about the big changes coming and what they will mean for finance?

And what if both groups – innovators and regulatory experts – started attending each other’s conferences, and built a real, bustling two-way street?



A two-part version of this post also appeared in a guest blog at Banking Exchange magazine.

Part 1

Part 2