Federal: Statement for the Record to The Subcommittee on Digital Assets, Financial Technology & Inclusion Of the House Committee on Financial Services United States House of Representatives on Modernizing Financial Services through Innovation & Competition

Statement for the Record
On Behalf of the American Fintech Council before
The Subcommittee on Digital Assets, Financial Technology and Inclusion
Of the House Committee on Financial Services
United States House of Representatives
Washington, D.C.
October 25, 2023

Modernizing Financial Services through Innovation and Competition

Chairman Hill, Ranking Member Lynch, and Honorable members of the Subcommittee on Digital Assets, Financial Technology and Inclusion, thank you for the opportunity to submit the American Fintech Council’s (AFC) statement for the record.

AFC is the premier trade association representing the largest financial technology (fintech) companies and the innovative banks that power them. AFC’s growing membership spans technology platforms, non-bank lenders, banks, payments providers, student loan servicers and platform holders, credit bureaus, and personal financial management companies. Our mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by supporting responsible innovation in fintech and encouraging sound public policy. AFC members are at the forefront of fostering competition in consumer finance and pioneering ways to better serve underserved consumer segments and geographies. Our members are also lowering the cost of financial transactions, allowing them to help meet demand for high-quality, affordable products.

Our members are improving products that help advance consumer financial health and financial capacity. AFC members are interested in providing more innovative products that address consumer demand for more affordable, lower-fee deposit products, unsecured consumer credit, small-dollar credit, and other products. AFC members are focused on products that are responsible, fair, transparent, and want to work in partnership with federal and state policy makers to scale responsible and competitive options in the marketplace.

I. Responsible financial innovation creates affordable, competitive, and safe services for consumers

AFC members span all verticals of the financial services industry and as further detailed below, have successfully provided lower cost and more efficient alternatives to traditional financial products and services. Fintech companies and the innovative banks that partner with them have created significant competition in all areas of the financial services market, which has led to industry changes for the benefit of consumers, particularly those from traditionally underserved communities.

A. Fintech lending expands access to consumer credit

The Federal Reserve Bank of St. Louis noted that fintech has expanded the consumer use of unsecured personal loans. This study also notes the role that fintech is playing in creating stronger competition for consumer product choice. The study points to Transunion’s research that shows Fintech unsecured personal lending expanded from 5% to 38% of the market from 2013 to 2019 alone. Fintech personal loans have become a lower-cost alternative to carrying debt on a credit card. In fact, about 80% of these loans through LendingClub are used to refinance credit cards or consolidate debt. Researchers at the Federal Reserve Banks of Philadelphia and Chicago have found that, “consumers pay smaller spreads on loans from LendingClub than from credit card borrowing.” While the average annual percentage rate (APR) paid on credit cards was 19.2% in 2020 according to the Consumer Financial Protection Bureau (CFPB), average APRs on LendingClub personal loans are lower by about one-fifth, or about four percentage points, evidenced by internal data and researchers from the St. Louis Federal Reserve Bank. Personal loans also have drastically lower back-end fees as compared to credit cards. Late fees have been a particular focus of the CFPB which notes that “[i]n 2019, the major credit card companies charged over $14 billion each year in punitive late fees.” CFPB research indicates that credit card late fees represent about 1% of outstanding balances. In contrast, late fees charged by LendingClub have represented less than 0.01% of outstanding balances.

Unsecured personal loans offered via Fintech companies are generally not associated with carrying what have been classified as hidden or deceptive fees. For example, loans offered by one bank-fintech partnership only charge consumers late fees following a grace period, and NSF fees for returned payments, but do not assess any payment processing, convenience, or prepayment fees. These unsecured personal loans are designed to be transparent, consumer friendly alternatives to payday loans available in the market. Competition facilitates more affordable options for consumers, as demonstrated through its effect on several factors, including credit score profiles, product types, and provider structure. Researchers at the Federal Reserve found considerable interest rate and APR savings from debt consolidation through marketplace lending after calculating spreads and analyzing data across nine credit score bands as compared to average credit card offer rates. Industry research supports these findings for various products and loan sizes.

Buy-now-pay-later (BNPL) company, Affirm, through its digital lending platform, provides consumers with lending solutions through flexible payment plans. Under these plans, consumers can select from available financing options. Affirm’s “Pay in 4” product offers interest-free, bi-weekly payments, which often cover everyday items. Alternatively, consumers can select longer repayment plans, ranging from 3 to 60 months, which are routinely used to finance “big ticket” purchases. These longer repayment plans may or may not have associated interest, depending on the merchant. Affirm never charges late fees.

Upstart is a national lending marketplace working with over 100 bank and credit union partners to help them improve access to affordable credit. Upstart is also a leading artificial intelligence (AI) lending marketplace partnering with banks and credit unions to expand access to affordable and sustainable credit. By leveraging Upstart’s AI marketplace, Upstart-powered banks and credit unions have higher approval rates and lower loss rates across races, ages and genders, while simultaneously delivering the exceptional digital-first lending experience their customers’ demand. Upstart offers 80 percent more loans to borrowers with an income below $50,000 at rates 2-4 percent lower to borrowers with FICO scores below 660.

Likewise, Prosper is another company underwriting products to address the needs of customers from various economic backgrounds. For instance, their credit card product is tailored to those from nonprime credit profiles, and features access to 50 percent of the credit line upon approval. This feature also offers automatic credit line reviews for customers, which allows customers opportunities to be aware of and improve their credit scores. Prosper also offers competitive debt consolidation options for customers struggling to keep up with other lines of credit.

Best Egg is another example of an online lending platform that provides competitive unsecured and secured personal loans through Cross River Bank and Blue Ridge Bank. Best Egg also offers credit cards, and a free financial health tool. In 2022, Best Egg added new features to its credit card product, including promotional rates and cash-back rewards. It also expanded its financial health tool capabilities by adding new features such as debt management, financial health scores, and borrowing power. Best Egg receives high customer ratings from review sites such as the Better Business Bureau.

B. Bank-fintech partnerships provide competitive low or no-cost deposit products

The Bank-Fintech partnership model increasingly provides consumers with access to modern financial services through the innovation furnished by Fintech companies but remains rooted in the regulatory compliance and consumer safety and soundness that comes by a regulated and insured bank. Cross River, a NJ state-chartered Community bank that partners with Fintechs, offers a full suite of financial products to small businesses and individuals throughout the country. Cross River was able to provide over 28 million consumers with access to over $37 billion in originations at very competitive and responsible rates; and processed in excess of 163 million payments in 2022 alone. Deposit products represent an opportunity for innovative small and community banks and bank-fintech partnerships to bring competitive pressure to the market with low-fee accounts. Excessive minimum balance requirements leave too many consumers without access to a bank account. While the numbers are improving, the Federal Insurance Deposit Corporation (FDIC) noted there were over 7 million unbanked in the United States in 2019. Competitive pressure from Fintechs including AFC members has changed the industry, allowing consumers greater choice in financial services. Fintech companies and their partner banks are leading the way to eliminate and prevent overdraft fees and lower other penalty and interest fees.

Fintechs are also providing lower cost, overdraft-free alternatives. Media reports have documented the competitive pressure on the nation’s megabanks and large regional banks to change their fee policies based on the fee policies created by overdraft-free startups and neobank competitors. For instance, LendingClub’s consumer deposit accounts have eliminated overdraft and the non-sufficient funds (NSF) fees. This action is designed for Americans across the income spectrum, including those living paycheck to paycheck for whom unexpected expenses like these would have a large impact. Chime Financial offers a range of basic banking services, including fee-free accounts, the ability for consumers to get their paycheck up to 2 days early for free, an interest- and fee- free secured credit card that is helping consumers build and improve credit scores, and fee-free overdraft (up to $200). Chime was first to offer fee-free overdraft in 2018. Loans offered through the Avant platform are all below 36% APR, with simple, transparent terms and equal monthly payments. They only charge consumers late fees following a grace period, and NSF fees for returned payments, but do not assess any payment processing, convenience, or prepayment fees. These loans cover critical credit needs, such as debt consolidation and emergency household expenses.

Oportun holistically addresses the most fundamental obstacles to financial resilience: adequate savings, and access to responsible and affordable credit. Oportun has been certified as a Community Development Financial Institution (CDFI) since 2009, and a study by the Financial Health Network found that they have helped their borrowers avoid over $2 billion in interest and fees. In addition, Oportun’s best-in-class automated savings app has helped its members build an average of $1,800 annually in personal savings and over $9.6 billion cumulatively.

SoFi Technologies, Inc. is a bank holding company that through its subsidiaries, including SoFi Bank, N.A., a national bank, offers student loans, home loans and personal unsecured loans, as well as checking and savings accounts. Its broker dealer affiliate offers active and passive investing options as well as SoFi themed ETFs and its technology platform business segment provides technology and services to financial institutions and fintechs. SoFi has more than 7 million members and is also the naming rights partner for SoFi Stadium in Los Angeles.

C. Responsible earned wage access provides instant availability to workers’ pay

Furthermore, industry survey data demonstrates that earned wage access (EWA) has helped consumers avoid and replace high-cost alternatives, including payday loan fees, overdraft fees, bill late fees, and loan payment late fees. EWA is not a loan, and should not be regulated as such. It enables employees to access wages they have already earned prior to their arbitrary bi-weekly or monthly pay period when they are short on funds between paychecks. Importantly, EWA transactions have no-recourse, interest, late fees, credit impacts, or underwriting. Data from an AFC member finds that the average amount of earned wages accessed by most consumers is about $115 to $150, once a pay period. Most users access their wages to pay bills that come with late fees, like utility bills, credit card bills, and childcare; and typically utilize one platform for about three months. While there are usually some small costs associated with EWA, at least one “no cost” option is offered by most EWA providers, such as through a debit card, or a next business day ACH bank transfer. A nominal fee of about $3 for instant delivery to any bank account is also common. Research by real-time wage access provider Daily Pay found that users see savings of $1,200 a year from overdraft fees or late fees not incurred.

II. Regulatory modernization would drive innovation and competition

Consumer demand, as discussed above, has helped to drive market competition and the overall success of financial services offerings by fintech companies and the innovative banks that partner with them. However, consumer demand alone, while necessary for initial market success, is insufficient to ensure sustained market development. To create sustained market development that drives further innovation and competition in the financial services industry, policymakers and regulators must review the existing regulatory framework and, where appropriate, modernize it. We are facing a crisis of a significant mismatch between the fintech used to conduct our daily lives and the regulatory mechanisms designed to ensure a fair and stable banking system.

Ensuring the proper regulatory framework exists for the innovative companies in AFC’s membership is crucial to the development of a competitive, consumer protected financial services industry. AFC members have operated within existing regulatory frameworks but have experienced regulatory challenges that have limited their abilities to innovate and compete with traditional financial institutions. As fintech providers and innovative banks continue to engage in partnerships, this committee should remain ready and willing to step in to ensure proper oversight of agencies efforts to modernize the regulatory structure to drive innovation and competition in a consumer-focused manner.

A. AFC recommends avoiding a patchwork regulatory landscape that harms service offerings and competition

The products and services offered by fintech companies and the innovative banks that power them are offered nationally, and therefore require a consistent regulatory approach that avoids inconsistent or conflicting requirements between states. While state regulatory regimes can be helpful when ensuring effective oversight to keep irresponsible actors out of the financial services industry, inconsistent and conflicting regulatory requirements stymies fintechs’ abilities to offer their products and services, ultimately disadvantaging consumers.

Responsible bank-fintech partnerships like those pursued by AFC members have shown substantial impacts on improving market competition and access to financial services over the past decade in the consumer lending space. Empowering especially smaller banking organizations to form these partnerships in a safe and responsible manner is critical to ensuring competition throughout the market, which creates lower prices and a variety of superior options for consumers. Sound, unambiguous federal policy will help to propel and foster responsible innovation while creating a more level playing field across the ecosystem. In many cases, the ability for these institutions – many of which previously have played a critical role in delivering affordable credit to low- and moderate-income communities – to continue to drive the industry forward and create innovative solutions depends on their ability to partner effectively with third parties. Banks and fintech companies have leveraged each other’s core competencies to offer consumers access to affordable credit at responsible rates without compromising on regulatory compliance or consumer protection. In addition, these responsible bank-fintech partnerships have enabled community banks to remain competitive in a market that has heavily favored large national banks.

In bank-fintech partnerships, the banks originate the loans, (commonly referred to as the “True Lender”). However, some states have started to develop varying interpretations on which entity—the bank or fintech company—constitutes the “True Lender” in a loan agreement. As a result, responsibly acting bank-fintech partnerships have been subjected to significant confusion as to the specific regulatory requirements each party has in a given loan agreement and faced significant additional regulatory burdens in a state-by-state manner. The confusion and regulatory burdens due to the patchwork regulatory framework under development by various states has undercut the ability for fintech companies and innovative banks to serve consumers nationally.

In response to the True Lender issue, the Office of the Comptroller of the Currency (OCC) finalized a rulemaking in 2021 that established a clear and concise way to determine which entity constituted the “True Lender” in a bank-fintech partnership. However, this rulemaking was invalidated by the 117th Congress, which created a return to the confusion and difficulties experienced by fintech companies and their bank partners prior to the OCC rulemaking, which has continued for the past two years. It is with this in mind that AFC believes that this Congress should work with the OCC and other federal agencies to create a federal solution to the True Lender issue to end the confusion resulting from the patchwork regulatory framework on this issue.

Sensible federal standards will assist with responsible emerging markets that create more sustainable options for consumers and will add to more regulatory compliant businesses in financial services. EWA products, for instance are facing a gambit of at times, conflicting state laws and regulations that are classifying this product in different, but consequential ways that make it less feasible for accountable companies to conduct their work and assist consumers in need. Again, EWA is not a loan, and should not be regulated as such, as their products have no-recourse, interest, late fees, credit impacts, or underwriting. However, some states are looking to classify this product as a loan, even though it does not fit any definition of the features of a loan product. This is one example of the perils of forcing EWA and other emergent products into a legacy lender regulatory framework. This would have significantly negative consequences for consumers and will lead to the withdrawal of responsible EWA providers and other competitive services from the market.

Key to driving innovation and competition across the modern banking system is ensuring that regulators avoid a patchwork regulatory framework related to data. Consumer data is crucial to ensuring consumers receive the best financial services possible. Unfortunately, banks and fintech companies, who are subject to data protection provisions under the Gramm-Leach-Bliley Act, continue to be subjected to de facto regulatory requirements from state and non-U.S. regulations, such as the California Consumer Privacy Act and the European Union’s General Data Protection Regulation. Further, the CFPB recently issued its proposed rulemaking to implement Section 1033 of the Dodd-Frank Act. While AFC supports this rulemaking in principle, we recognize the importance of ensuring that CFPB’s implementation does not add to the patchwork regulatory framework that exists on the consumer data issue. We therefore recommend that CFPB continue its interagency work with the FTC and other regulators as it moves forward with rulemaking on this very important topic.

For these complex regulatory issues that do not have an inherent geographic limitation, it is important to develop policy solutions at the federal level that are based in empirical evidence and seek to establish clear and consistent framework for fintech companies and their bank partners. By advocating for federal legislation on the above policy issues, AFC and its members are not recommending that this approach is adopted across the board. Members of this committee continuously recognize the importance of developing consistent regulatory frameworks derived from strong empirical evidence. We agree with this measured, evidence-based approach to policymaking. We believe it is not appropriate to pursue reactionary policymaking, but instead focus on developing pragmatic policy once there is sufficient evidence to construct such legislation.

B. AFC recommends developing a unified approach to regulation

As regulators have become more aware of the need to adapt their regulatory infrastructure and processes to the modern banking system, they have at times pursued activities, rulemaking, or guidance in a unilateral manner. Pursuing unilateral activities, rulemaking, or guidance is not inherently an issue, since institutions under a given regulator’s jurisdiction might face unique issues not experienced by institutions under another regulator’s jurisdiction. However, there are times when unilateral activities, rulemaking, or guidance create a disparity between regulated entities and allows for potential regulatory arbitrage to exist.

For example, as noted above, the financial regulatory agencies have pursued varied approaches to understanding fintech and adapting their regulatory approaches to innovative technologies. While OCC and FRB have each pursued more explicit oversight methods of fintech through the development of the Office of Financial Technology and Novel Activities Supervision Program respectively, the FDIC has pursued a less formal strategy. Further, as noted in a recent GAO report, CFPB, OCC, and the National Credit Union Administration have offices of innovation that are “dedicated to addressing innovation in the financial industry”. In addition, FRB, while lacking a centralized office of innovation, also addresses innovation in the financial industry through various efforts. Only the FDIC, according to the GAO report, “no longer focuses on external competition or innovation within the financial sector”. Given the diverging strategies between FDIC and the other financial regulators, AFC respectfully recommends that policymakers review the agencies’ reasons for pursuing their respective strategies and evaluate how this may impact regulated entities under each agency’s jurisdiction.

Also, as regulators finalize their regulatory agendas for this and next year, it is important that relevant agencies to ensure that rules and requirements established on various topics, such as supervision issues discussed above, data privacy, and fees, and are not duplicative or contradictory of one another. Clear and congruent rules and/or guidance from regulators will help augment existing frameworks for how consumer financial information can be protected, accessed, and shared in responsible ways to benefit consumers. This will also allow industries to be compliant with one set of federal standards that will allow them to follow the law and better serve their customers. Finally, we believe strong regulatory coordination will avoid regulatory arbitrage between regulators and market participants across financial services and other industries. To this end, we encourage regulators to ensure that upcoming rulemakings involving Section 1033 of the Dodd-Frank Act, reforms to the Fair Credit Reporting Act, and other issues revolving around consumer data surveillance and security be as coordinated within and across the agencies as possible.

C. AFC recommends the regulators increase clarity of supervisory expectations.

Regulation does not simply end at the finalization of an agency rulemaking. The supervisory expectations established through prudent agency examination practices and guidance provide important clarity to companies engaged in activities that may not neatly fit into previous interpretations of agency regulations. There are several opportunities that policymakers and regulators should pursue to ensure that supervisory expectations are properly conveyed, while regulatory arbitrage and duplicative requirements are avoided.

Agency leadership and policy staff have shown a willingness to understand innovations in the modern banking system. However, when these perspectives are not reflected throughout the agency, namely, through examination staff, supervisory expectations remain unclear and, ultimately stymie innovation in financial services. AFC and its members recognize the importance of rigorous examinations that properly ascribe agencies’ risk-based criteria to a given activity. However, agencies’ examination staff should prudently engage with innovative regulated entities to ensure that they possess the requisite technical knowledge of the bank-fintech partnership model and innovative financial products and are able to convey their supervisory expectations effectively. Further, staff should recognize the intent of the regulations underlying their examination manuals and use their “examiner discretion” to adapt their requirements to the modern banking system to not stymie responsible innovation.

For instance, we have seen the need for increased regulatory clarity in the application of the Bank Secrecy Act’s Customer Information Program (CIP) Rules to innovative online purchasing options like Buy Now Pay Later. In brief, the text of the CIP Rules require banks to implement a written CIP program that includes risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable using specific information, such as a customer’s tax identification number. This has resulted in a burdensome and unnecessary process of banks requiring that the full tax identification number of each consumer is collected to remain in compliance with their regulator’s interpretation of the CIP Rule. For example, banks have required a burdensome and unnecessary process of collecting consumers’ full tax identification numbers to remain in compliance with their regulator’s interpretation of the CIP Rule. Though innovative processes were created after implementation of the CIP Rules allow fintech companies to collect the last four digits of a tax identification number directly from the consumer, while collecting full tax identification numbers from a third party, and verifying the provided numbers through the bank’s risk-based identity verification procedures, the collection of the full tax identification, it is currently unclear if these processes are allowable under the CIP Rules. AFC has requested clarity on this issue and the development of a more uniform approach to the application of the CIP Rules that allows for practical approaches to adherence with the Rules.

AFC and its members are encouraged by the banking regulators’ recent issuance of their interagency guidance on Third-Party Risk Management including relationships with fintech companies. This interagency guidance exemplifies our recommendation for agencies to pursue a unified approach. However, AFC believes that banking regulators should build on the recently issued guidance to provide additional interagency guidance on specific activities of particular interest within the newly developed definition of “third-party”. Specifically, advancing the ideas developed through the notice and comment period associated with Federal Deposit Insurance Corporation’s (FDIC) proposed guidance on third-party lending could improve industry’s understanding of supervisory expectations within the fintech lending space.

Regulators at the Federal Reserve Board of Governors (FRB) and the OCC have started their work to address emerging technologies and business models within the modern financial services ecosystem. The Federal Reserve's newly created Novel Activities Supervision Program (NASP) and the OCC’s previously created program reflect the growing role of technology and innovation in the financial services sector. AFC is supportive of regulators efforts in ensuring the safety and soundness of the nation's financial institutions are maintained, while recognizing the benefits of new technology and innovation that have been shown to increase competition, bring down costs for services, increase efficiency, and reach consumers historically left behind by the traditional financial system. We appreciate the regulators’ commitment to ensuring the NASP complements existing supervisory activities, working within existing supervisory portfolios and partnering with dedicated supervisory teams that have knowledge on the supervised firm’s risk profile.

AFC recommends that the Federal Reserve publish robust standards detailing the supervisory approach to novel activities and how they will be governed. For example, it will be useful to have full clarity on standards and guardrails with respect to bank/non-bank partnerships and the permissibility of crypto-related activities. AFC supports the Federal Reserve’s acknowledgement of the need for knowledge acquisition and diverse standards for diverse novel activities development as NASP proceeds.

Establishing clear expectations and requirements for novel activities is essential in assisting firms to quickly determine whether a program or opportunity as well as its scale would fall within an institution’s risk and technical capabilities, while ensuring a balanced playing field for both new and existing market participants. As the Federal Reserve builds information, AFC urges that the agency coordinate with others of jurisdiction to publish additional supervisory standards to ensure similar supervisory messages are applied across regulated financial institutions.

D. AFC recommends aligning incentives for fintech companies and innovative banks.

Fintech companies and their innovative bank partners have made great strides in improving access to financial services for those communities that have been historically left behind, such as low- and moderate-income communities. Primarily, this success stems from fintech companies reaching consumers through easy-to-use applications and debunking previously held conceptions of the risks associated with serving these communities by using innovative modeling techniques that more accurately predict risks such as default risk and fraud risk. While these innovative techniques have helped to improve access to financial services for historically left behind communities, it is important to recognize the impact that proper alignment of incentives from a regulatory perspective can have on improving financial inclusion.

To encourage further financial inclusion policymakers and regulators must work to ensure that the regulatory framework aligns incentives to further expansion of financial inclusion. The soon to be finalized reforms to the Community Reinvestment Act (CRA) show that regulators are willing and able to modernize a crucial regulation and adapt it to the modern banking system. As noted in AFC’s previous comment letter on the CRA reforms, we believe that the federal regulators should encourage the bank-fintech partnership model by expanding the ability for banks partnered with fintech companies to gain CRA credit by allowing banks to count lending activities conducted in partnership with fintech companies outside of their designated CRA assessment areas. Further, we believe that the regulators should adopt a more holistic approach to the volunteer activities that count for CRA credit.

In addition, we believe that the agencies should preserve the strategic plan option for financial institutions in a manner “that accommodates the full range of business models in the banking industry and the option should continue to be available to all banks”. The strategic plan option provides needed flexibility for banks that (because of their business model or product mix) do not fit well under the conventional retail framework that is designed primarily for branch-based banks that offer mortgages and small business loans. The current strategic plan framework has allowed digital banks, banks that focus on consumer lending, and banks with significant wholesale activities to fulfill their CRA obligations under a tailored evaluation that recognizes their unique business models, delivery systems, and product sets. We would also note that the guardrails in the strategic plan process – the requirements to solicit public input and secure regulatory approval – are designed to ensure that under the strategic plan option, a bank can meet its CRA obligations in a manner that is responsive to community needs and opportunities and appropriate considering the bank’s capacities, business strategies, and expertise. We were encouraged to see that the strategic plan option remained in the final rulemaking.

These recommendations reflect an opportunity to develop regulations that fully align the incentives for fintech companies and innovative banks to work even harder to serve historically underserved communities.

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AFC again thanks the Subcommittee on Digital Assets, Financial Technology and Inclusion for the opportunity submit this statement for the record on these very important issues. AFC and its members continue to push for open dialogue and collaboration with legislators, regulators, and other policymakers at the state and federal level to assure that reasonable evidence-based policies are enacted to create a pragmatic policy regime that protects consumers and the sound operation of the financial services industry without hurting innovation and competition. We urge federal regulators and policymakers to remain open and receptive to responsible emerging markets as they continue push to learn more about these markets to create legal and regulatory clarity in financial services.