[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
DISRUPTER SERIES: IMPROVING CONSUMERS' FINANCIAL OPTIONS WITH FINTECH
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON DIGITAL COMMERCE AND CONSUMER PROTECTION
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2017
__________
Serial No. 115-36
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
__________
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COMMITTEE ON ENERGY AND COMMERCE
GREG WALDEN, Oregon
Chairman
JOE BARTON, Texas FRANK PALLONE, Jr., New Jersey
Vice Chairman Ranking Member
FRED UPTON, Michigan BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
TIM MURPHY, Pennsylvania ELIOT L. ENGEL, New York
MICHAEL C. BURGESS, Texas GENE GREEN, Texas
MARSHA BLACKBURN, Tennessee DIANA DeGETTE, Colorado
STEVE SCALISE, Louisiana MICHAEL F. DOYLE, Pennsylvania
ROBERT E. LATTA, Ohio JANICE D. SCHAKOWSKY, Illinois
CATHY McMORRIS RODGERS, Washington G.K. BUTTERFIELD, North Carolina
GREGG HARPER, Mississippi DORIS O. MATSUI, California
LEONARD LANCE, New Jersey KATHY CASTOR, Florida
BRETT GUTHRIE, Kentucky JOHN P. SARBANES, Maryland
PETE OLSON, Texas JERRY McNERNEY, California
DAVID B. McKINLEY, West Virginia PETER WELCH, Vermont
ADAM KINZINGER, Illinois BEN RAY LUJAN, New Mexico
H. MORGAN GRIFFITH, Virginia PAUL TONKO, New York
GUS M. BILIRAKIS, Florida YVETTE D. CLARKE, New York
BILL JOHNSON, Ohio DAVID LOEBSACK, Iowa
BILLY LONG, Missouri KURT SCHRADER, Oregon
LARRY BUCSHON, Indiana JOSEPH P. KENNEDY, III,
BILL FLORES, Texas Massachusetts
SUSAN W. BROOKS, Indiana TONY CARDENAS, California
MARKWAYNE MULLIN, Oklahoma RAUL RUIZ, California
RICHARD HUDSON, North Carolina SCOTT H. PETERS, California
CHRIS COLLINS, New York DEBBIE DINGELL, Michigan
KEVIN CRAMER, North Dakota
TIM WALBERG, Michigan
MIMI WALTERS, California
RYAN A. COSTELLO, Pennsylvania
EARL L. ``BUDDY'' CARTER, Georgia
7_____
Subcommittee on Digital Commerce and Consumer Protection
ROBERT E. LATTA, Ohio
Chairman
GREGG HARPER, Mississippi JANICE D. SCHAKOWSKY, Illinois
Vice Chairman Ranking Member
FRED UPTON, Michigan BEN RAY LUJAN, New Mexico
MICHAEL C. BURGESS, Texas YVETTE D. CLARKE, New York
LEONARD LANCE, New Jersey TONY CARDENAS, California
BRETT GUTHRIE, Kentucky DEBBIE DINGELL, Michigan
DAVID B. McKINLEY, West Virgina DORIS O. MATSUI, California
ADAM KINZINGER, Illinois PETER WELCH, Vermont
GUS M. BILIRAKIS, Florida JOSEPH P. KENNEDY, III,
LARRY BUCSHON, Indiana Massachusetts
MARKWAYNE MULLIN, Oklahoma GENE GREEN, Texas
MIMI WALTERS, California FRANK PALLONE, Jr., New Jersey (ex
RYAN A. COSTELLO, Pennsylvania officio)
GREG WALDEN, Oregon (ex officio)
(ii)
C O N T E N T S
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Page
Hon. Robert M. Latta, a Representative in Congress from the State
of Ohio, opening statement..................................... 1
Prepared statement........................................... 3
Hon. Janice D. Schakowsky, a Representative in Congress from the
State of Illinois, opening statement........................... 3
Hon. Greg Walden, a Representative in Congress from the State of
Oregon, opening statement...................................... 5
Prepared statement........................................... 6
Hon. Frank Pallone, Jr., a Representative in Congress from the
State of New Jersey, opening statement......................... 6
Prepared statement........................................... 7
Hon. Michael C. Burgess, a Representative in Congress from the
State of Texas, prepared statement............................. 78
Witnesses
Jeanne M. Hogarth, Vice President, Center for Financial Services
Innovation..................................................... 9
Prepared statement........................................... 12
Javier Saade, Managing Director, Fenway Summer Ventures.......... 27
Prepared statement........................................... 29
Christina Tetreault, Staff Attorney, Consumers Union............. 32
Prepared statement........................................... 34
Peter Van Valkenburgh, Director of Research, Coin Center......... 45
Prepared statement........................................... 47
Submitted Material
Statement of the Electronic Transactions Association, June 8,
2017, submitted by Mr. Costello................................ 79
Letter of June 8, 2017, from John Berlau, Senior Fellow,
Competitive Enterprise Institute, to subcommittee members,
submitted by Mr. Costello...................................... 81
Statement of Kaspersky Lab, June 8, 2017, submitted by Mr.
Costello....................................................... 92
Statement of Intuit, by Bernard F. McKay, Chief Public Policy
Officer and Vice President, Corporate Affairs, June 8, 2017,
submitted by Mr. Costello...................................... 95
DISRUPTER SERIES: IMPROVING CONSUMERS' FINANCIAL OPTIONS WITH FINTECH
----------
THURSDAY, JUNE 8, 2017
House of Representatives,
Subcommittee on Digital Commerce and Consumer
Protection,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2123, Rayburn House Office Building, Hon. Robert Latta
(chairman of the subcommittee) presiding.
Members present: Representatives Latta, Harper, Upton,
Lance, Guthrie, McKinley, Kinzinger, Bilirakis, Bucshon,
Mullin, Costello, Walden (ex officio), Schakowsky, Clarke,
Cardenas, Green, and Pallone (ex officio).
Staff present: Blair Ellis, Press Secretary/Digital
Coordinator; Melissa Froelich, Counsel, Digital Commerce and
Consumer Protection; Adam Fromm, Director of Outreach and
Coalitions; Jay Gulshen, Legislative Clerk, Health; Bijan
Koohmaraie, Counsel, Digital Commerce and Consumer Protection;
Paul Nagle, Chief Counsel, Digital Commerce and Consumer
Protection; Hamlin Wade, Special Advisor for External Affairs;
Michelle Ash, Minority Chief Counsel, Digital Commerce and
Consumer Protection; Jeff Carroll, Minority Staff Director;
Lisa Goldman, Minority Counsel; Caroline Paris-Behr, Minority
Policy Analyst; and Matt Schumacher, Minority Press Assistant.
Mr. Latta. Well, good morning. I'd like to call the
Subcommittee on Digital Commerce and Consumer Protection to
order, and the Chair now recognizes himself for 5 minutes for
an opening statement.
OPENING STATEMENT OF HON. ROBERT E. LATTA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
Again, good morning, and welcome to our witnesses today. We
are very glad to have you with us today.
Today, we continue the Disrupter Series examining FinTech
and all the ways that entrepreneurs and established businesses
are looking to give consumers more tools and control over their
finances.
Families across the country strive to achieve financial
independence and stability. Many no longer feel certain that
their children will be better off than they were at their age,
a change from just a few years ago.
Understanding how new technology can assist families in
managing their finances, especially while on the go, is a
conversation we need to have.
Improving consumers' financial options is a clear example
of the new technology pushing and disrupting established
industries.
While we must focus on protecting the consumers, it is also
important that we keep an eye on what matters to the consumer--
what are their goals, what motivates them to use one service
over another.
How can we encourage innovation while keeping the consumer
protection bar high? In this conversation about improving
access to commerce it is important to remember that there are
generally three relationships people have with traditional
institutions.
People have access to all the traditional financial
services; second, the underbanked who have a checking account
and maybe a savings account but also use alternative financial
services like rent-to-own services or auto title loans; and
third, the 7 percent of Americans who are unbanked, who do not
have a checking or savings account and how use alternative
services.
There are a number of statistics demonstrating how large
the opportunity is to reach more Americans with relevant
services. Twenty percent of the U.S. population--over 60
percent of Americans--are underbanked or unbanked.
Sixty-four percent of Americans earning less than $30,000
per year own a smart phone, and finally, over $12 billion were
invested in FinTech companies in 2016.
Increasingly, Americans are turning to online and mobile
banking, according to a 2015 study from the Federal Deposit
Insurance Corporation. Over 31 percent of Americans used mobile
banking and that number has likely risen in the last 2 years.
There are tremendous opportunities for companies to reach
consumers with new products to help them create a rainy day
fund for the first time, securely pay their mortgage, rebuild
their credit budget, manage multiple income streams and invest
their earnings.
One of the first questions that come to mind in any
conversation about money is security. Cybersecurity is an
ongoing challenge and one the Energy and Commerce Committee is
tackling head on.
At this time, one of our other subcommittees in the Energy
and Commerce is getting ready to start a hearing focused on
healthcare cybersecurity.
In this subcommittee we have discussed how cybersecurity
plays in development and life cycle of a number of connected
devices through the Disrupter Series.
While there is no silver bullet, we do need to keep
cybersecurity at the top of our minds because if consumers do
not trust the products and services they use are secure then
they will not use them.
I would like to thank our witnesses for joining us today
and I look forward to your perspectives on how we can ensure
that innovation in the FinTech space continues in the United
States, how innovation can improve consumer protection and how
the regulatory environment has impacted innovation.
Again, I want to thank all of our witnesses for rejoining
us today for this very important discussion that we will have.
[The prepared statement of Mr. Latta follows:]
Prepared statement of Hon. Robert E. Latta
Good morning and welcome to the Digital Commerce and
Consumer Protection subcommittee hearing. Today we continue the
Disrupter Series examining FinTech and all of the ways that
entrepreneurs and established businesses are looking to give
consumers more tools and control over their finances.
Financial independence and stability is the goal for so
many families across this country. People no longer feel
certain that their children will be better off than they were
at their age--a change from just a few years ago. Understanding
how new technology can be leveraged responsibly to give people
on-the-go control over their finances is a critical
conversation.
Improving consumer's financial options is a clear example
of where new technology is going to push and disrupt
established industries. As much as consumer protection is
focused on protecting, we also need to keep our eye on the
consumer too. What are their goals? What motivates them to use
one service over another? How can we encourage innovation while
keeping the consumer protection bar high?
In this conversation about improving consumers access to
commerce, it is important to remember that there are generally
three relationships people may have with traditional
institutions:
People who have access to all of the traditional
financial services;
The underbanked, who have a checking account, and
maybe a savings account, but also use alternative financial
services like rent-to-own services or auto title loans; and,
The 7 percent of Americans who are unbanked--who
do not have a checking or savings account and only use
alternative services.
There are a number of statistics demonstrating how large
the opportunity is to reach more Americans with relevant
services:
20 percent of the U.S. population, over 60 million
Americans, are underbanked or unbanked.
64 percent of Americans earning less than $30,000
per year own a smartphone.
Finally, over $12 billion was invested in FinTech
companies in 2016.
Increasingly Americans are turning to online and mobile
banking. According to the most recent study from the FDIC
(Federal Deposit Insurance Corporation), over 31 percent of
Americans use mobile banking and that number has likely risen
in the last 2 years.
There are serious opportunities for companies to reach
consumers with new products to help them create a rainy-day
fund for the first time, make faster more secure payments,
rebuild their credit, budget and manage multiple income
streams, and invest.
One of the first questions that comes to mind in any
conversation about money is security. Cybersecurity is an
ongoing challenge, and one the Energy and Commerce Committee is
tackling head on. Upstairs, our sister subcommittee is getting
ready to start a hearing focused on health care cybersecurity.
Throughout the Disrupter Series, we have discussed how
cybersecurity plays into development and the lifecycle of a
number of connected devices. There is no silver bullet. We need
to keep cybersecurity top of mind, because if consumers do not
trust that the products and services they use are secure, then
they will not use them. Plain and simple.
I would like to thank our witnesses for joining us today
and I look forward to your perspectives on:
How we can ensure that innovation in the FinTech
space continues in the United States,
how innovation can improve consumer protection,
and
how the regulatory environment has impacted
innovation.
Thank you all for joining us today for this important
discussion.
Mr. Latta. And at this time, I'd like to recognize the
gentlelady from Illinois, the ranking member of the
subcommittee for 5 minutes for an opening statement. Good
morning.
OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Ms. Schakowsky. Good morning. Thank you, Mr. Chairman.
Today, in the subcommittee, we are going to be looking into
the potential to provide consumers better options through
financial technology, or FinTech.
On the floor this afternoon, the House will be debating
legislation to gut existing consumer protections for financial
products. These discussions can't happen in isolation.
Consumers can only realize the full benefit of FinTech if
we have reasonable safeguards in place to prevent abusive
practices, secure personal information and protect consumers
from fraud.
The Financial CHOICE Act, what my Democratic colleagues and
I call the Wrong Choice Act, puts those safeguards in severe
jeopardy.
One of the landmark achievements of the Dodd-Frank Wall
Street Reform Consumer Protection Act was the creation of the
Consumer Financial Protection Bureau.
The CFPB is an effective consumer watchdog and it has
returned $12 billion to 29 million harmed consumers. The Wrong
Choice Act would gut this critical consumer watchdog. It would
make it harder for the CFPB to take action to protect
consumers.
It would threaten the CPB's funding. It would specifically
block the CFPB from pursuing consumer protections in areas like
payday lending and it would block the CFPB's proposed rule
limiting arbitration to ensure that consumers can defend their
rights in court.
Who benefits? Not consumers. Not responsible businesses.
The winners are big banks like Wells Fargo that open up
fraudulent accounts for their customers, pay lenders that trap
consumers in unaffordable debt, credit card companies that
engage in deceptive practices, for-profit colleges that prey on
veterans and reverse mortgage companies that put seniors' homes
at risk.
The CFPB has proven time and time again that it is a
research and data-driven agency. It has been actively engaged
in exploring how FinTech can be part of consumer-friendly
innovation.
In October, the CFPB released its Project Catalyst Report
on Innovation in Financial Services. The report highlighted the
tremendous potential for FinTech to improve the lives of
Americans. It also emphasized the importance of building
consumer protections into new innovations from the outset.
Effective protections need to be flexible enough to apply
to new financial products. That's precisely what the CFPB did
in its rule for prepaid products.
It requires protections against fraud and unauthorized
charges as well as basic transparency regarding fees and
balances.
The rules apply to both physical prepaid cards and mobile
wallets because consumers deserve strong protections whether
they are swiping cards or using smart phones.
I believe the CFPB's valuable work should continue. I
choose consumers over unethical companies that engage in
unfair, deceptive and abusive practices.
I will be voting against the Wrong Choice Act this
afternoon. If my colleagues really care about providing quality
financial options for American consumers, they will do the
same.
With proper protections baked in, I believe FinTech will
have great benefit for consumers. It provides new opportunities
to reach the unbanked and underbanked households. FinTech
companies have already made it easier than ever to make person-
to-person payments.
We will be hearing much more from our witnesses about some
of the specific innovations that FinTech companies are working
on.
And as with other topics in our Disrupter Series, the
policy challenge for this subcommittee to consider is how we
adapt today's rules to tomorrow's technology.
I look forward to hearing the insight from our panelists as
we continue efforts to make sure consumers can truly benefit
from the promise of new innovation.
And I yield back.
Mr. Latta. Thank you. The gentlelady yields back.
At this time, the Chair now recognizes the gentleman from
Oregon, the chairman of the full committee, for his opening
statement. Good morning.
OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OREGON
Mr. Walden. Good morning. Thank you, Mr. Chairman, and
welcome to our panelists and to our guests today.
Today's Disrupter Series takes an important look at how we
can ensure that innovation's improving options and outcomes for
consumers and their financial health by way of financial
technology, more commonly known as FinTech.
Smart phone adoption has skyrocketed in recent years which
provides a new platform to reach consumers with basic services
such as online banking or more complex transactions like
mortgage applications.
In Oregon where I come from, the percentage of people
unbanked or underbanked is slightly higher than the national
average.
So if there is an opportunity to help folks engage in
commerce, start a savings account, become more financially
secure, we should be giving it serious consideration and
FinTech could provide that opportunity.
Disruption or change can be uncomfortable. But if we remain
focused on the consumer and what is in the best interests of
the consumer we can move forward productively.
Startups, incumbents and partnerships are all critical
components of this conversation. Now, ultimately we know that
if consumers do not find something useful, they won't use it,
given the choice.
The reality is that consumers are demanding better, faster,
more secure services in every industry. The growth of new peer-
to-peer payment services like PayPal and Venmo also show that
the younger generations are quickly adopting these services and
they will soon expect the same level of service and convenience
for other traditional financial services as well.
Block chain is another important component within this
industry as it has the potential to disrupt how we transfer
assets digitally with increased transparency and security.
All of this is to say it's clear that the FinTech world is
all-encompassing and is quickly growing. The United States
should continue to be a hub for this innovation and for this
opportunity and FinTech's rise in popularity demonstrates its
fulfillment of both.
So I look forward to the testimony and your comments today
and continuing to work to increase consumers' financial options
with FinTech.
That is the charge this subcommittee has, among many others
in the innovation environment, and it's ably led by our
chairman and ranking member.
So we thank you for being here. I will give you a heads up
that I also have to go up to the Oversight Investigations
Subcommittee that's meeting concurrent with this one.
So I've got your testimony, and I appreciate your counsel
and your input and look forward to working with you in the
future.
With that, Mr. Chairman, I yield back the balance of my
time.
[The prepared statement of Mr. Walden follows:]
Prepared statement of Hon. Greg Walden
Good morning. Today's Disrupter Series taken an important
look at how we can ensure that innovation is driving improved
options and outcomes for consumers and their financial health
with financial technology or FinTech.
Smartphone adoption has skyrocketed in recent years, which
provides a new platform to reach consumers with basic services,
such as online banking, or more complex transactions like
mortgage applications.
In Oregon, the percentage of people unbanked or underbanked
is slightly higher than the national average. If there is an
opportunity to help these people engage in commerce, start a
savings account, become more financially secure, we should be
giving them serious consideration. FinTech provides a path
forward.
Disruption can be uncomfortable to talk about but if we
keep focused on the consumer and what is in their best
interest, we will be about to move forward productively. And we
know that if consumers do not find something useful they will
not use it. Startups, incumbents, and partnerships are all
critical components of this conversation.
Consumers are demanding better, faster, and more secure
services in every industry. The growth of new peer-to-peer
payment services like PayPal and Venmo also show that the
younger generations are growing up with these services and will
expect the same level of service and convenience for other
traditional services as well. Blockchain has the potential to
disrupt how we transfer assets digitally with increased
transparency and security. The FinTech world is broad and
growing.
The United States should continue to be a hub for
innovation and opportunity. I look forward to hearing from our
witnesses about their work to increase consumers' financial
options with FinTech. Thank you all for being here.
Mr. Latta. Thank you very much. The gentleman yields back.
The Chair now recognizes for 5 minutes the gentleman from
New Jersey, the ranking member of the full committee.
OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Pallone. Thank you, Mr. Chairman. This hearing is an
update to last Congress' hearings on mobile payments and
digital currencies.
Technological advances are making financial transactions
more convenient and efficient with nine in 10 Americans
regularly connected to the internet and over 75 percent of us
having smart phones. Online access to banking has never been
better.
New financial products may help people pay and receive
goods faster and consumers may have better and more secure
access to their funds and these products also may help people
have greater control over their financial lives by giving them
more and better financial information.
These potential benefits are important but these new
financial products should have consumer protections attached to
them just like protections attached to old and more traditional
financial products.
Consumer protections are essential and I look forward to
hearing how we can help ensure there are appropriate safeguards
while at the same time encouraging this new marketplace to
thrive.
One area that is ripe for improvement in the financial
sector is faster payments. In this day of technological
advancements, some Americans still have to wait days for their
checks to clear.
Oftentimes, these consumers are then forced into turning to
high cost credit to access their own money.
In 2015, the Federal Reserve created a task force to review
the issue of faster payments and I am hoping today for an
update on the work of that task force.
People should be able to get real-time access to their
money. I realize that some actors in this space such as check-
cashing companies, payday lenders or wire transfer services may
lose out on fees if real-time access is achieved.
However, with all of the technological advances that have
been made delays are really not acceptable anymore and they
have adverse effects on merchants and others waiting to be
paid.
A number of Federal agencies play a critical role in the
success of financial technology including both the Federal
Trade Commission and the Consumer Financial Protection Bureau.
These two agencies conduct research and analysis of
consumer financial interests, educate consumers and take
enforcement actions against the perpetrators of financial
exploitation.
As some of the witnesses will discuss today, the CFPB is
working to ensure consumer protections are in place for prepaid
debit user cards and advising companies wanting to enter the
FinTech arena.
This is important work. Yet, today on the House floor the
Republican majority is trying to gut the CFPB with the CHOICE
Act, or what many of us are calling the Wrong Choice Act.
The timing of this hearing is interesting. While some may
think FinTech is just another disruptive technology that may or
may not help people, members should be mindful of the bigger
picture.
Taking the teeth out of the CFPB is not the answer. The
CFPB was created to protect consumers from fraud and financial
products and it has proven itself truly able to help people.
We should be working together to ensure the CFPB continues
its robust mission and I hope all the witnesses and those
interested in today's financial technology hearing join me in
supporting the CFPB.
[The prepared statement of Mr. Pallone follows:]
Prepared statement of Hon. Frank Pallone, Jr.
This hearing is an update to last Congress' hearings on
mobile payments and digital currencies. Technological advances
are making financial transactions more convenient and
efficient. With nine-in-ten Americans regularly connected to
the internet and over 75 percent of us having smartphones,
online access to banking has never been better.
New financial products may help people pay and receive
goods faster, and consumers may have better and more secure
access to their funds. These products also may help people have
greater control over their financial lives by giving them more
and better financial information.
These potential benefits are important, but these new
financial products should have consumer protections attached to
them, just like protections attached to older more traditional
financial products. . Consumer protections are essential, and I
look forward to hearing how we can help ensure there are
appropriate safeguards, while, at the same time, encouraging
this new marketplace to thrive.
One area that is ripe for improvement in the financial
sector is faster payments. In this day of technological
advancements, some Americans still have to wait days for their
checks to clear. Oftentimes, these consumers are then forced
into turning to high-cost credit to access their own money.
In 2015, the Federal Reserve created a Task Force to review
the issue of faster payments, and I am hoping today for an
update on the work of that Task Force. People should be able to
get real-time access to their money. I realize that some actors
in this space, such as check cashing companies, payday lenders,
or wire transfer services, may lose out on fees if real-time
access is achieved. However, with all of the technological
advancements that have been made, delays are really not
acceptable anymore, and they have adverse effects on merchants
and others waiting to be paid.
A number of Federal agencies play a critical role in the
success of financial technology, including both the Federal
Trade Commission and the Consumer Financial Protection Bureau
(CFPB). These two agencies conduct research and analysis of
consumer financial interests, educate consumers, and take
enforcement actions against the perpetrators of financial
exploitation.
As some of the witnesses will discuss today, the CFPB is
working to ensure consumer protections are in place for prepaid
debit card users and advising companies wanting to enter the
FinTech arena. This is important work. Yet, today on the House
floor, the Republican Majority is trying to gut the CFPB with
the CHOICE Act. Or, what many of us are calling the Wrong
Choice Act.
The timing of this hearing is interesting. While some may
think FinTech is just another ``disruptive technology'' that
may or may not help people, Members should be mindful of the
bigger picture. Taking the teeth out of the CFPB is not the
answer. The CFPB was created to protect consumers from fraud in
financial products, and it has proven itself truly able to help
people. We should be working together to ensure the CFPB
continues its robust mission.
I hope all of the witnesses and those interested in today's
financial technology hearing join me in supporting the CFPB.
Thank you.
Mr. Pallone. I would like to yield the remaining 2 minutes
to the gentleman from California, Mr. Cardenas.
Mr. Cardenas. Thank you very much, Chairman Latta, and
thank you very much, Congressman Pallone, for having this
hearing. Good morning, and thank you all so much for being
here.
As some of you might know, my colleague, Congressman
Kinzinger, and I led a resolution that passed last Congress
highlighting some of the goals and responsibilities of the
financial technology industry and how the Government can
support innovation in this space.
It was the first legislation related to financial
technology, or FinTech, that has passed either chamber. I am
not on the Financial Services Committee, and I don't come from
a strictly financial services background.
But let me tell you what brings me to be an advocate for
smart FinTech innovation. I represent Los Angeles, which has
five of the top 100 most unbanked Census tracks in the country.
That means that nearly three out of 10 Los Angeles County
residents--and L.A. County is 10 million people--are
underbanked and may rely on short-term lending to pay their
bills and stay afloat.
FinTech innovation has the potential to help fix this. The
reason I came to Congress is effect change that directly helps
our communities, and working on FinTech at the Federal level is
a great example of very real potential for change at the local
level.
FinTech could potentially give small businesses and
consumers an alternative way to bank that doesn't force them to
rely on high-interest short-term loans or other risky money
management strategies.
FinTech also has the potential to create hundreds of
thousands of U.S. jobs. United States is the world leader in
software development and technology, and it is in our best
interests to develop a national policy on FinTech.
This national policy must drive innovation, boost economic
growth and ensure the protection of every American's personal
information.
Above all, we must make sure this policy helps the people
that need it the most, like the people in my district.
Thank you, and I look forward to hearing your testimony and
answers to our questions today, and I yield back.
Mr. Latta. Thank you very much. The gentleman yields back,
and that concludes today's opening Member statements.
The Chair would like to remind all Members that, pursuant
to committee rules, all Members' opening statements will be
made part of the record.
And, again, I want to thank our witnesses today for being
with us today to talk about this very important topic and
today's witnesses will each have 5 minutes for their opening
statements.
Our witnesses today are Jeanne Hogarth, who's the vice
president at the Center for Financial Services Innovation;
Javier Saade, managing director at Fenway Summer Ventures; Ms.
Christina Tetreault, the staff director at Consumers Union; and
Peter Van Valkenburgh, research director at Coin Center.
Again, we appreciate you all for being with us today and
look forward to your testimony, and Ms. Hogarth, we will start
with you for your opening statement.
Thank you very much. If you want to just press that button,
please, and pull the mic kind of close to you there.
Thank you.
STATEMENTS OF JEANNE M. HOGARTH, VICE PRESIDENT, CENTER FOR
FINANCIAL SERVICES INNOVATION; JAVIER SAADE, MANAGING DIRECTOR,
FENWAY SUMMER VENTURES; CHRISTINA TETREAULT, STAFF ATTORNEY,
CONSUMERS UNION; PETER VAN VALKENBURGH, DIRECTOR OF RESEARCH,
COIN CENTER
STATEMENT OF JEANNE M. HOGARTH
Ms. Hogarth. Thank you. Chairman Latta, Ranking Member
Schakowsky and committee members, thank you for inviting us
here today to share some insights on the potential for
financial technology to improve Americans' financial health.
The Center for Financial Services Innovation is a national
authority on consumer financial health and we lead a network of
financial services innovators committed to building higher
quality products and services.
We believe that finance can be a force for good in people's
lives and that meeting consumers' needs responsibly is good for
both the consumer and the provider.
Nearly three out of five American households struggle with
their financial health. These households are banked but they
are not well served.
What people want and need is more automation of good
choices combined with control and transparency. Unfortunately,
most tools today don't provide this control and transparency,
and FinTech, with better data, better analytics and better
advice can ultimately provide that. CFSI is committed to
working industry wide with a range of both incumbents and
start-ups to encourage and seed innovation.
In 2014, CFSI partnered with JPMorgan Chase to launch our
Financial Solutions Lab, which supports the development of
technology-based products that improve the financial health of
Americans.
The lab identifies challenges facing consumers and hosts an
annual competition. As an accelerator program, we provide
participants with capital and technical assistance from CFSI,
JPMorgan Chase and a diverse community of industry partners and
experts.
We work with the lab companies to help them monitor the
financial health of their customers as well as that of their
own bottom lines.
The first challenge for the lab was to solve for income
volatility. Our second challenge was to help families weather
financial shocks.
Next week we'll be announcing our third cohort of financial
tech companies who are trying to improve the financial health
of consumers with particular emphasis on products on aging
Americans, individuals with disabilities, people of color and
women.
Let me share three examples from our first FinLab cohort.
Digit helps consumers automate savings by predicting their cash
flow and identifying savings opportunities.
Since launching in 2015, Digit has helped users save over
$500 million. The average Digit user saves between $80 and $170
a month, and while it's difficult to know if Digit users have
enough liquid savings to cover an emergency, the use of
automatic transfers is on the right path toward building a
savings reserve to cope with an unexpected expense.
SupportPay believes that technology should be used to make
family life easier. Through an automated child support payment
platform, SupportPay is helping parents amicably settle child
support and alimony directly with each other.
Today, more than 41,000 people, whether separated, divorced
or grandparent custodians are using SupportPay and, as a
result, are 90 percent more likely to exchange child support.
SupportPay's data show that late payment rates have dropped
from 33 to 25 percent. Even helps consumers stabilize volatile
income by guaranteeing a consistent amount of pay each pay
period.
The team recently launched the 3.0 version of the app which
pairs cash flow smoothing with an ongoing financial plan,
improving consumer engagement and positive financial change.
Even its focus on rolling out its product to thousands of
employees of a large employer, which will be announced in the
coming months.
Beyond standalone products, it's important for FinTech
providers to partner with banks, credit unions and other
financial providers to offer products to a broader set of
consumers.
We believe that responsible partnerships provide wins for
the credit unions and the banks, the FinTech providers and the
consumers, especially for consumers of smaller and rural banks
who can expand the array of products they offer.
Consumer protection is still very much needed but policy
makers need to identify the right tools to reshape the
regulation of financial services to fit innovations in the 21st
century. It's not a question of whether. It's a question of
how.
Importantly, we believe that FinTech can help consumers but
it alone is not sufficient enough to ensure financial health
for all Americans.
It takes better job structures, living wages, benefits
including sick leave and retirement plans and much more.
Again, we appreciate this opportunity to share these
insights with the committee and I'm happy to answer any
questions.
[The prepared statement of Ms. Hogarth follows:]
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Mr. Latta. Thank you very much.
Mr. Saade, you are recognized for 5 minutes.
STATEMENT OF JAVIER SAADE
Mr. Saade. Thank you. Good morning.
Chairman Latta, Ranking Member Schakowsky and distinguished
members of the committee, thank you very much for the
opportunity to participate here today.
My name is Javier Saade and I'm a managing director at
Fenway Summer Ventures. Fenway Summer is a venture capital firm
that backs young companies innovating at the intersection of
finance and technology.
We capitalize fast-growing ventures and serve as a value-
added partner to the entrepreneurs that lead them. Since 2013,
we have backed over 30 companies and have co-founded three
ourselves: a credit card company, a tech-enabled mortgage
lender, and a private student lender.
I am honored to be here today and lend a voice to this
important dialogue. Changing landscape in financial services.
It's no secret, as all of you have said, that over the last few
years the financial services industry has undergone a
significant amount of disruption.
Many factors have contributed to this but the most
important, in our view, are the global financial crisis and the
regulatory response engendered; rapid technological advances;
secular shifts in consumer behavior and evolving capital
markets' dynamics.
Every sector of the financial services industry had been
affected by these changes. FinTech has the potential to
transfer the way that financial services are delivered and
designed, widen credit and capital access funnels and reduce
friction in the process of payments.
In the past few years we have seen a proliferation of
digitally enabled financial products. Just as smart phones
revolutionized the way in which we interact socially, FinTech
is revolutionizing how we interact financially.
In our perpetually connected world, consumers, businesses
and financial institutions are finding ways to engage in
financial transactions that are more convenient, cost
effective, timely, and secure.
In addressing the traditionally excluded and underserved
sectors of the population, FinTech companies are well
positioned to drive innovation. It is estimated that around the
world more than 2 billion adults are underserved and unbanked.
In assessing the inclusiveness of the U.S. banking system,
the FDIC 2015 survey of unbanked and underbanked households
found that 30 million households either have no access to
financial products or obtain products outside of the banking
system.
By reducing loan processing and underwriting costs, all
nine origination platforms can enable financial services
providers to more cost effectively offer small balance loans to
household and small businesses that have been previously
feasible. This in turn facilitates credit flow to individuals
and firms that otherwise would not have access to credit. New
technologies are also opening up efficient ways to manage money
and control spending.
We have seen mobile technology and innovations in
distribution that enable financial service firms to reach
communities that were previously unserved because building a
traditional brick and mortar outlet was not economical.
While financial innovation holds significant promise, it is
crucial that all stakeholders understand and mitigate
associated risks.
There is a tension between aligning pace of development and
new products and services being brought to market and the duty
to ensure that these risks are addressed.
This is precisely why we at Fenway Summer are focused on
finding entrepreneurs who display what our firm's founder
refers to as paradoxical conservatism.
We look for entrepreneurs who have grand ambitions to
effect positive change in the financial services industry but
who understand that the fail fast and often approach typical of
tech-driven start-ups in other sectors may not be well suited
to the financial services industry.
Two examples of our companies: one, EarnUp. It's a company
that offers automated repayment of consumer loans, and FS Card,
whose sole product is a credit card targeted towards customers
seeking to establish, strengthen or rebuild our credit. EarnUp
helps consumers save money and reduce debt by intelligently
allocating income towards loan repayments.
Budget in outstanding loans. EarnUp's technology integrates
with thousands of services of home loans, student loans and
auto loans and other asset classes in order to route consumer
payments automatically.
FS Card provides access to mainstream and reasonably priced
credit to consumers in the 550 to 600 credit score range
through their product called the Build Card, which is an
unsecured credit card with a typical line of $500. In the
absence of a product like this, consumers would likely need to
resort to much more expensive alternatives like payday loans.
Thanks for listening and, again, I appreciate the
opportunity to be here with you and share my thoughts on this
topic and I'm happy to answer any questions you may have.
[The prepared statement of Mr. Saade follows:]
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Mr. Latta. Well, thank you for your testimony.
Ms. Tetreault, you are recognized for 5 minutes. Thank you
very much.
STATEMENT OF CHRISTINA TETREAULT
Ms. Tetreault. Chairman Latta, Ranking Member Schakowsky,
committee members, thank you for the opportunity to testify
today.
Consumers Union is the policy and mobilization arm of the
independent nonprofit organization Consumer Reports. We
research and report on financial services issues and engage in
advocacy to encourage fair finance.
We appreciate your leadership in investigating FinTech as
we believe that it holds promise to increase inclusion and
choice without sacrificing safety and security.
FinTech holds this promise to increase financial inclusion
by solving some of the problems that consumers report have kept
them from using traditional financial services.
Innovative products may provide consumers greater control
over their financial lives and be offered at a lower cost and
be more convenient than traditional or alternative financial
services, leading to greater integration of the unbanked,
underbanked and unhappily banked.
We encourage service providers to bake in consumer
protections as technology often moves at a faster pace than
regulation. We also believe that there's role for lawmakers to
ensure that appropriate safeguards are enacted while still
being flexible enough to allow for new products to thrive in
the marketplace when they provide meaningful value to
consumers.
Contrary to complaints by industry that regulation kills
innovation, appropriately tailored regulation ultimately
benefits businesses.
While financial services regulation is essential for
protecting consumers from harm, regulation and supervision of
consumer financial services benefits industry by promoting
consumer confidence and thereby driving adoption.
Strong and consistent regulation also ensures that
businesses that take consumer protections and regulatory
compliance seriously are not at a competitive disadvantage to
those that do not.
Lawmakers and regulators should not hesitate to hold these
new financial services businesses to the highest standards.
Some of the most exciting developments in financial
technology are occurring in payments. Cashless payments, faster
payments and virtual currencies and the technology behind them
may pose additional risks to consumers unless there are clear
rules of the road.
Cashless payments are improved by the Consumer Financial
Protection Bureau's final prepaid rule. Our organization
documented the unfair discrepancy between the protections
afforded bank debit card users and prepaid card users for many
years and we are pleased that the final rule no longer
relegates prepaid cards to second tier bank account status.
In addition to prepaid cards, the final rule extends
protections to mobile wallets that store consumer funds. While
this is a positive development, concerns around mobile payments
remain.
For example, consumers making peer-to-peer payments may
find the complex liability chains make it hard to know who to
contact if something goes wrong.
We've also found that some providers do not offer a
telephone point of contact to resolve issues. We urge
stakeholders to address these concerns.
Faster payments are another area where financial technology
promises great improvement. A number of providers have
announced plans to bring faster, potentially real-time payments
to the United States.
Speed may help bring underserved consumers back into formal
relationships with financial institutions by reducing or
eliminating the unpredictable aspects of traditional banking
that drive consumers away such as fees, surprise fees and
overdrafts.
There are potentially unresolved questions about the
applicable consumer protections and the faster payments
environment such as when funds received must be made available
to consumers and we urge stakeholders to work together to
resolve outstanding issues so that the benefits of faster
payments may be realized.
Virtual currencies and the technology behind them hold
tremendous potential but also may pose consumer risks. Many
States are grappling with the question of whether these
businesses should be licensed as money transmitters.
The issue is complicated as this technology has uses beyond
financial services. For example, ledgers transactions are
recorded on may one day be used to protect intellectual or real
property rights.
Regulating those businesses as financial services is
inappropriate. Many proponents of virtual currencies have
potential to increase financial inclusion. It is precisely
because disadvantaged consumers may be the first to experience
harm that strong protections must be in place.
At present the most pressing consumer protection concern
around virtual currency is not technology specific. It exists
because there are businesses built on virtual currency
protocols that act as financial intermediaries.
Whenever businesses come between consumers and their value,
they must be held accountable. We urge a thoughtful approach to
these technologies that ensures consumer value is protected.
We believe that new financial products and services should
be subject to appropriate public review and oversight by
Federal and State financial regulators to ensure that financial
services are safe and transparent and we urge providers to do
their part by baking in consumer protections at the outset.
Thank you very much for the opportunity to testify here
today, and I'm available to take questions.
[The prepared statement of Ms. Tetreault follows:]
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Mr. Latta. Thank you very much for your testimony today.
And Mr. Van Valkenburgh, you are recognized for 5 minutes.
Thank you.
STATEMENT OF PETER VAN VALKENBURGH
Mr. Van Valkenburgh. Thank you, Mr. Chairman, members of
the committee. I'm Peter Van Valkenburgh, the director of
research at Coin Center, an independent nonprofit focused on
the public policy questions raised by digital currencies and
open block chain networks.
I'm going to explain open block chain networks and then
suggest why we need a unified Federal approach to regulating
some businesses in this space while also offering a safe harbor
to other businesses.
Open block chain networks allow connected computers to
reach a trustworthy agreement over shared data. The connected
computers can be owned by anyone in the world.
The shared data could be a ledger of digital currency
ownership or any other data for which widespread agreement and
auditability are essential.
Notable open block chain networks include the original
Bitcoin network for electronic cash as well as follow-on
innovations such as Ethereum for smart contracts and Zcash for
privacy.
Open block chain networks are permission lists. There's no
patent or copyright to license, no university or corporation
from which to seek a job, no exclusive membership fee to pay.
Anyone with a computer or a smart phone and an internet
connection can use these technologies and even can help build
them. Just as the PC democratized computing and the web
democratized news and entertainment, open block chain networks
are democratizing financial services.
This innovation is inevitable. What remains undetermined is
whether America will remain a home for permissionless
innovation, as a venture capitalist might ask, and whether
there will be responsible innovation, as a regulator might ask.
Those aspirations are not irreconcilable, but they are also
not guaranteed. America pioneered home computing and the
internet in part because of our deep cultural and
constitutional reverence for free speech but also because of
two laws passed by Congress in the last 1990s: the
Communications Decency Act and the Digital Millennium Copyright
Act.
Both laws created safe harbors for infrastructure-building
businesses. They protected companies that were building the new
information superhighways from third party liability stemming
from the actions of users on those highways. These safe harbors
made the U.S. a friendly home for the leaders of the internet
revolution. But today we are following, not leading.
A young innovator dreaming of building the future of
financial infrastructure would be best advised to leave the
U.S. not because she can do it on the cheap in a foreign
jurisdiction that will look the other way but simply because
instead determining what the U.S. regulatory landscape demands
of her is a Herculean undertaking.
Indeed, between 53 States and territories and several
independent Federal regulators, it's a task that would be much
simpler if she was in the United Kingdom and could ask one
regulator, the Financial Conduct Authority, for an opinion.
In order to reestablish the U.S. as a leader we need to
rationalize the chaos of financial services regulation starting
with State-by-State money transmission licensing. Custodial
businesses should be regulated but they should not need to
repeat a licensing process 53 times over.
These businesses are by virtue of the internet interstate
in their scope of operations and they should have similarly
scoped regulators to avoid costly compliance redundancies and
guarantee uniform consumer protection.
Congress should encourage the Office of the Comptroller of
the Currency to offer Federal FinTech charters to custodial
digital currency firms and Congress should also consider the
creation of a new Federal money transmission license as an
alternative to State-by-State licensing.
We also need a safe harbor. In several States the
definition of money transmission is broad and can be
interpreted to require that noncustodial developers of the
technology be licensed.
It is not reasonable to mandate licensure from a
technologist who helps build the networks but is not holding
consumer valuables. That's like trying to stop speeding by
requiring costly licensing for highway construction personnel.
It doesn't make sense and it'll only mean that fewer highways
get built.
But amending over broad laws in every State is not a
scalable approach. The commerce clause empowers Congress to fix
this problem. Much as it did in the 1990s for internet
infrastructure, Congress should craft a Federal block chain
safe harbor for noncustodial developers.
Open block chain networks are the pipes for our future
economy. We want this infrastructure built here without
unnecessary impediment and with reasonable protections for
consumers.
Innovation can be both permissionless and responsible but
it will only happen in the U.S. if we take a unified national
approach to regulating custodians and create a safe harbor for
noncustodial developers.
Thank you.
[The prepared Statement of Mr. Van Valkenburgh follows:]
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Mr. Latta. Thank you very much for your testimony, and that
concludes our testimony from our witnesses today. I will begin
the questioning of our witnesses and I will recognize myself
for 5 minutes.
Ms. Hogarth, in your testimony you mentioned some of the
less mature aspects of FinTech innovation like insurance
products and block chain that have the potential to drastically
improve consumers' lives.
What are some of the emerging technologies that are most
exciting to you?
Ms. Hogarth. Thank you, Mr. Chairman.
We see a lot of opportunity for disruption in the insurance
arena and in insurance it's more than just what you think of
as, you know, your house insurance, car insurance, health
insurance.
As we think about older Americans--and I will count myself
in that--getting ready to approach retirement, thinking about
dissaving and helping Americans begin to decapitalize and
unsave the 401K and IRA money that they have in their
portfolios, finding new ways to create pensions that are going
to be lasting outside of perhaps what is traditionally an
annuity system.
So the insurance market is certainly ripe for disruption
for the consumer products.
Mr. Latta. Thank you.
Mr. Van Valkenburgh, your group has focused on the block
chain technologies or the distributed ledger technologies. Will
you give the subcommittee some of the insights into what you
think are on the horizon for the industry in the future?
Mr. Van Valkenburgh. Thank you, Mr. Chairman.
These are young technologies and as I said in my opening
statement they are fundamental infrastructure. They are pipes.
So many of the consumer-facing apps are still in their
infancy and this is why I think we still see fairly little
actual consumer adoption from normal Americans.
However, what excites us most about the industry is that
this infrastructure is open for others to build applications on
top of.
So, for example, a company could build an app that
facilitates international remittances. The company designs the
user interface so that it's friendly, it's useful, it's
compliant with KYC requirements and has consumer protections
baked in, as my colleague suggested.
But rather than moving the money between the users via
correspondent banking systems, the app uses digital currency to
move value between the sender and the recipient.
Now, the value moves faster in that system--an hour instead
of three or more days--and the fees are potentially lower
because there are not multiple correspondent banks in between.
There is two things that are important to point out in that
hypothetical. One is that the technology made the application
more friendly for the user--lower fees, a smart phone
application that makes sense to them--but second, that the
technology, the open block chain network, made it easier for
the business to get started.
It lowered the barriers to entry for competition. Because
previously they would have had to establish a banking
relationship or multiple banking relationships with
correspondent banks and several branch locations.
But now they can simply build their consumer-facing app on
top of existing open block chain infrastructure and smart
phones.
Mr. Latta. Thank you very much.
Mr. Saade, in your testimony you focused, of course, on the
FinTech innovation and in the last year what patterns or trends
have you seen for new entrants that are out there?
Mr. Saade. Thanks for the question.
The exciting part about what's happening in financial
services is that it's a confluence of events that have led to
all of this happening almost at the same time.
If you think about what the iPhone or the smart phone did
to basically everything, there were a lot of capabilities to do
that because there was no significant institutions that were
divergent from a particular technology.
In the case of financial services I agree with my colleague
here that there's a lot of things we are starting to see in
insurance technology.
We are starting to see a lot of things in what's termed
legal tech or reg tech, which is at the end of the day
regulations are ones and zeroes just like any other bit of
information, and there's ways to comply and better ensure that
consumers and small businesses are safe.
So there's a continuing amount of innovation across the
spectrum.
Mr. Latta. Thank you very much.
And my time has expired and I now recognize for 5 minutes
the gentlelady from Illinois, the ranking member of the
subcommittee.
Ms. Schakowsky. Thank you so much.
Mr. Chairman, when I first saw the title of today's hearing
I was really glad to see that we agree that there's room to
improve the financial options currently available to consumers,
and it's our job then to ensure that the American people have
access to financial products that are fairly priced,
innovative, and not abusive.
But I'm sorry that I'm really distracted--or not, maybe not
distracted--I want to bring into this room the fact that I
think that we cannot do those things without an empowered
Consumer Financial Protection Bureau, and today on the floor we
are going to do a lot to undermine Dodd-Frank.
I wanted to ask--let me say your name right so I can look
at it here--Mr. Van Valkenburgh, you know, you seem to suggest
a kind of new Federal regulatory scheme.
You talked about the OCC getting involved. But it seems to
me that the CFPB can play a role, too, in entering this arena
and future arenas and having that institution in place is
really important. What do you think?
Mr. Van Valkenburgh. One role that the CFPB has already
played is enforcing unfair and deceptive and potentially
abusive acts and practices.
This is a logical way, potentially, to regulate some of the
entities in this space because it's an ex-postregulatory scheme
rather than ex-anti.
Our chief bugaboo, if you will, is the fact that companies
need to get licensed in several States before operating, not
necessarily that there aren't adequate watchdogs who can police
their behavior once they're running.
As far as creating a Federal hub for regulation, we are
agnostic as to which agency takes on that authority. What we
primarily want to see is coordination between the agencies
because, as I remarked, things are much simpler in more unified
governments like in the United Kingdom, where there's one point
agency, the Financial Conduct Authority, that does all
regulation.
Ms. Schakowsky. Having all different rules across many
different States, I get it.
I wanted to ask Ms. Tet-tree-ault--how do I say it?
Ms. Tetreault. Tetreault.
Ms. Schakowsky. Tetreault. OK. Got it.
I wanted to ask about the CFPB. I know Consumers Union has
been an advocate and helped in our deliberations over that by
altering the CFPB structure and funding.
How does the Republican bill on the floor today undermine
the agency's ability to do its job of protecting consumers in
the space that we are talking about?
Ms. Tetreault. So the CFPB has done amazing work for
consumers, returning $12 billion to nearly 29 million Americans
who have been wronged.
It also provides an essential channel for getting consumer
complaints resolved. They've helped hundreds of thousands of
consumers who have complained to the CFPB get resolution with
the companies who in many instances have ignored their
complaints leading up to that time.
There's an amazing 97 percent resolution rate on the
complaints that come through the CFPB.
So it would be a tremendous loss to consumers to have its
capacities diminished and particularly as my colleague here to
the left said about its UDAAP authority.
So the Financial CHOICE Act would significantly reduce if
not entirely eliminate in some instances the ability of the
bureau to go after scammers and ripoff artists and that would
be a huge loss for consumers.
Ms. Schakowsky. Right, and I wanted to follow up on that.
Bad financial actors that take a lot of money preying on
seniors, on military members, on low-income population, why
would they be disproportionately harmed then by the undermining
of the CFPB?
Ms. Tetreault. The Consumer Financial Protection Bureau has
speciality agencies within it. There are speciality units
within it that focus on particular problem areas where
consumers have suffered incredible harm and that includes
service members as well as older Americans.
So these communities would really be devastated if the
protections and the oversight that the Consumer Financial
Protection Bureau offers are reduced, eliminated or otherwise
redirected.
Ms. Schakowsky. The CFPB rule also applies to digital
wallets such as PayPal, right. So under the rule what
requirements would be in place to protect users of digital
wallets?
Ms. Tetreault. Sure. So it's really some pretty basic
safeguards: ensuring transparency and right to recredit and
redress if errors or fraud are detected. So it's really the
same safeguards that apply when you swipe a plastic card for
debit purchase at point of sale.
Ms. Schakowsky. Let me just say that I see this
subcommittee as a place where we should be protecting the CFPB
because we are designated to do consumer protection.
Thank you. I yield back.
Mr. Latta. The gentlelady yields back, and the Chair now
recognizes for 5 minutes--you're on--the gentleman from
Kentucky.
Mr. Guthrie. Thank you very much. I appreciate that very
much.
First, Ms. Hogarth, the Financial Solutions Lab has some
very interesting stories based on the start-ups you highlighted
in your testimony, and I have a couple questions.
One--and I will ask them both--how are you working with
those companies to create any easier path to commercialization,
and how many of the companies that won funding through your
application processes are offering products to customers?
Ms. Hogarth. So thank you very much.
We work both with industry incumbents as well as start-ups
and we have a network that provides introductions so that there
are opportunities not only for partnering where, you know, the
entities stay as individual entities but they're partners--
third-party vendors to an incumbent--but we also provide access
through additional venture capital and our network discussions
to help them grow and build their business independently.
And one of our companies in our first cohort, Prism, has
been acquired by a company called PayNearMe. So there's a lot
of different ways, you know, that you can think about
partnering with a financial institution. You know, you can
acquire it. You can partner with it. You can also just compete
with it.
But I think the reality is is that we really do want to see
these ideas grow to scale and eventually the idea of
partnerships is really, really important for the companies in
our lab.
Mr. Guthrie. Thanks.
Mr. Saade, in your testimony you mentioned that not only
does your firm invest in FinTech companies but you also have
co-founded three companies. In your experience, what were the
biggest hurdles launching your own start-ups and what was your
experience working with regulators across the country?
Mr. Saade. Starting a company is a leap of faith no matter
what, regardless of having the ability to raise the capital,
having an understanding of what the regulatory landscape is.
Entrepreneurs overall, no matter in what industry in this
country or around the world, really--it's a global ecosystem of
entrepreneurs--need to be supported.
So I think really the biggest hurdle to start the companies
we started or for any entrepreneur to start companies is
actually having an environment which supports that and there's
no better place I can think of.
There are pockets of innovation in which, for example, it
was brought up that the FCA is a much easier place and
situation to deal with.
But the overall entrepreneurial ecosystem in the United
States bar none is the best one--that there's a tug of war
which policymakers always need to ensure that they're dealing
with, and that is that if you're too easy on the capital
formation side the consumers get hurt and if you pull too much
on the other side you end up hampering innovation.
So at the end of the day--that's a very long answer to say
that taking a leap of faith is really what innovation and
entrepreneurship is about with a backdrop that supports it.
Mr. Guthrie. Thank you.
And Mr. Van Valkenburgh, Coin Center testified before this
committee last Congress when we took a look at digital currency
and block chain technology.
What can you tell us about how the landscape has changed
for that technology in the last year, and we heard a lot about
potential applications. Can you tell us about where you see the
most promise in the short term?
Mr. Van Valkenburgh. Thank you, Congressman.
I think the biggest change has been the emergence of
several new networks based off of the original Bitcoin open
block chain technology.
For example, I mentioned in my opening remarks Ethereum,
which is a decentralized network for creating smart contracts.
Smart contracts are a fancy word, basically, for more
programmatic flows of funds through these networks. With
Bitcoin, a transaction normally looks like I paid Mr. Chairman
some Bitcoin.
With a smart contract, we could give each of you a device,
have that device provision you with a key of sorts, like a
password, and quite literally have you vote on the flow of
funds through the network.
And unless somebody can penetrate each one of your devices
and make you vote against your will, the movement of funds will
have fidelity with your opinions when you make that vote.
That is a fantastic innovation. It exists to some extent in
Bitcoin under the name multi-sig transactions--multiple
signatures from multiple people who are voting on the movement
of funds.
Ethereum makes programming those smart contracts even
easier so you can imagine even more complicated decentralized
applications being built by supremely bright people on top of
those networks.
Additionally, Bitcoin is a very transparent network. It's
not very private because all of the transactions are fully
auditable on the block chain.
Another innovation that's recently emerged is a technology
called Zcash built on scientific research that allows for more
private but still fully verifiable block chains. That's also
very exciting.
Mr. Guthrie. Thank you. My time has expired. I yield back.
Mr. Latta. Thank you. The gentleman's time has expired and
the Chair now recognizes the gentlelady from New York for 5
minutes.
Ms. Clarke. Thank you, Chairman Latta, and to our ranking
member, Jan Schakowsky, to our expert witnesses. Thank you for
your testimony here this morning.
As the FinTech industry has grown, a number of our new
companies, not just banks, have begun offering financial
products such as e-lending and electronic payments.
The Consumer Financial Protection Bureau and the Office of
the Comptroller of Currency have been active in trying to help
these companies understand their regulatory responsibilities.
In December of 2016, OCC proposed creating a special
national bank charter for FinTech companies. State regulators
and consumer groups including Consumers Union, however, have
asked OCC to withdraw the proposal.
Ms. Tetreault, the comments submitted to OCC consumer
groups including yours expressed their concern that the
proposed charter could preempt critical State consumer
protections like caps on interest rates for loans.
Can you expand on those concerns and if OCC does go forward
with the new national charter, what are the baseline consumer
protections that it needs to contain?
Ms. Tetreault. Thank you.
The OCC's FinTech charter or special purpose charter
unfortunately would abrogate many of the State laws that are
really there to protect consumers against predatory loans and
so that is the primary concern that the advent of such a
charter would create a race to the bottom as businesses south
to find the lightest approach to oversight to them.
And so we've really expressed strong concern about this
proposal, really thinking that State regulators are in a much
better position to supervise and examine these banks and also
that the protections that States have put in place should be
honored to protect their citizens.
So it's really, you know, a concern about overriding these
in many case very strong protections, although the protections
vary greatly from State to State.
So to your second question, if there were to be such a
special purpose charter extended, it would be the same strong
oversight that the States provide. It would include no
preemption of these State protections.
It would be extensive examination and then, of course, the
safety and soundness of requirements that are so essential to
ensuring consumer protection.
Ms. Clarke. Drill down a little bit deeper on that and say
how the OCC's proposed charter differs from existing bank
charters and how they would be similar.
Ms. Tetreault. So right now I would actually draw a greater
contrast between the way that States supervise financial
services, license financial services entities and why that's
the preferable model.
To say that you have some States like California and New
York that really have extensive methods for examining the
entities that they supervise.
They can really go in there. They can see in a level of
detail that perhaps might elude a Federal regulator. So we've
seen instances in the lead-up to the housing crisis where
federally regulated entities were made aware of problems, and
action wasn't taken, and we know how that resulted in, you
know, many millions of foreclosures and a financial crisis that
nearly took down the entire economy.
So there are some pretty grave concerns about having the
Federal oversight that perhaps might not had the attention to
detail, and that is I think the biggest contrast between what
is done now and what might happen under this.
Ms. Clarke. And do most FinTech companies currently offer
their services independently or do they partner with banks or
other traditional financial service providers?
Ms. Tetreault. So it's really a mixed back in that regard.
So you have guidance to help banks and financial service
companies that are nonbanks partner together and there are
pretty extensive rules of the road for ensuring consumer
protection in that regard.
You also may see start-ups who seek licensure within the
States and you have some pretty successful examples and I will
just cite one, which would be PayPal where they're able to do
the work that they do and by pursuing these State licensees.
So it can really be--you know, there also may be a start-up
that happens within a State, and that's the first State that
they seek out licensure, and so it's a mixed bag.
Ms. Clarke. Mr. Chairman, I yield back.
Mr. Latta. Thank you very much. The gentlelady yields back.
And the Chair now recognizes the gentleman from West
Virginia for 5 minutes.
Mr. McKinley. Thank you, Mr. Chairman.
One way that consumers access FinTech is through their
smart phone and for many individuals in rural areas it's not a
very reliable service.
In West Virginia, the mountainous terrain limits that
ability for people to have access. So I'm curious as to how
FinTech companies are addressing the needs of rural areas as
compared to those in more urban settings.
Is there something that you're focussing on that you would
recommend we look towards for addressing rural areas as
compared to the urban centers?
Don't all speak at once.
Ms. Hogarth. So I will take a stab at that.
Mr. McKinley. Thank you.
Ms. Hogarth. I mean, I said that, you know, FinTech is
necessary but not sufficient and there are a set of
infrastructure issues that clearly need to be addressed, not
just in the mountainous regions but in any rural area.
And we should also add even in urban areas, you know, wifi
is not necessarily ubiquitous or cost-free. And so for many
low-income households accessing data plans is a really tough
pull on their budgets.
So in addition to sort of thinking through some of the
issues that you heard today this is really a whole cloth
because you're exactly right.
There needs to be some sort of infrastructure program in
place to be able to provide access to reliable high-quality
broadband services whether that is a wired line, a fiber optic
line or a wifi.
Mr. McKinley. Thank you.
Because I think far too often in this country we focus on
our urban centers and our rural communities across this country
are shortchanged on access and other opportunities whether it's
health care, growth, water, sewer.
I could go on with it. So I'm hoping that through these
services how helpful these can be with our smart phone. We are
still limiting a certain number of people.
Mr. Saade, in your testimony you mentioned how many
Americans are underserved by existing products and services to
help them with their finances. But there's also been a
discussion about the attention between bringing new innovations
to market quickly and making sure consumers are protected
because this is their financial health.
So how has your firm attempted to address this tension and
make sure that the consumers are getting safe, secure and
innovative products?
Mr. Saade. So one comment on your previous question. I
sense that the digital divide actually knows no--the issues
you're facing in West Virginia are not dissimilar to what you
see in the South Bronx.
Even though it's heavily populated--heavily populated
areas, the digital divide actually affects underserved
communities in different ways.
So there's some threads across what you're seeing in the
mountains of West Virginia with what you see in the canyons
across the East River.
When we look at businesses to invest in, we don't believe
that regulatory arbitrage is a business model and in fact a
couple of the principals, myself included, actually served in
the Federal Government in the executive branch as actual
regulators.
So we are very cognizant of the fact that innovation has to
be done responsibly, and a lot of innovation that we see,
there's almost like a natural self-selection of people that
approach us or we approach because they're doing innovative
things in a way that doesn't harm consumers.
So I don't think it's a binary choice. I think you can
accomplish all of it. It's just a tug of war. It depends on
where in the spectrum you want to fall. But innovation can be
done very responsibly.
Mr. McKinley. Thank you. I yield back.
Mr. Latta. Thank you. The gentleman yields back the balance
of his time.
The Chair now recognizes the gentleman from Texas for 5
minutes.
Mr. Green. Thank you, Mr. Chairman and Ranking Member, for
having the hearing today and as well for our witnesses to take
the time to testify.
FinTech has the potential to help not only entrepreneurs
and investors but those who need financial help in their daily
lives the most. Often the people with the least time and with
the most things to juggle on day to day basis are those who
come from less financially literate backgrounds.
The help that FinTech can provide to the working class is
especially important. Apps with the potential to help people
pay their bills, improve their credit, provide guidance on how
to distribute limited resources across many needs represent a
welcome development, for one, from which Congress must work to
provide the necessary regulatory framework.
However, the testimonies of the distinguished witnesses
also highlight the importance of consumer protections. Despite
the potential benefits as consumers' financial data becomes
available to an increasing number of service providers,
consumers become more vulnerable to the theft and abuse of that
data. They must have somewhere to turn in case that happens.
I look forward to discussing on how the balance to the
risks and rewards that FinTech can offer with witnesses.
Ms. Tetreault, in your testimony you underline the
importance of consumer protections when it comes to FinTechs
and you lay out consumer safety guidelines which several types
of FinTech service providers should adhere.
With the CHOICE Act on the floor this week, what impact if
any do you see this having on the ability of the Consumer
Finance Bureau to implement and enforce these guidelines?
Ms. Tetreault. Sure. So I think if the Financial CHOICE Act
passes it would be devastating for consumers for a variety of
reasons, specifically related to consumer harms.
It gets rid of the monitoring function of the bureau and
the market monitoring allows the CFPB staff to get a good
insight into what's happening within various segments within
financial services and meet with those industry leaders and
service providers and also to monitor consumer complaints and
concerns long before they become system issues or widespread
problems for consumers.
So that would disappear. You'd have the loss of the public-
facing database, consumer conflate database that allows not
only researchers but everyday people to go ahead and look and
see where the issues are with particular service providers
around particular products.
It's searchable in many dimensions. There would be a loss,
presumably, of the specialty offices within the bureau or at
least those are made optional so you potentially lose Project
Catalyst, which is an initiative from the bureau to take a look
at innovation.
With that you lose the convening that the bureau does for
financial technology companies and providers. You lose the
opportunity for a no-action letter which is----
Mr. Green. I'm almost--I only get 5 minutes. We've heard
today about FinTech's potential for offering financial service
for the unbanked and underbanked populations, which tend to be
lower income.
But research shows that the majority of the people that are
actually using FinTech products are wealthier customers. What
needs to be done so that the unbanked and underbanked
populations can also have full access to FinTech potential
benefits and are there obstacles preventing these populations
from using these traditional financial services because of the
lack of access to these new financial products?
Ms. Tetreault. So access to broadband is definitely an
issue and one that's been discussed here because so many of
these innovative products and services are reliant on a secure,
sound, continuous internet connection. That, I would say, is a
very strong hurdle.
I think the other is one of the things that we've seen a
lot is consumer concerns. So, you know, the stories that we
hear back when we ask people, for example, why aren't you using
mobile payments is they say, I'm worried about safety and
security.
And while the evidence may indicate that these services are
quite safe, the consumer perception potentially was there
because of these gaps that existed, for example, before the
CFPB's final prepaid rule.
So, you know, there is I think any number of things that
stand in the way of consumers engaging with these services and
concerns that can be addressed by appropriate safeguards.
Mr. Green. I am almost out of my time. Last month, Energy
and Commerce Democrats introduced the Lift America Act, a 21st
century infrastructure package that includes $40 billion to
expand access to broadband internet not only in rural areas but
also in the urban areas like I represent.
Thank you for your time, Mr. Chairman.
Mr. Latta. Thank you. The gentleman yields back.
And the Chair now recognizes the gentleman from Indiana for
5 minutes.
Mr. Bucshon. Thank you, Mr. Chairman.
A question for anybody, really. I mean, technology is
great. My older kids use Venmo. They don't have any cash,
right. So we know that people are underbanked and unbanked now.
What makes us optimistic that adding technology to that will
substantially change that situation?
Just a hypothetical because there are reasons why people
don't have a bank or they're underbanked now, and it could be
access to a local, you know, to a bank standing on the corner.
But there are other, more complicated reasons why. And so when
you add actually the--I'm just playing a little devil's
advocate here--you add the technology on board, what makes us
think that that will help? Be curious to--anyone.
Ms. Tetreault. I will just--thank you--I will address that
very briefly around faster payments. I will use faster payments
as an example, as that's an area where the technology will need
to move forward to bring us to real-time payment, and there are
proposals out there.
And how I can see that bringing in underserved consumers is
that it allows for real-time information for better money
management, and then there are potential aspects of the
technology that would ensure that there wouldn't be an
opportunity for things like surprise fees or overdrafts for the
way that the payments actually work.
So I see that. We know for a fact from consumers, due to
extensive research, that it is surprise fees and overdrafts
that often drive consumers out of the mainstream banking system
and forces them to use, you know, more expensive products or
rely on cash.
So I see that particular area as a tremendous opportunity.
Mr. Bucshon. OK. Yes.
Ms. Hogarth. And I would add in addition to the faster
payments piece that the ability of financial technology to give
consumers a 360-degree picture of their finances is really,
really important because a lot of times you're operating in
one-off decisions when you don't really understand the
interaction of the decision X with decision Y and financial
technology and many of the apps now are really trying to help
consumers get that fuller picture of their financial lives.
Mr. Bucshon. OK.
Mr. Saade. I was going to say that just one example that
happens to be a relevant one here is that the biggest
generation of Americans--76 million or something of them--
typically would rather not step foot in any one of the 100,000
or so, give or take, bank branches in the United States.
So even though there's sort of a dark side of technology
kind of making you anonymous, as we have seen in other
industries----
Mr. Bucshon. Oh, yes.
Mr. Saade [continuing]. In the media recently, that sort of
faceless ability enables you to access things with a lot less
friction and the lack of friction leads to lower cost. So I
think the question is not what but how.
It's a very good question you ask but the--and if you look
at it from a business perspective, 2 billion people are not
getting banked around the world. That is a huge business
opportunity.
So there's a lot of people thinking about this exact issue,
not just venture capitalists or the people here but people
across the spectrum.
Mr. Bucshon. OK.
Mr. Van Valkenburgh. The only thing I would add is that the
user interface matters a great deal with technology. Google was
actually the fifteenth search engine thereabouts.
There were several that tried to make the web accessible to
people and help them find the information they wanted but
simply didn't make it intuitive. It just didn't make sense to
people when they tried to use it. Rapidly prototyping and the
ability of new people to come in with a fresh idea of how to
get people excited about their financial futures is very
important and to the extent that open block chain networks
create infrastructure that they can build on top of minimizing
the costs of trying something new I think will see much more
rapid consumer adoption of these new tools because they'll
suddenly make sense when they're finally built by the right
people had the right vision.
Mr. Bucshon. Yes. My concern is that, what do you think
will happen to more traditional ways that people access the
banking system?
Because, as you know, already technology is such where--
say, for example, my parents, you know, who have gone to a bank
for years and years. What happens when there's no longer a bank
on the corner? So I think we need to think about that question
also, and I'm all for technology.
I think it's great. But to your point, we need to make sure
that the services that are available are intuitive, are easily
accessible not only to my sons who are in their 20s but to my
in-laws and my parents who are in their 80s if we are going to
backtrack a little bit on more traditional type service
availability.
Thank you. I yield back.
Mr. Latta. Thank you. The gentleman yields back.
And the gentleman from California is recognized for 5
minutes.
Mr. Cardenas. Thank you, Mr. Chairman.
Once again, I appreciate the opportunity for us to have
this hearing. This question goes out to any of the individuals
who want to chime in and answer.
Could you give some examples of how often is a bank account
needed to participate in these technologies and count as a
traditional bank account?
Mr. Van Valkenburgh. Especially in the digital currency and
open block chain space, despite the fact that the technology I
described in some ways supplants the correspondent banking
system, there will still be a need to onramp people into these
new digital currency networks.
So it will be very common for the company to have banking
relationships that they process payments for and it will be
necessary for the user to have a bank account that they can
connect in order to exchange their dollars for digital
currency.
Unfortunately, many of the companies that are working in
this very exciting space have had trouble getting and
maintaining banking relationships because they're seen as a
money-laundering risk.
That is despite the fact that all of the companies
operating in the U.S.'s exchanges are fully registered and
compliant with anti-money laundering requirements from FinCEN.
I think there is a bit of a cultural problem here where
perhaps the examiners look at this as a fringe technology that
should simply be ignored and banks take a derisking approach.
I think that approach may be misguided because we want
these companies in the regulatory system because if these
technologies exist outside of the regulatory system we'll
simply have less information about what people are doing with
them and will not allow them to flourish as hubs for innovation
in these services.
Mr. Cardenas. OK. Well, Mr. Van Valkenburgh, how do you
open block chain networks? How does open block chain networks
encourage financial inclusion and diversity in the financial
marketplace?
Mr. Van Valkenburgh. So the primary mechanism, I think, is
allowing for the rapid prototyping of new tools that can be
intuitive for users and meet their goals.
So transactions can be faster when their back end is
running through an open block chain network. It can be cheaper
for the customer and it can also be cheaper for the business to
try new approaches.
So I think in that competition you find more likely there
will be an emergence of apps and services that speak to
underserved communities, make them want to use those
technologies and make it easier for them to use those
technologies safely.
Mr. Cardenas. OK. Thank you.
Ms. Tetreault, are there occurrences of deceptive practices
in the financial industry that consumers should be aware of,
and if there are, what role can Congress play in helping to
alleviate that issue?
Ms. Tetreault. There are many abusive practices.
Fortunately, we've seen a tremendous enforcement of consumer
financial protection laws by the Consumer Financial Protection
Bureau. So that's where you have these 29 million Americans
getting back $12 billion in relief.
In terms of existing problems, having a strong cop on the
beat is really essential to ensuring the consumers are
protected, and we are very eager to see the strength and
integrity of the Consumer Financial Protection Bureau ensured
by keeping a strong leadership structure, no attacks on funding
and maintaining its singular focus on consumer financial
protection as opposed to dissipating and across a number of
Federal regulators.
Mr. Cardenas. So having a cop on the beat is a good thing?
Ms. Tetreault. Absolutely, and I think, you know, you can
see every day it seems that there's another example of a
financial institution or financial service provider behaving
badly and to see them held to account not only holds that
business to account but it sets an example so that other
services providers know that they need to mind their p's and
q's.
So it's incredibly important to consumers to have this cop
on the beat, or as we like to refer to it, consumer watchdog so
that folks, you know, are protected and make sure that there
are not only protections in place because of the rulemaking
authority but also people watching out to ensure that there are
safe financial service products available.
Mr. Cardenas. I mentioned earlier in my opening statement
about the opportunity or idea that perhaps this opportunity
could give unbanked individuals and households an opportunity
to get involved in access to capital and financial stability.
What does this technology bring to bear when it comes to
underwriting and giving someone an opportunity to get access to
capital versus the old brick and mortar, you know, old-
fashioned underwriting methods?
Ms. Tetreault. So the one thing I would say that we do see
a lot of attempts from service providers to quantify the
creditworthiness of consumers. I would just raise two quick
concerns.
In many instances there's a lack of transparency and then
there's the concerns around the way that data is collected and
used and would urge service providers to be considerably more
transparent in the way that they quantify consumers.
Mr. Cardenas. Thank you. Yield back.
Mr. Latta. Thank you. The gentleman's time has expired, and
the Chair now recognizes for 5 minutes the gentleman from
Illinois.
Mr. Kinzinger. Thank you, Mr. Chairman. Thank you all for
being here today. This is a very important hearing. This
committee having jurisdiction over consumer affairs, I'm very
pleased that we are continuing to shed light on the importance
of financial technology and the benefits it can provide.
FinTech is improving the speed, convenience, efficiency and
accessibility of financial information for consumers. At last
Congress I introduced a resolution with Congressman Cardenas
highlighting the potential positive impact technology can have
on a consumer's financial health and expressing the sense of
Congress that there should be a single national strategy to
ensure the development of FinTech.
In many cases we see out here technology always leads
Congress and Government, and we basically kind of wake up and
see what's happening and then have to figure out a strategy to
deal with it.
So some of you have already answered to an extent this
question but I just want to ask it of all of you and I will
start with Mr. Van Valkenburgh because he has the coolest last
name on the committee or on the panel. No offense to the rest
of you.
But what are the issues and trends that we in Congress need
to watch for to ensure that consumers benefit from innovation
in a responsible and a secure way?
Because it sounds like developing the regulatory framework
can obviously be a huge challenge. But this access to the
financial account is very serious and should be treated as
such. So I'd appreciate all your thoughts. I will start with
you, sir.
Mr. Van Valkenburgh. So I think the key distinction to be
made is between technologists who are building these
technologies and holding other people's value, playing that
custodial role, and technologists who are simply building the
future infrastructure, really, the pipes for the future
economy.
Making that distinction is key because I think you're
absolutely right that we need a unified approach to regulating
those custodians to make sure consumers are protected and we
very much appreciate your and Congressman Cardenas' resolution
emphasizing that point.
But it's also very important that people who are building
the fundamental infrastructure are not swept up in a burdensome
regulatory regime that isn't aimed at the risks they create
because they don't take custody, because they don't actually
hold other people's valuables.
Mr. Kinzinger. That's interesting. OK.
Ms. Tetreault. I would say first the importance of strong
rules of the road as exhibited with the Consumer Financial
Protection Bureau's final prepaid rules.
So having that extend to digital wallets that hold funds I
think is a great example of how regulations can be in place at
the Federal level.
And then to the question about any sort of streamlined
oversight is so long as the State consumer financial protection
rules are not preempted, you know, there's opportunity there.
Mr. Saade. Yes, we've been, obviously, very focused on
lending and kind of the debt side of the balance sheet. But
just to highlight that, there's a whole other side of the
balance sheet which is equity and the SEC, for example--I'm
just going to answer it this way--tried a lot of really
interesting things to allow for common citizens to participate
in let's call them high-value potential investments and for
otherwise companies raising capital or projects raising capital
or people raising capital--not loans but actual capital--is
Title 3 of the Jobs Act, and they worked pretty diligently to
get it done, but what it highlighted was that, as they were
going through that, all of the States' regulatory entities for
securities were doing their own fixes, and they were doing them
only with the hope that the SEC would then work with the
preemption.
So I think that the jobs all of you have is very difficult.
But if you put things into the perspective of what benefits
consumers respond to, you end up in a place that actually is
solutions that could work.
Mr. Kinzinger. Thank you.
Ms. Hogarth, I have another question for you, and since
time is limited I will just ask that.
You discussed seeing competition in the FinTech space
around savings products and financial health for employees
where there's been little innovation in the past.
Can you talk a little further about what changed in that
environment that spurred innovation and competition?
Ms. Hogarth. Thank you.
Breaking into the employer channel is very, very difficult,
and one of the things that we have found that is very, very
helpful is to just do proof of concepts and pilots.
And by having somebody be bold, to go first and to try out
something gives other people confidence that they too can do
it.
This actually gets to my answer to your original question,
which is thinking about how bright lines used to work when we
had a nice segmented marketplace, but there is significant
blurring of lines right now.
And thinking about in terms of trends, how we regulate in
the 21st century not so much with specific rules but perhaps
with principles and guidelines. For example, thinking about
consumer outcomes as the metric of success, not whether or not
your disclosure is in 18 point font.
Mr. Kinzinger. Very good. Very interesting.
Well, I thank all of you for your participation. Well, I
thank all of you for your participation. I will yield back my
negative 37 seconds, Mr. Chairman.
Mr. Latta. The gentleman yields back.
And the Chair now recognizes the gentleman from New Jersey
for 5 minutes.
Mr. Lance. Thank you very much, Mr. Chairman.
My district in New Jersey has a lot of constituents who
work in the financial services industry either in New Jersey or
in New York itself.
Are the innovations in FinTech being driven predominantly
by start-ups or by the more traditional banking institutions
and are there partnerships between the two--between start-ups
and more traditional banking institutions--and I defer to all
members of the panel.
Mr. Van Valkenburgh. Some very fruitful partnerships have
emerged even in the open block chain space. I think in the
early days many people believed Bitcoin was just a strange
internet phenomenon. But that has radically changed as block
chains become a popular almost buzzword in Wall Street and
elsewhere.
One particularly exciting partnership to highlight is the
partnership between Ethereum, Zcash and innovators at JPMorgan
to build a block chain that will be flexible for smart
contracts like Ethereum's open block chain network that will
have some privacy elements taken from the Zcash network and
that will serve potentially heavyweight enterprise type
clients.
Mr. Lance. Thank you. Others on the panel, would you like
to comment? Yes.
Ms. Hogarth. So, obviously, JPMorgan Chase is clearly
involved in trying to stimulate innovation not only outside of
the bank but certainly within it as well and there are a number
of other incumbent banks who have their own innovators hubs.
And I think there are a number of other entities like CFSI
who are trying to stimulate in the start-up community. So I
think it is a both end, Congressman.
Mr. Lance. And are these more traditional forms of banking
the coordination--are they the American banks or is this also
true of banks in other parts of the world?
Ms. Hogarth. Well, certainly, we've seen a lot of
innovation across the globe. I think we need to look to our
colleagues in Australia, Singapore, Hong Kong, beyond the U.K.
The U.K. is always getting lifted up as the--as the
prototype here. But there are a lot of really great innovations
coming out.
But I would agree with Mr. Saade that the U.S. is, you
know, bar none the leader in this arena.
Mr. Lance. I, obviously, have a bias toward New York as
opposed to London or Shanghai or Singapore. Is there something
that we should be doing here in Congress to make sure that we
are preeminent in FinTech?
Mr. Van Valkenburgh. I would say, quickly, that for
noncustodial developers of these technologies--these open block
chain networks--the State-by-State money transmission framework
is a bit of a maze to navigate.
They are really not money transmitters. They build pipes.
They don't push the water through the pipes. But they'll have
to get an opinion from 53 different States and territories from
the regulator in that jurisdiction that says that they're safe
and they won't be on the hook for unlicensed money
transmission, which carries a $5,000--well, no, 5 years in jail
and potentially multi-thousand-dollar fines.
So those are very real liabilities and I think they
frighten people away to some extent from building their
infrastructure here in the U.S.
Mr. Lance. This is always a challenge regarding our dual
sovereignty. What would you recommend that we do? Because we do
have dual sovereignty in this country.
Mr. Van Valkenburgh. Yes, and I think the States have a
valuable role to play as far as licensing custodians of other
people's digital currency.
However, I think we do need a Federal safe harbor that
would basically clarify the legal landscape across all the
States saying that noncustodial businesses should not need to
be licensed.
Mr. Lance. Are there others on the panel who have an
opinion on that? Yes.
Mr. Saade. I'm going to take a little bit of a different
angle and that is something that the Federal Government has
done for decades is invest in extremely basic seed money and
basic R&D science and development, which at the end of the day,
after Defense uses the technology or whatever the technology is
being used for, the private sector comes in and innovates on
top of that.
So one thing I think that, irrespective of are you
developing clean energy technology or a cybersecurity thing
that could be applied here or anywhere else to protect our
borders, that's something the Federal Government can do and is
the only entity that can do it--spend significant money looking
into the future.
Mr. Lance. Thank you. This is a very interesting and
important topic and I hope that the Commerce Committee takes
the lead on this issue as we have taken the lead in so many
areas and it's a very distinguished panel.
Thank you, Mr. Chairman.
Mr. Latta. Thank you very much. The gentleman yields back
the balance of his time.
And at this time, the Chair recognizes the gentleman from
Mississippi, the vice chairman of the subcommittee.
Mr. Harper. Thank you, Mr. Chairman, and thanks to each of
you for being here.
Ms. Hogarth, I will start with you, please. The number of
companies applying to be a part of the Financial Solutions Lab
is remarkable: 358 for this upcoming group of companies.
In your testimony you mentioned three key trends from that
applicant pool, one of them being companies focused on products
subject to complex regulatory oversight. Understanding that the
finalists have not been announced yet, can you give us some
examples of what sorts of services might fall in this category?
Ms. Hogarth. Sure. You know, just as consumers' lives are
not sort of unidimensional, the products that our lab companies
develop are cut across traditional financial services products.
They're not just a transaction card. They're not just a
credit card. They're not just a savings product. They feature
some of those multiple features.
In our last cohort, we had a company that worked with
freelance workers. We had a company that was in a loan
servicing arena, and we had a very interesting company called
Remedy that looks at medical bills and errors on medical bills
and how do you help consumers understand what's in their bill
and protest any duplicative charges, things like that.
That company actually saved their customers about a
thousand dollars a year in misbilling on medical products.
That's not a bank account. That's not a stock or a bond or a
mutual fund.
It's not an insurance product. And so there are these kinds
of really complex kinds of financial issues that consumers face
where it doesn't fit neatly into a regulatory box.
Mr. Harper. OK. Thank you.
Mr. Valkenburgh, you know, we understand that innovations
in the financial industry have incredible potential to offer
great benefits to consumers and we are also mindful of consumer
protections and, of course, privacy concerns.
Can you speak to the role the FTC can play to ensure the
latter?
Mr. Van Valkenburgh. I'm sorry, Congressman. That was the
FTC?
Mr. Harper. Yes.
Mr. Van Valkenburgh. The FTC plays a valuable role
enforcing unfair and deceptive acts and practices somewhat
mirrored by the CFPB's authority there.
However, I think they play a valuable with respect to these
open block chain networks in that many of the applications that
people build on these networks will not be custodial and, as I
suggested, should not therefore be regulated as money
transmitters.
You might then ask OK, well, who's going to check their
code as a regulator, make sure that the app does what it says
even if the money is not being held by the app designers.
Unfair and deceptive acts and practices have a long track
record in making sure that people build their tech right on the
internet for nonfinancial Web site and I think the FTC can
continue to play that role with respect to these new open block
chain networks.
Mr. Harper. You know, in your testimony you also talked
about digital assets outside of digital currencies, of course.
Can you help us understand exactly what those digital assets
could be, and help me visualize what the future looks like if
this technology can develop?
Mr. Van Valkenburgh. Absolutely. So you can think of these
things as bearer instruments and the bearer instrument we are
most familiar with is, of course, cash. It's a way of doing
peer to peer money transfer.
But there are other bearer instruments in our real world.
There's tokens for a fairground. There's tickets for a concert.
There's vouchers for certain goods and services that won't be
used for other goods and services.
One particularly exciting network that's being developed is
called the Interplanetary File System, which I'm really glad I
get to say here in the subcommittee.
That is a decentralized cloud storage network that would
allow people to just use the internet to store files without
contracting with one or another company like Amazon or Dropbox.
The way that the files would be stored would be encrypted
for privacy and then they'd be verifiably stored at different
places by people running computers who are rewarded for
providing that storage with a voucher, Filecoin, that can only
be spent on buying storage.
Mr. Harper. I mean, it's incredible to comprehend and I'm
so glad you got to use that phrase, too. That's very good.
I see my time is almost up so with that I will yield back.
Mr. Van Valkenburgh. Thank you, Congressman.
Mr. Latta. Thank you. The gentleman yields back the balance
of his time, and the Chair now recognizes the gentleman from
Florida for 5 minutes.
Mr. Bilirakis. Thank you. Thank you, Mr. Chairman. I
appreciate it very much and I want to thank the panel for their
testimony today.
I will start with Ms. Hogarth. Maybe I mispronounced that.
I apologize. Hogarth.
In your testimony you talk about the Financial Solutions
Lab which helps start-ups focused on improving consumers'
financial health and outline a few companies.
One of those companies, Digit, uses an algorithm to help
people automatically save money without having to move the
money themselves. Would you, again, tell us more about how they
made it to your program and what their experiences have been so
far?
Ms. Hogarth. So they made it to our program by--once you
apply to our program, there is a series of evaluations that we
do. A number of, you know, like, sort of, is this really
helpful to consumers. CFSI bases a lot of our work on our
compass principles, which are to build inclusion, build trust,
promote success and create opportunity.
And so we always ask people ourselves how much does this
company help with inclusiveness, trust, opportunity and
success.
We do financial due diligence so we look at the business
model of the company and we also do sort of a--what I will call
a gut check in is this actually going to improve the financial
health of U.S. households.
Mr. Saade's company has helped us in the past in reviewing
so we are not just looking at these ourselves. We have a number
of outside and expert reviewers including consumer advocacy
organizations.
The company Digit has grown substantially over time. Most
of the companies in our cohort, our labs, have grown. As a
matter of fact, they now reach a total of about 10 million U.S.
households, which is 10 times what they were when they joined
the program in the beginning.
So it is really, I think, on the whole the companies find
it a very positive experience.
Mr. Bilirakis. OK. Thank you very much.
This question is for the panel. We'll start with you, Ms.
Hogarth, if you wish. Many individuals own and run small
businesses. These businesses power---they are a major part of
the economy--obviously, jobs, financial well-being. How is
FinTech and the innovation you are seeing in this space going
to help small businesses find capital, reduce paperwork or
filing costs or any other examples you can share? We'll start
of with you, please.
Ms. Hogarth. Sure. Well, I think that one of the things
you've seen in the market over the last several years is new
business models.
The marketplace lenders and other kinds of opportunities
for small businesses to get access to capital is really, really
important and when we are talking about access to capital you
have to remember that financial institutions--the incumbent
financial institutions often don't want to make that $25,000
loan.
They want to make the $250,000 loan or the $250 million
loan. So having an opportunity to serve the market that the
really small business guy needs--the food truck guy, the guy
that just needs a pizza oven or a dentist chair--those become
really, really important.
Mr. Bilirakis. That's good. Anyone else, please?
Mr. Saade. Yes. I would say that 30 million or so U.S.
small businesses, half of them, when you're looking to give
them credit, it's actually a person credit.
So at the end of the day, a lot of these small businesses
actually are basically personal guarantees and all this stuff.
So that's one thing is that helping consumers access credit
means that they can start these micropreneurial businesses.
The other thing is the, like she was saying, has to do with
the size. Typically, because pools of capital have become so
big, especially banks and things of that nature, they don't get
out of bed for anything less than some big number.
So there's a huge swath of underserved small businesses not
for any macabre reason other than it doesn't make any business
sense. So a lot of these innovations actually label you to
scale the ability to deliver capital to these tiny pipsqueak
companies which, as you said, are the beating heart of our
economy. So it's critical to small businesses.
Mr. Bilirakis. Very good. Would you like to add something?
Ms. Tetreault. If I may, I just would want to emphasize
that micropreneur is another thing that can be incredibly
important is receipt of payment and that faster payments can
really enable receipt of those funds so long as banks are held
to make those funds available to consumers upon receipt. The
gap needs to be closed.
Mr. Bilirakis. Very good. Thank you.
Mr. Van Valkenburgh. I would simply echo the rest of the
panel saying that the reduction in costs of provision of these
services and potentially the reduction in costs of having a
robust in order to discover creditworthiness are things that
open block chain networks can deliver on by streamlining the
pipes in between, you know, persons, small businesses, big
companies and making trust and verifiability easier between
those parties.
Mr. Bilirakis. Very good. My time has expired, Mr.
Chairman. I yield back. Thank you.
Mr. Costello [presiding]. Gentleman yields back. I will
recognize myself for 5 minutes.
Mr. Van Valkenburgh, I have a block chain company in my
district in Berwyn, Pennsylvania--AlphaPoint--who prior to this
hearing echoed much of the details that you shared today. In
fact, they're doubling the size of their team, and they expect
that trend to continue.
Preliminarily, I'm curious. When we talk about block chain
technology and job creation and GDP growth, is block chain
technology creating new jobs or displacing old jobs?
Mr. Van Valkenburgh. I think that's an excellent question.
I come from a legal background, and when the term ``smart
contracts'' started floating around, everyone started
suggesting that, well, we'll be able to get rid of the lawyers,
that's great.
I think the reality is that's simply either too optimistic
or foolhardy. Really, what you end up seeing is retraining.
A lawyer, for example, in this space should now learn how
to code. They should learn how to write a contract that is not
only embodied in legal terms in written language but also
potentially embodied in computer code that runs on top of a
decentralized network.
So I don't think this leads to substantial job losses. I
think it does lead to challenges with retraining and I think
education and efforts to make sure that people are aware of how
things are changing are important to that end.
Mr. Costello. I discerned a little bit of disagreement on
the panel on the issue of FinTech charters, and so I first
wanted to ask you this question and then open it up to those
who agree, disagree or maybe have a slightly different take.
You used an interesting phrase--issue of permissionless
innovation versus responsible regulation. I think that's what
you characterized it as, and I get what you're getting at
because I think there's always that tension when we talk about
innovation between making sure that regulatory barriers don't
get in the way.
At the same point in time, you don't want innovation to
sort of take advantage of an outdated set of rules or laws that
creates victims and I think that that's what we are really
focussing on when you talk about FinTech charters and this
issue writ large.
The question that I have for you on FinTech charters is,
Why do you think that they're needed versus why could it not
just be being a little bit additive to the existing regulatory
or legal framework which already exists?
Mr. Van Valkenburgh. So under existing----
Mr. Costello. It's a little thing, and it's kind of a big
step. I would----
Mr. Van Valkenburgh. Yes. Thank you, Congressman.
I think under existing regulatory structures in general if
you want a unified Federal regulator you're going to need to be
what we traditionally consider a bank.
You're going to need to take deposits, make loans and maybe
do check paying or payments. If you don't want to do deposit
taking and maybe if you don't even want to do loans--you just
want to do payments--you have no choice for a unified Federal
regulator. You will have to go State by State and get money
transmission licensing.
Now, that is a severe barrier to innovation from a
permissionless innovation standpoint because you're going to
have to have 53 conversations across the States and territories
and explain, well, in many cases what Bitcoin is and that is a
difficult conversation to have with a State regulator.
Mr. Costello. Right.
Mr. Van Valkenburgh. Now, they may be on board with what
you're proposing long-term but it's a lot of legwork. Now, the
alternative would be can I get one Federal regulator and I
think the OCC's FinTech charter presents an opportunity for
that because they've suggested that they're willing to charter
banks or, you know, Federal banks who do not do deposit taking,
who only do payments or only do lending.
I would add that the controversial nature of the charter
with respect to some consumer groups I think often focuses on
aggregation or preemption of State limits on interest rates.
This is not an issue that we take a position on.
At Coin Center, we are primarily concerned with payments
companies getting Federal charters, not lenders.
Mr. Costello. And I don't see what--I mean, you can have
preemption, but it doesn't mean everything is preempted.
Mr. Van Valkenburgh. Precisely.
Mr. Costello. So I tend to see the argument your way there.
Others?
Ms. Tetreault. I would emphasize that it is the preemption
of those lending caps that raises a particular concern and then
there also is a question about whether or not there will be
enough oversight in particularly examination and supervision.
And then there are the concerns around, obviously, the
safety and soundness requirements. I think also one other piece
of it is when it comes to information sharing that there are
tools available at the State level that may not exist presently
at the Federal level. So that would need to be addressed as
well.
Mr. Costello. But safety, soundness, oversight--could you
make the argument, though, that given the sophistication of
this that that might be done better at the Federal level but
you wouldn't preempt issues such as interest rates, et cetera?
Because I understand State banking law, but on some of this
stuff it just strikes me that preemption might be the way to
not have innovation be hampered by State patchwork.
Ms. Tetreault. I understand around the duplicative efforts
and the concerns there and, again, that could be something that
is more streamlined with a national licensing systems.
I would not rule that out provided that there are those
essential safeguards in place and no preemption of those
lending caps in particular.
Mr. Costello. Anyone else?
Ms. Hogarth. I would just like to point out that I have a
driver's license from the State of Virginia and it lets me
drive anywhere across the United States.
And I recently drove in South Africa on the left. So go
figure. But I still have to obey the State speed limits, and I
think there's an interesting analogy there.
Mr. Costello. Thank you.
Seeing there are no further members wishing to ask
questions for the panel, I would like to thank all of our
witnesses again for being here today.
Before we conclude, I would like to include the following
documents to be submitted for the record by unanimous consent:
a letter from Electronic Transactions Association, a letter
from Competitive Enterprise Institute, a letter from Kaspersky
Lab, a letter from Intuit.
[The information appears at the conclusion of the hearing.]
Mr. Costello. Pursuant to committee rules, I remind Members
that they have 10 business days to submit additional questions.
Ms. Schakowsky. Without objection.
Mr. Costello. Very good. And I ask that witnesses submit
their response within 10 business days upon receipt of the
questions. Subcommittee is adjourned.
[Whereupon, at 11:55 a.m., the committee was adjourned.]
[Material submitted for inclusion in the record follows:]
Prepared statement of Hon. Michael C. Burgess
Good morning. I want to thank Chairman Latta for holding
this hearing today. When I was chairman of the Commerce,
Manufacturing, and Trade Subcommittee we held a hearing on
mobile payments that provided valuable insight into the ways
consumers pay for goods and services using financial
technology, or FinTech.
FinTech provides numerous opportunities for individuals who
are unbanked, underbanked, or simply looking for banking
alternatives to access financial services. Advantages of
FinTech include faster receipt of payments, improved access to
wealth-management services through broad data acquisition and
analysis capabilities, increased access to lines of credit and
cryptocurrencies, and accountability through auditable,
permissionless, distributed ledgers like blockchain networks.
One of the reasons FinTech products and services have
continued to develop is the desire for innovative solutions to
common financial needs. You can now split a check or buy an
online item with the press of a button on a mobile device, all
without thinking about directly involving a banking
institution.
In addition, FinTech provides advanced tools to aid
individuals with financial planning and decision-making where
such services previously did not exist to such a granular
level. This capability is especially important for individuals
who need exact guidance on how to overcome debt or increase a
savings account balance.
While FinTech has successfully developed solutions for
alternative access to financial services, for it to continue
meeting the needs and desires of consumers it must remain free
of burdensome and disparate laws and regulations. Congress
should evaluate ways to hold providers of products and services
accountable without holding them back from further innovation.
The maturation of the FinTech industry is a step in the
right direction for incorporating the unbanked and underbanked
into the economy as well as providing alternatives for
traditional financial services. I look forward to learning more
about this industry, and its barriers to entry, from our
witnesses today. Thank you.
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