This week a House subcommittee held a hearing to better understand the how to balance the proliferation of financial technology (“fintech”) with consumer protection. As with all of the conversations, conferences and symposia regarding financial innovation, the discussion was focused on credit. However 30% of the adult population of the United States has at least one past due account. Yet, there is no discussion of real innovation on that side of the equation.
Blaine Luetkemeyer (R-NO), who chairs the Subcommittee on Financial Institutions and Consumer Credit, set the context. He noted that the universe of technology is evolving on a nearly daily basis, and has revolutionized the way consumers make payments and interact with financial services companies. He said,
“From online lending and payment companies to blockchain and cryptocurrencies, advances in financial technology are changing the way financial markets work and how consumers access credit. With greater understanding of fintech’s capabilities, the Financial Services Committee and Congress can better create an environment that fosters certainty and responsible innovation while maintaining consumer protections.”
The following witnesses testified:
- Nathaniel Hoopes, Executive Director, Marketplace Lending Association – official testimony
- Brian Knight, Director, Program on Financial Regulation and Senior Research Fellow, Mercatus Center, George Mason University – official testimony
- Brian Peters, Executive Director, Financial Innovation Now – official testimony
- Andrew Smith, Partner, Covington and Burling, LLP – official testimony
- Adam Levitin, Professor of Law, Georgetown University Law Center – official testimony
Most of the opinions represented industry, and described challenges that existing regulations have posed to the advancement of innovation through partnership between technology companies and traditional financial institutions. Levitin’s was the sole voice that provided cautionary tales of new strategies – such as making lending decisions based on the use of nontraditional data or neural networks -- leading to discriminatory practices, even if unintentional. He stressed it is important for regulations to assist in differentiating between the good guys and the bad guys. He offered these recommendations:
- Encourage a national money transmitter license
- Encourage greater consumer financial data portability
- Don’t encourage the predatory lending practices he alleged would be caused by bills currently under consideration; R. 3299 and H.R. 4439.
Lawmakers asked the panel for their suggestions in how to thread the needle in creating regulation that supports innovation but also provides proper consumer protection. Brian Knight summed it up this way:
- Keep the consumer in mind first – How is the customer best served?
- Regulate to the risk
- Create conditions that allow for a regulatory sandbox where companies can safely test new products at scale
When asked what the chief barrier has been to innovation, panel members described: 1) Technology and financial services are now fully integrated, however the regulations were written in the days of paper; and 2) State by state rules for money transmission and lending prevent startups without the resources of major established companies from being able to enter the market.
This sounds familiar…
“Laws were written in the days of paper.”
“The current structure is needlessly fragmented and inconsistent among federal regulators, and varies widely across state jurisdictions.”
“Regulations should help distinguish the good guys from the bad guys.”
Those of us who have been advocating for the modernization of the Fair Debt Collection Practices Act have repeatedly made the same statements. As it relates to the discussion at yesterday's hearing, I offer these thoughts:
Perfection is impossible
Brian Knight made an interesting comment: “New opportunities should not be measured against perfection, but against the status quo.” This is such a relevant statement in the context of debt collection rulemaking. Discussions of ever-more complex rules that require the most granular operational contortions seem to have perfection as their goal. Folks, perfection is virtually impossible. 77 million consumers have a debt in collections, across dozens of industries and thousands of creditors, with hundreds of thousands of human employees. The more complex the rules, the less likely companies are to be able to execute them. I would argue this leads to more harm. No, I’m not suggesting there should be no rules. I am suggesting a limited number of really clear ones.
One very large part of the financial services industry is being left in the last century
All of the conversations, conferences and symposia regarding financial innovation are focused on the credit side of the equation. But 77 million Americans have a connection to the other side – when, for whatever reason, the bills aren’t paid. Most attempts to bring innovation to this side of the equation, such as (gasp) sending information to consumers about a debt through email - are met with attorneys saying, “can’t do it; there is too much risk.” This is crazy.
Here is the situation:
- As the population ages, digital-only consumers will become the lions’ share of those in collections. This group doesn’t talk on the phone and doesn’t open postal mail (unless of course it’s a package).
- Regulators and media constantly tell the public not to talk to strangers on the phone (or, especially, not to give out any personal information – which is currently required by law in order for a collector to tell you what they are calling about, because they first have to confirm you are the right person).
- Robocall blocking and labeling technology is increasingly getting in the way of communicating with consumers. The fact is, if we could simply get rid of “Rachel from card services” and the other ½ dozen egregious scams, the legitimate (even if unwanted) callers would be a whole lot more manageable.
- When legitimate collectors can’t reach consumers, what often happens (at the choice of the creditor) is that credit scores are harmed and lawsuits are filed. The debt doesn’t simply go away. A conversation needs to happen.
Fintech innovation is desperately needed in the past-due world too. Consumers need to be able to authenticate their identity in new and less threatening ways, they need to be able to pay debts the way they would pay regular bills, and they need to be able to communicate with companies through a range of channels just the way they would have before their bill went past due. Let’s get this marketplace into the conversation, too.
Editor's note: For more on consumer preferences related to payment and communication, read this other story about Millenials and medical bills.