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EXAMINING THE FINTECH LANDSCAPE 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE INNOVATIVE TECHNOLOGIES BEING USED TO CHANGE 

THE WAY FINANCIAL SERVICES ARE PROVIDED AND THE WAY THE 

FINANCIAL SYSTEM OPERATES 

SEPTEMBER 12, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

TRAVIS HILL, Senior Counsel 

KRISTINE JOHNSON, Professional Staff Member 

ELISHA TUKU, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

PHIL RUDD, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, SEPTEMBER 12, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Lawrance L. Evans, Director, Financial Markets and Community Investment, 

Government Accountability Office ...................................................................... 4 

Prepared statement .......................................................................................... 30 

Responses to written questions of: 

Senator Menendez ..................................................................................... 82 

Eric W. Turner, Financial Technology Research Analyst, S&P Global Market 

Intelligence ........................................................................................................... 6 

Prepared statement .......................................................................................... 48 

Responses to written questions of: 

Senator Menendez ..................................................................................... 83 

Frank Pasquale, Professor of Law, University of Maryland Francis King 

Carey School of Law ............................................................................................ 7 

Prepared statement .......................................................................................... 66 

Responses to written questions of: 

Senator Brown ........................................................................................... 87 

Senator Menendez ..................................................................................... 90 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement submitted by the Independent Community Bankers of America ...... 95 

Letter submitted by the Electronic Privacy Information Center ......................... 97 

Letter submitted by the Milken Institute Center for Financial Markets ........... 100 

(III)

(1) 

EXAMINING THE FINTECH LANDSCAPE 

TUESDAY, SEPTEMBER 12, 2017 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The Committee will come to order. 

Before we proceed with the hearing today, I wanted to just indicate that last night the Senate passed six securities bills that we 

marked up earlier this year, bills that will improve economic 

growth and investor protections. And I want to thank you, Senator 

Brown, for working with me to get these bills through the Committee, and thanks to all of the Committee for your work in getting 

these pieces of legislation through the Senate. 

These bills were introduced in past Congresses with broad bipartisan support, with the House most recently passing similar bills 

last spring. And I want to thank our colleagues on the House Financial Services Committee for their work on this as well. I look 

forward to seeing these bills signed into law. 

Senator BROWN. Could I say a word now? 

Chairman CRAPO. Yes. 

Senator BROWN. Thank you, Mr. Chairman, for your partnership 

on these bills to improve the securities markets and investor protections. I am pleased they passed the Senate last night as well. 

I thank the members of this Committee and others in the Senate 

especially for their work on this bill, Senators Heller and Peters, 

off the Committee; Senators Heitkamp, who is here, and Toomey 

on the Committee, and Donnelly, also on the Committee, Menendez, Hatch, Warner, and Tillis, and others on this Committee for 

moving the bill forward. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

This morning, we will receive testimony on the growing financial 

technology, or fintech, industry. Fintech is providing new and innovative products and services in areas such as marketplace lending, 

digital payments and currencies, wealth management, insurance, 

and more. 

Technological innovation has brought about improvements in virtually every sector of the economy, and the financial sector is no 

exception. Technology advances are nothing new to the financial 

2 

world; inventions such as the ATM and the credit card led to significant improvements in consumer welfare. 

Today new innovations by fintech companies have similar potential to make financial services faster, cheaper, and more accessible. 

For example, marketplace lending has the potential to expand the 

availability of credit to consumers and small businesses at lower 

costs. 

In particular, with the use of alternative data and technology, 

the business models of marketplace lenders may enable them to 

reach underbanked populations. Innovations in the payments space 

can offer enhanced speed, convenience, and efficiency in transactions. 

Fintech startups are not the only ones embracing this opportunity and responding to changing consumer demand. Traditional 

banks and other established financial institutions are increasingly 

participating in the fintech space through partnerships, incubators, 

investments, and more. 

Fintech firms may also reap the mutual benefits of partnering 

with banks who have well-established operations and comparative 

advantages in certain areas. But with all the potential for fintech 

to improve the financial services sector, the industry is still relatively new. 

Uncertainty remains around questions like data security and the 

proper regulatory treatment to ensure that consumers and the financial system are safeguarded. The recent Equifax data breach reminds us of the critical need to ensure that areas like cyber and 

data security are given the proper attention. 

The tremendous growth in this sector over the past few years has 

gained the attention of market participants, regulators, and other 

stakeholders. The OCC, for example, has a proposal to provide special purpose national bank charters for fintech companies. 

Other Governments are exploring options such as a regulatory 

sandbox approach that encourages innovation by allowing firms to 

test products and services in a supervised environment. 

In response to this Committee’s call for economic growth proposals, we received a number of fintech-related submissions that 

will also help us as we think about these issues. 

Today I look forward to learning more about the opportunities 

fintech may bring, the various ways fintech is interacting with and 

impacting the financial system, and the current regulatory supervision of the fintech industry. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. I appreciate your 

holding this hearing on financial technology. It has been too long 

since our Committee considered this important topic. I do not think 

any of us knew how timely this hearing would be until we got news 

of the Equifax data breach, apparently after some executives at 

Equifax also knew, although they deny that was the case. 

While financial technology covers many different activities, all of 

those activities rely on the responsible use and careful protection 

of data. 

3 

In the case of Equifax, that did not happen. Americans are now 

forced to worry whether the information that hackers stole will 

have lasting impacts, from outright theft to damaged credit. We 

just cannot cancel a credit card to fix this problem. Equifax has let 

criminals get their hands on the most private and valuable pieces 

of millions of Americans’ financial identities. 

Credit reports also include other deeply personal information. A 

history of our medical debt can reveal information we do not share 

with anyone but our doctors and families. 

More and more, new financial technologies rely on the collection 

of vast troves of data no longer limited to our financial transactions. Data aggregators collect information regarding our associates, what kind of products we buy, and maybe even how often we 

check Facebook. 

The collection and use of this alternative data may promise some 

benefits by providing access to credit for people in communities 

that traditional lenders overlook. But as recent data breaches have 

shown, the risks are clear and substantial. 

It will take us a long time to assess the impact of the Equifax 

data breach on 143 million Americans. Businesses, consumers, and 

Government watchdogs will have to be even more vigilant about 

identifying fraud, possibly making it harder for Americans to get 

access to credit. 

It is bad enough that the Equifax breach included important personally identifiable information—names, dates of birth, Social Security numbers, addresses, and credit card numbers—the building 

blocks for your financial identity. Future breaches at firms that use 

alternative data might include far more personal information with 

far-reaching consequences. 

Today I want to hear how we can improve Federal oversight of 

data collection and data security to protect working American families. I hope we can work together to make sure companies that use 

our private data are held accountable for its protection. 

If a college student in Columbus misses a credit card payment 

or a family in Toledo is forced into bankruptcy because of medical 

debt, Equifax would undoubtedly ding their credit scores. So now 

that this breach has left millions of people vulnerable to criminals, 

what should be done to hold Equifax accountable? 

At a minimum, customers should have the right to use the court 

system to help make them whole. That is why I appreciate, under 

apparently some public pressure, Equifax answered my call, and 

that of others on the Committee, to remove forced arbitration 

clauses from its free credit monitoring product. 

This is a step in the right direction, but customers cannot be 

sure their rights are truly protected until Equifax makes this policy 

clear for all products and on all of its websites. 

One year of credit monitoring cannot be expected to undo the 

damage of this breach. After the 2015 breach of the Office of Personnel Management put information of Government employees at 

risk, this body passed 10 years of free credit monitoring. We cannot 

accept any less for the people we serve. 

Today’s hearing is focused on new products and markets. I am 

interested in how Congress can encourage fintech innovation to 

make it easier for community banks to serve their customers, to 

4 

comply with important safety and soundness and anti-money-laundering rules. 

If we can encourage banks to partner with each other or innovative startups, we may be able to cut down on red tape without exposing consumers or the financial system to additional risk. 

I am also interested in how these new technologies can help 

Americans who are currently underserved by the traditional banking system. We have already seen how mobile payments have expanded access for many to the financial system, both at home and 

abroad. But we need to fully understand the risks and ensure that 

oversight gaps do not exist for bad actors to exploit American customers. 

I thank the witnesses for joining us. 

Chairman CRAPO. Thank you, Senator Brown. We will now move 

to our witnesses. 

First we will hear testimony from Mr. Lawrance Evans, Director 

of Financial Markets at the U.S. Government Accountability Office. 

Then we will hear testimony from Mr. Eric Turner, research analyst at S&P Global Market Intelligence. 

And then, finally, we will hear testimony from Mr. Frank 

Pasquale, professor of law at the University of Maryland Francis 

King Carey School of Law. 

I would remind each of our witnesses that your full testimony 

has been made a part of the record. We ask you to limit your presentation orally to 5 minutes. There will be plenty of opportunity for 

further follow-up with questions from the Committee. 

With that, Mr. Evans. 

STATEMENT OF LAWRANCE L. EVANS, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, GOVERNMENT 

ACCOUNTABILITY OFFICE 

Mr. EVANS. Thank you very much, Mr. Chairman. I am pleased 

to appear before you, Ranking Member Brown, and the other Members of the Committee to discuss the fintech landscape, which currently finds a number of potentially disruptive and foundational 

technologies, and innovative firms that are transforming the financial industry. Calling this hearing represents the type of forward 

thinking that is essential to effectively harnessing the opportunities these developments bring. 

My testimony today is based on our April 2017 report produced 

as a partial response to a request from the Ranking Member and 

others. The report covers a high-level look at four commonly referenced fintech subsectors: marketplace lending, mobile payments, 

digital wealth management, and distributive ledger technology, 

which I will refer to as ‘‘DLT.’’ While this report is largely based 

on secondary sources, we are able to glean some useful findings 

and observations for consideration. 

Considering the benefits, our sources suggest that technological 

innovation is occurring throughout the financial ecosystem, driven 

by large technology firms and smaller technology-driven new entrants known as ‘‘fintechs’’ or ‘‘fintech firms.’’ One of the primary 

potential benefits include expanded access to financial services. 

For example, digital wealth platforms, which rely on data-driven 

algorithms and minimize human interaction, provide services to a 

5 

class of investors previously frozen out of traditional wealth management. Other potential benefits include convenience, speed, and 

lower costs across a range of financial services. 

On the flip side, new technologies and new entrants into the financial services industry, while bringing much needed innovation, 

bring potential risk. For example, the data-driven algorithms marketplace lenders rely on to assess creditworthiness and underwrite 

loans raise concerns about the use of nontraditional data and the 

risk for potential fair lending violations. Moreover, data security 

and privacy risks may exist with these newer technologies. 

It is important to note that these concerns are real, but they are 

not unique to these innovations. And there are also features in mobile payments in DLT that may produce benefits in the area of 

data security. Losing sight of the benefits and overreacting to risk 

could stifle financial inclusion and much needed innovation in the 

area of payments, value transfer, and recordkeeping. Therein lies 

the great challenge for policymakers and regulators. There is always a need to manage the risk-reward balance of innovation; that 

is, managing risk without stifling innovation, ensuring consistent 

regulation and a level playing field, and encouraging socially beneficial innovation without picking winners or losers. 

On the one hand, advances in technology are occurring in a heavily regulated and mature financial ecosystem. On the other hand, 

the financial regulatory structure in the U.S. is complex, with responsibilities fragmented among multiple Federal and State agencies that have overlapping authorities. This has raised concerns 

about gaps in coverage, inconsistent regulation, compliance challenges for new and incumbent firms, and whether the existing regulatory framework might slow or otherwise harm innovation. 

As you know, there are a number of issues being considered 

today that will impact the regulatory landscape going forward, 

such as the appropriate charter type for fintech firms conducting 

bank-like activities. It will be important to carefully sort through 

the various competing interests to settle on a regulatory framework 

that is truly in the public interest. 

Putting the public first and developing a regulatory framework 

that is best positioned to achieve it is essential to getting the riskreward balance of innovation correct. As one Federal Reserve official recently noted, ‘‘it would be a lost opportunity if instead of expanding access in a socially beneficial way, some fintech products 

merely provided a vehicle to market high-cost loans to the underserved, exacerbating rather than ameliorating financial access inequalities.’’ 

Similarly, it would also be unfortunate if the regulatory framework served as a barrier to entry to innovative firms with socially 

beneficial products. GAO is currently undertaking work that will 

support congressional efforts to strike the appropriate balance in 

this area. 

Chairman Crapo, Ranking Member Brown, and Members of the 

Committee, this concludes my prepared statement. I look forward 

to questions and further dialog. 

Chairman CRAPO. Thank you, Mr. Evans. 

Mr. Turner. 

6 

STATEMENT OF ERIC W. TURNER, FINANCIAL TECHNOLOGY 

RESEARCH ANALYST, S&P GLOBAL MARKET INTELLIGENCE 

Mr. TURNER. Thank you, Chairman Crapo, Ranking Member 

Brown, Members of the Committee. Good morning, and thank you 

for inviting me to testify today. My name is Eric Turner, and I am 

a research analyst with S&P Global Market Intelligence, where I 

cover financial technology. 

S&P Global Market Intelligence is a division of S&P Global. We 

provide actionable intelligence on the global financial markets and 

the companies and industries that comprise those markets. We 

support economic growth by providing market- and sector-specific 

data, news, and research to help investors identify opportunities 

and manage risk when providing financing to businesses and job 

creators. S&P Global Market Intelligence closely follows the fintech 

sector, which we view as pivotal to economic growth and innovation. 

Financial institutions have long used technology, but startups 

have broken new ground during the past decade. These companies 

have created what we know as fintech today. Leveraging advances 

in technology and the ubiquity of the Internet, these companies 

offer new and cutting-edge financial products. Expansive data sets, 

advanced analytics, and automation have made accessing financial 

services faster and less expensive for millions of people. 

Incumbent institutions are increasingly looking to fintechs not as 

competitors but as partners for improving operations and reaching 

new consumers. 

Through our research, we have identified five key areas that impact consumers in the financial industry today. These include digital lending, mobile payments, digital investment management, insurance technology, and distributed ledger technology, which includes blockchain. These innovations present enormous opportunities to consumers accompanied by unique challenges in implementation. 

Digital lending has increased access to credit and made borrowing more efficient. Automation and a lack of physical offices 

allow digital lenders to reduce processing time and costs. This allows them to offer competitive rates, potentially saving borrowers 

thousands of dollars in interest, while small businesses seeking access to working capital are able to obtain funds much more quickly. 

Mobile payments services are used by millions of consumers because they reduce transaction costs and frictions, while offering an 

enhanced user experience. For international transfers, specialized 

peer-to-peer apps charge low fees for the conversion and transfer 

of funds across borders and currencies. This benefits underbanked 

and immigrant communities. 

Mobile wallets create more secure transactions by preventing 

fraudsters from skimming card data or stealing PIN information. 

Additional features, like biometric and two-factor authentication, 

have further enhanced security. 

Digital investment management has given retail investors new 

access to professional investment services, and insurance technology has made it easier and more affordable to protect against 

risk. If implemented properly, distributed ledger technology, including blockchain, will revolutionize many parts of our financial sysVerDate Nov 24 2008 14:27 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-12 EXAMINING THE FINTECH LANDSCAPE\HEARING\91217.TXT
7 

tem, reducing costs and settlement times while enhancing transparency. 

Despite the benefits discussed today, the industry is still young 

and challenges remain. Regulation has been unevenly applied to 

the sector, and in many ways the introduction of a clear regulatory 

framework could help boost innovation. This may require firms to 

define their stake in the financial system and could lead to technology-only platforms exiting certain lines of business like lending. 

Overall, this will lead to a more fair and defined playing field for 

startups and incumbents alike. 

Issues such cybersecurity, data ownership, and data privacy are 

important not just to fintechs but to the financial industry as a 

whole. Clear standards and regulation can provide clarity in these 

areas as well. Understanding the fintech landscape as well as the 

benefits and challenges presented by this growing industry can 

help shape a clear framework for responsible innovation. 

Thank you again for inviting me to testify, and I would be happy 

to answer any questions for the Committee. 

Chairman CRAPO. Thank you, Mr. Turner. 

Mr. Pasquale. 

STATEMENT OF FRANK PASQUALE, PROFESSOR OF LAW, UNIVERSITY OF MARYLAND FRANCIS KING CAREY SCHOOL OF 

LAW 

Mr. PASQUALE. Chairman Crapo, Ranking Member Brown, and 

distinguished Members of this Committee, thank you for the opportunity to testify today. My name is Frank Pasquale, and I am a 

professor of law at the University of Maryland. 

The financial technology, or fintech, landscape ranges from the 

very simple to the tremendously complex. Regulators at the OCC’s 

Office of Innovation and the CFPB’s Project Catalyst are energetically helping entrepreneurs to comply with existing consumer 

protections and other Federal mandates. Fintech may promote 

competition and create new options for consumers, but we should 

ensure that it is fair competition and that these options do not 

have hidden pitfalls. 

In my research on the finance and Internet sectors over the past 

decade, I have explored patterns of regulatory arbitrage and 

opaque business practices that sparked the mortgage crisis of 2008. 

I am afraid I see some similar themes emerging today. 

In the run-up to the crisis, Federal authorities preempted State 

law meant to protect consumer borrowers. Their stated aim was to 

ensure financial inclusion and innovation, but the unintended consequences were disastrous. Federal authorities were not adequately 

staffed to monitor, let alone deter or punish, widespread fraudulent 

practices. They also flattened diverse State policies into a one-sizefits-all, cookie-cutter approach. We all know the results. Millions of 

families lost their homes to foreclosure, and the economy suffered 

a permanent output gap. 

That history should make us cautious about legislative or regulatory efforts to federally preempt State laws now applying to 

fintech. Why should consumers lose important protections provided 

by their own States simply because they engage with fintech firms? 

Think, for instance, of restrictions on payday lending. As the New 

8 

Economy Project and hundreds of community, labor, military, and 

veterans groups have argued earlier this year, 90 million Americans live in jurisdictions where payday lending is illegal. These 

State laws help consumers save billions of dollars each year in 

predatory payday loan fees that could trap people in long-term devastating cycles of debt. OCC should not strip these consumers of 

these protections. 

Advocates for deregulation will likely argue that imposing a level 

playing field on fintech and non-fintech firms might harm innovation in the fintech sector. But innovation is not good in itself. The 

toxic assets at the core of the financial crisis were innovative in 

many ways, but ultimately posed unacceptable risks. 

Promoters of fintech deregulation may claim that such worries 

are anecdotal. But many tech firms prevent more robust analysis 

as they obscure what we know about the sector. As I explain in my 

book ‘‘The Black Box Society’’, aggressive assertion of trade secrecy 

claims—both about data collection and use, and the algorithms 

used to make judgments about us—keep regulators and legislators 

in the dark about the full range of risks in finance in general and 

fintech in particular. 

A key message I hope to convey to the Committee today is to empower agencies like CFPB and OFR and to expand their funding 

as they try to come to grips with a rapidly financial landscape. 

Data gathering is important because nearly every story of 

technologized ‘‘financial inclusion’’ can be countered with other stories of exclusion, via digital redlining. As Cathy O’Neil’s book 

‘‘Weapons of Math Destruction’’ shows, consumers often are in the 

dark about what new algorithms are judging them and how they 

can respond if they think they have been treated unfairly. Regulators must more full understand what firms are doing and how 

they are performing. Moreover, as the recent Equifax hack shows, 

concentration of information in almost any firm creates great risks 

to consumers. Improving financial cybersecurity should be an essential goal in fintech policy, and I applaud the GAO for highlighting security issues in its report, as well as proposals by Senator Reed to require cybersecurity expertise at large firms. 

We should not have faith that accelerated deregulation will free 

the financial sector to solve important social problems. There is a 

difference between exploiting an existing problem in credit provision and addressing the root causes. For example, if fintechs can 

make hefty profits by refinancing student debts owed to the U.S. 

Government, perhaps that is less an indication of fintechs’ business 

prowess than it is evidence that the Government is overcharging 

students for loans. If consumers are desperate for marketplace 

lending to cover next month’s utility bills, maybe we need to ensure 

work pays more fairly. I am confident that a system of postal banking would do far more than the fintech sector to ensure financial 

inclusion to millions of Americans without adequate access to deposit accounts, as Mehrsa Baradaran has helped prove in her book 

‘‘How the Other Half Banks’’. 

In conclusion, fintech should not be an excuse for stripping safeguards from consumers. We need far more information about how 

fintech firms are gathering, processing, and protecting data. And 

we should be wary about the ability of technology alone to solve 

9 

much larger social problems of financial inclusion, opportunity, and 

nondiscriminatory credit provision. 

Thank you for the opportunity to testify today. 

Chairman CRAPO. Thank you, Mr. Pasquale. 

This is a question for the entire panel, so I would like to ask you 

to each be brief in your responses. But could each of you discuss, 

as we move forward, what are some of the most significant risks 

that we should evaluate? And in your response, if you have an 

opinion on whether there should be a specific charter for fintech 

companies separate from other types of charters that we deal with 

in a regulatory context, I would appreciate your thoughts on that. 

Mr. Evans. 

Mr. EVANS. So I think you see many of the risks that are commonly witnessed when you think about innovation, and there is, I 

think, a disconnect between the ‘‘move fast and break things’’ approach that you might see in the technology industry with the more 

conservative approach in the banking industry. And so I think 

there could be some significant compliance challenges going forward as they grapple with the various rules and regulations that 

are in place. 

I will punt on the issue of a Federal or a State charter. I know 

it is a critical issue. There are pros and cons on both sides, and I 

think other witnesses might—— 

Chairman CRAPO. I figured you might pass on that part of it. 

Mr. Turner. 

Mr. TURNER. Thanks, Senator. I think as you mentioned, probably the biggest risk right now is a fractured regulatory system. I 

think when people look at fintech companies, they kind of assume 

that, you know, when you hear things like regulatory arbitrage and 

lack of regulation, that these companies are operating, you know, 

like it is the Wild West. And that is really not the case. These companies have looked for regulation wherever they can, and right now 

it seems that they are just trying to fit themselves into a system 

that was not made for them. 

Chairman CRAPO. Thank you. 

Mr. Pasquale. 

Mr. PASQUALE. Yes, thank you, Senator. I would cite problems in 

three areas, one being an area of opaque algorithms being used to 

assess credit. I think that we are entering into a new world, and 

we do not quite understand fully how many different types of data 

sources could enter into, say, emerging credit decision making. And 

I give some examples in my written testimony of how fintech firms, 

say, outside of the U.S. have used some types of data that might 

be troubling, I think, to people, like political activity or other issues 

like that. 

I would also say that with respect to looking at the 2016 Fed survey on small business credit, the Fed found that there were lots of 

small businesses that distrusted fintech firms more than they distrusted small banks, or even large banks. With respect to high interest rates, they felt they were being overcharged, and I think 

that that highlights some concerns about the potential overextension of credit into, say, marginal communities or into marginal 

business opportunities. 

10 

And I would finally highlight the cybersecurity concerns because 

I do think that as more and more—even Jamie Dimon and other 

folks were sort of concerned about consumers sharing too much of 

their data with unvetted apps. 

Chairman CRAPO. Thank you very much. 

Mr. Turner, in the United Kingdom, the Financial Conduct Authority has implemented a regulatory sandbox that allows firms to 

operate on a limited basis to test different ideas while under the 

FCA’s supervision, but without needing to comply with the full regulatory enforcement regime. Could you just discuss your thoughts 

on whether that is a good idea or something that we should possibly pursue here? 

Mr. TURNER. Yes. Thanks, Senator. So just a little background. 

Whenever I speak to somebody in the industry, you know, they do 

say that the U.S. is pretty far behind on this, and there are other 

countries with these regulatory sandboxes that are beating us in 

innovation. And I think as we look at some sort of specific regulatory framework, a sandbox not only will let fintechs continue to 

innovate, but it will also give regulators a way to actually test new 

ideas and learn a little bit more about the process. 

Chairman CRAPO. Thank you. 

Mr. Pasquale, do you have a thought on the sandbox approach? 

Mr. PASQUALE. You know, I have written in the past in favor of 

pilot programs, and I think that they have proven their worth in 

some areas, for example, in health care policy. And I think that a 

very—we would have to do a very careful assessment of it, but 

there may be some promise there in terms of experimenting to 

learn more about exactly how this innovation might play out in certain contexts. 

Chairman CRAPO. Thank you. 

Mr. Evans, do you have anything to add? 

Mr. EVANS. We have a report that will be released in the winter 

of 2018 that actually looks at various regulatory approaches to 

fintech. And, in fact, our teams have traveled to Singapore, U.K., 

and Hong Kong and will be reporting out on ones that we think 

are more applicable to the United States. 

It is important to point out that the CFPB does have Project Catalyst, which allows fintech firms to pilot innovations that are 

deemed consumer-friendly. 

Chairman CRAPO. Thank you. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. Thank you to all 

three of you for joining us. 

Professor Pasquale, the Equifax breach showed why CFPB’s arbitration rule is so important. Had it not been for sharp-eyed consumer advocates and lots of public pressure, millions of scared consumers may have accidentally signed away their right to a day in 

court. But Americans should not have to go to court to defend 

themselves from companies that never got permission to collect 

their data. Big companies like Equifax got to hold Americans accountable for mistakes of every size. Now that this breach has left 

143 million people around our country vulnerable to criminals, 

what should the Government do to hold them accountable at this 

point? 

11 

Mr. PASQUALE. So I think that this breach really ought to be a 

watershed and that we ought to really reconceive how we regulate 

this area. I think existing approaches are failing. I know that the 

Federal Trade Commission and the SEC are trying very hard with 

existing approaches, but I do not think they are really protecting 

people. 

And what I like to analogize the situation to is if you have a doctor, for example, in a State that repeatedly commits malpractice, 

they lose their license. If you have a lawyer that, you know, shirks 

duties to clients, et cetera, they will lose their license. And I think 

we really have to think seriously about licensing certain entities, 

as we do at the corporate level, with respect to the consumer finance information because we have seen so many instances of failure here. And I think repeated instances of failure should lead to 

a revocation of such a license. But I know that is a long way off. 

Senator BROWN. Thank you. 

Mr. Turner, the Equifax breach exposed, as we have said repeatedly, 143 million Americans’ financial data to potential fraudsters. 

Do you have an opinion as a market analyst on what its impact 

may be for the broader economy when this happens? 

Mr. TURNER. I do not have an exact opinion related to this case. 

I think when you look at cybersecurity, you need to look at a few 

factors. You know, it is not only the technology that actually is in 

place to protect against a breach, but also a culture around compliance. So I think if we did have some sort of nationwide standard 

around cybersecurity, we could prevent instances like this in the 

future. 

Senator BROWN. So because this has been so front and center in 

the Nation’s media and people are increasingly concerned and in 

some cases have a pretty good belief that they were breached, does 

this make consumers less likely to give their data to new fintech 

platforms? Will established banks and financial firms think twice 

before partnering with a fintech and sharing their consumer data? 

Take that out and its impact on the economy that way, answer that 

directly, and then in a broader way, its impact on the economy 

through those portals, if you will. 

Mr. TURNER. Yeah, so I think that fintech companies in general 

are pretty advanced when it comes to cybersecurity. I think if you 

look at, as I mentioned, culture, the cultures are all really based 

around the technology. People are very aware of the risks. And in 

many cases, these companies actually just use an API to get information from a bank that has created this data trail in the past. 

So I think maybe a more important question needs to be when 

we create data, whether it is financial transactions, whatever it 

may be, who owns that data? Is it the consumer that owns that 

data or is it the institution that created it? And should consumers 

have the ability to own their data and only display it when it is 

actually needed? 

Senator BROWN. So what happens if banks decide that they just 

do not want to partner with a fintech and share this data? Understanding what you just said, but what happens then? 

Mr. TURNER. Yeah, I think that has actually been an area of concern because there has been some back and forth between large 

banks and fintechs. And I think that depending on the platform 

12 

and the implementation, you know, if you look at a company that 

needs your bank account information in order to process payments 

or needs access to, you know, your bank account, those companies 

will not exist and that innovation will go away if there is not some 

sort of agreement on how to share data. 

Senator BROWN. OK. Mr. Evans, under Section 1033 of Dodd– 

Frank, the CFPB is ordered to create rules granting consumers 

more control over their financial data. The law specifically, as I 

think you know, exempts sharing data about algorithms or other 

methods companies use to create risk scores or make other predictions about a consumer’s financial performance. Should these algorithms be exempt? 

Mr. EVANS. That is a tough question because, on the one hand, 

these algorithms might represent proprietary information that 

gives institutions their advantage in whatever space they are operating. 

On the other hand, these algorithms and the use of nontraditional data could be important in determining whether or not a 

person gets credit or not, and we do not have a lot of information 

about the algorithms. 

I think one of the critical issues, though, is that this aggregation 

of information fuels some of the novel fintech approaches. For example, it is based on the aggregation of accounts across an individual’s life to give a holistic picture of what the financial situation 

is. 

If knowledge of the algorithm has a chilling effect on that, that 

could be problematic for some models. So it is tough, Senator 

Brown. It could go both ways. 

Senator BROWN. But it is pretty hard to argue, in light of the 

data breach, that consumers should not know exactly how their 

data is being used. 

Mr. EVANS. Absolutely. 

Senator BROWN. All right. Thank you. 

Chairman CRAPO. Senator Perdue. 

Senator PERDUE. Mr. Evans, this is off point, but would you 

agree the same thing applies to the CFPB? 

Mr. EVANS. Could you clarify, Senator? 

Senator PERDUE. That the data that the CFPB is collecting 

should meet the same standards of the data that we are talking 

about here? 

I will withdraw the question. I have got a more relevant question. 

Mr. EVANS. OK. Thank you. 

Senator PERDUE. We will talk offline about that. 

Mr. EVANS. OK. 

Senator PERDUE. I am concerned about the fact that this area 

has no borders. Forty-seven percent of all global online transactions, retail transactions, are made in China, are from China, 

and 40 percent of all Chinese consumers are using new payment 

systems like we are talking about today. They are talking about 

WeChat, Ant Financial, and others. This is a very rapidly growing 

sector over there, and I am very concerned that we have our regulatory environment here, but we have a lot of transactions going on 

around the world that come and go across borders. 

13 

What recommendations, given the global impact—and I would 

like all three of you to comment on it. What do you recommend 

that we—what should we be doing here to get ahead of this? 

Mr. EVANS. Excellent question, and I think it goes back to something Eric pointed out before and we have pointed out in this report, that our regulatory system in the United States is quite fragmented. It could stifle innovation to some degree. And so that 

should be job number one for Congress and regulators, to make 

sure we have the right regulatory framework given these novel approaches being taken across the financial landscape. 

Senator PERDUE. Mr. Turner. 

Mr. TURNER. Thank you, Senator, and I think I just want to clarify something here. When you look at China, you know, in some 

ways we actually are at a disadvantage because we are so advanced in our financial system. They are coming into a time where 

they did not have a lot of the infrastructure we have, so if you look 

at—you mentioned WeChat and payment systems like that. It is 

because there was not a robust card network presence or an ACH 

system like we have. So if you look at what we have in terms of 

peer-to-peer payment systems, global payment systems, those for 

the most part actually still, you know, as you would say, ride the 

rails. They still process through the same systems of the large card 

networks or ACH. I think that, you know, that is going back to regulation because these payment companies know that they are 

doing—they are complying with the way things need to be done. 

They are using systems that are in place. So, you know, I think as 

everybody has mentioned, if we want to push that innovation forward and you want to see us on par with, you know, the innovation 

in China or something like that, there just needs to be more clarity 

on where fintechs can go. So if that is a regulatory sandbox or 

some sort of specific regulatory framework, I am not sure, but it 

is going to be something like that. 

Senator PERDUE. Dr. Pasquale. 

Mr. PASQUALE. Yes, I think you are absolutely right, Senator, to 

point to China as a place where there is a great deal of innovation 

here. It is very cutting edge. I remember Connie Chung’s piece for 

a16z on WeChat and describing just how many things you can do 

within the app. And I am sure that consumers would find it extremely convenient. And global cooperation among regulators could 

enable similar types of apps to arise in the U.S. 

My only caution would be that I think looking at some of the literature on the Chinese social credit scoring system, which I cite in 

my written testimony, I do have concerns that the integration of 

information across so many sectors into one app could raise both 

concerns about competition and about privacy. So I think we should 

work with global regulators, but we should be cognizant of some of 

the risks. 

Senator PERDUE. Mr. Turner, in the time remaining, talk to us 

about tokenization. Is this a way of the future relative to EMV 

chips and PIN efforts right now in terms of privatization and security of data? 

Mr. TURNER. Yeah, I think we are seeing—you know, again, this 

is kind of an area where the U.S. is catching up on a lot of this. 

If you look at the U.K., the most popular form of payment is 

14 

contactless card payments. So, you know, we are just getting to the 

point where we are upgrading to EMV systems, and there is no 

doubt that those are more secure than what we had with magnetic 

strips. 

I think that, you know, if we continue to see growth in payments 

being moved outside of the traditional network, so as we see cards 

go away, as we see cash go away, you know, tokenization will be 

how everything is processed, and that will either be with our mobile wallets, if we are doing some sort of contactless transaction in 

a store, or if we are sending payments person to person. 

Senator PERDUE. Do you see this as a rising capability that 

makes some of—well, let us just say the terrorist network in terms 

of shadow banking and so forth. I mean, we have heard testimony 

here in other committees about that. Do you have any insights into 

that? 

Mr. TURNER. Really, I think that as we continue to have growth 

in digital payments, a lot of people do not realize that is probably 

good for controlling things like AML, anti-money-laundering. I 

think that it creates an audit trail, and as we see things like 

blockchain technology start to take off, you know, those transactions are recorded in an immutable ledger. You cannot go back 

and change them. You can trace them, and you can actually do 

AML compliance in real time. So I think the way that we are moving in digital payments in the future is actually going to be a lot 

easier for companies to control these compliance costs. 

Senator PERDUE. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman. And 

thank you, gentlemen, for your testimony. 

Professor Pasquale, thank you for citing my proposed legislation 

along with Senator Warren and Senator Collins. It is a response 

really to all of what we are seeing in terms of the Equifax breaches 

and everything else. And the underlying principle is it is a disclosure bill. I think shareholders should be aware of what their investment—or their company is doing in terms of cybersecurity. And 

it leads to the question that I think a lot of people are asking now: 

Are companies at the proper level focusing proactively on avoiding 

major and costly cybersecurity attacks? So I will ask you, in your 

opinion, are most companies doing that now, or is it the exception? 

Mr. PASQUALE. Thank you, Senator. I do think it is the exception. 

Based on the work of Kristin Johnson on managing cyber risks, I 

think she has done some very interesting analysis of how the problem is that when these types of cyber risks arise, there can be a 

huge leak of data, but the full consequences may not be known for 

years or even decades afterward. And the problem is, as your bill 

anticipates, how do you sort of front-load awareness of these problems and try to engage the board so that we are thinking about it 

not after the fact, not requiring disclosure after something bad has 

happened, but actually requiring something that happened beforehand. 

So, yes, I do think that it is an area that needs much more attention from corporate boards. 

15 

Senator REED. Let me ask you, Mr. Turner, your experience too 

in terms of looking across the spectrum of both private and publicly 

held companies. Is suitable attention being paid to cybersecurity 

issues, in your view? 

Mr. TURNER. I think if we are looking at the fintech sector in 

particular, as I mentioned before, cybersecurity is a big focus. But, 

you know, as you start to take a step back and look at the economy 

as a whole, especially just the financial system we have today, cybersecurity is definitely a big focus. But I think a lot of the problems lie in the fact that our banking system really is a product of 

decades’ worth of consolidation. There are a lot of, you know, fractured technology systems, physical servers, and things where, you 

know, it is hard to comply and keep an eye on cybersecurity when 

you are really just trying to keep these old systems running on a 

day-to-day basis. And I think we see some of the more innovative 

institutions moving toward things like cloud storage and cloud computing. And as we start to get there, I think it will be easier for 

firms to take a good look at cybersecurity and put some good measures in place. 

Senator REED. But it would seem appropriate to have the Securities and Exchange Commission lead that effort to try to get them 

to that position. That is fair? 

Mr. TURNER. Yeah, again, I mean, you know, an actual cybersecurity law or regulatory framework is really up to Congress and 

the regulators. But I do think, you know, it is not only that but 

just a—you know, if you had some sort of national standardization 

even in what these terms mean, you know, if NIST or someone like 

that could come out as well, I think those are all good steps in the 

right direction. 

Senator REED. You actually raised a very profound question, and 

the best parts of these hearings are not the answers but the questions that we have to think about, like who owns the data, which 

has to be done on an international basis, obviously, since it flows 

so freely across the globe. But that is an issue that we have to confront, I think, in Congress, at least for the United States. I think 

there are other questions like that. Are there data that should be 

off limits, you know, no one can have it or the person has to give 

an affirmative thumbs up or thumbs down? Should data be purged 

rapidly so that you do not accumulate this vast holding stretching 

back that is more transactional than archaeological, if that is a 

term? And I think there is a whole series of questions that you 

have raised which I find very, very helpful, so thank you very 

much. 

Mr. Evans, thank you and your colleagues at GAO. Just a final 

point. I have just a few seconds. Your response to the perception 

of how well prepared or well versed most companies are with respect to cyber, is it—— 

Mr. EVANS. Yes, so my team did not look at that as part of this 

work. 

Senator REED. Yes, sir. 

Mr. EVANS. But it is something that we are considering, and we 

do have folks that have given great thought to cybersecurity and 

the innovative technologies that might lead to improvements in 

16 

this space. But, unfortunately, I have nothing to add to that question. 

Senator REED. Thank you very much. Thank you, gentlemen. 

Chairman CRAPO. Senator Cotton. 

Senator COTTON. Thank you, gentleman, for your appearance 

and your testimony this morning on this important topic. 

Estimates from a 2015 FDIC survey indicated that 7 percent of 

households in our country are unbanked; another 20 percent were 

underbanked, which means they have access to a bank but also 

used products outside the traditional banking sector. So that is 

over a quarter of our fellow citizens who do not have the kind of 

traditional banking relationships that the rest of Americans do. 

Mister—is it ‘‘Pascal’’? 

Mr. PASQUALE. Pasquale. Thank you. 

Senator COTTON. I apologize. ‘‘Pascal’’ is how we pronounce it in 

Arkansas. 

[Laughter.] 

Senator COTTON. Along with other innovative pronunciations of 

different words. Do you think that the growing fintech market has 

the potential to help these unbanked and underbanked Arkansans 

access the digital economy and achieve greater financial security? 

And if so, please elaborate on how exactly. 

Mr. PASQUALE. You know, I do think that when we look around 

the world, we have seen fintech used as a tool of financial inclusion. For example, with M–Pesa in Kenya and some other areas 

around the world, you see an effort there. And I do think that that 

is—you know, there could be some inspiring opportunities in order 

to sort of create that sort of tier of opportunity. 

But I think one of the very difficult questions for Senators and 

for the regulators now is: Do you want to create sort of a two-track 

system, sort of a system that, say, is maybe a higher tier, that has 

higher levels of protection and regulatory standards, and then a 

lower level? Or to what extent do we want to maintain sort of a 

more unitary set of protections? 

So I do think that, yes, there are definitely global examples of 

inclusion, but I am also cautious about, you know, what we might 

be giving up in order to bring them to the U.S. 

Senator COTTON. What, if anything, is inherent in fintech that 

would lead to that kind of two-tier system that we should have on 

our minds as we craft policy? 

Mr. PASQUALE. I think that one of the things is that if you have, 

for example, fintech firms wanting to avoid, say, consolidated supervision or other sorts of requirements that go along with some 

of the benefits of, say, certain forms of regulation, that could be one 

aspect of the problem. But I think the other aspect is that I think 

sometimes fintech is confused because—the term itself leads to confusion because a lot of the technology ideally would be sort of an 

adjunct to existing banks that might be required to do what we 

want them to do in terms of serving the underbanked as opposed 

to itself providing those services. 

Senator COTTON. OK. Mr. Evans, you look like you might have 

something to add on that point? 

Mr. EVANS. Yes, so I was just thinking through some of what Dr. 

Pasquale was discussing. Certainly I think there are great possiVerDate Nov 24 2008 14:27 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-12 EXAMINING THE FINTECH LANDSCAPE\HEARING\91217.TXT
17 

bilities in this particular area, and of course, great risks that we 

detailed in the report. And it is almost too soon to know. We have 

not seen a full credit cycle. And we have seen, you know, earlier 

episodes where we have seen spikes in homeownership rates that 

were not sustainable. And so we want responsible, sustainable access to credit, and so those are some of the things we need to shake 

through when we think about marketplace lending. 

Senator COTTON. Mr. Turner, would you like to round out these 

thoughts? 

Mr. TURNER. Yeah, I think it is important to note when we are 

talking about, you know, the unbanked and the underbanked, and 

when we say fintech can promote inclusion, you know, there are 

really two parts to that. There is the idea just of access, you know, 

as we continue to see bank branches closing, it is harder for people 

to actually have that local bank that they can go to and get financial services. So if we have, you know, mobile applications where 

people can bank on their phone, I think that is access. 

And then I think the second part of that is the inclusion that 

comes with, you know, expanded services that might use alternative data or something like that to make a decision on a loan 

that a FICO score might show a borrower is, you know, a risk, 

where if you include some additional data, you can get a better picture, and that person actually can get credit. 

So I think there is a lot to consider, and I think that, you know, 

as we move forward and we look at regulation, it is important to 

remember and it is important to make sure that fintechs kind of 

have a framework where, you know, they need to decide are they 

going to be deposit-taking institutions and be like a real bank or 

are they going to continue as they are now and then need some 

sort of defined regulatory structure specific to fintechs. 

Senator COTTON. Thank you. 

Mr. Pasquale, I would like to look at fintech from another perspective now. We were looking at it from the customer’s perspective, now from the perspective of jobs and investors. A CEO of a 

London-based company called ‘‘TransferWise’’ recently said that he 

was recruited by Silicon Valley venture capitalists, but he chose 

the U.K. because of their regulatory structure. That is disappointing from the standpoint of American jobs. What, if anything, can we do to prevent future companies from making that decision and seeing the United States is the best, most favorable climate in which to start their companies and create new jobs? 

Mr. PASQUALE. You know, I do think that the problem of is the 

U.S. sort of falling behind sort of the awareness of other countries 

like the U.K., that is a key problem. I also would note, though, in 

terms of the work involved, I think that we do have such a great 

advantage in terms of some of our sources of strength in Silicon 

Valley and in New York in terms of the funding of institutions 

there of education and other areas that sort of led to a big advantage there. 

So I guess my thought would be that I would not necessarily 

want to see the U.S. regulatory infrastructure be rapidly chipped 

away at to sort of keep up with this, with, say, what is going on 

other countries. But I do think that we should keep in mind that 

if there is a certain level of divergence, maybe that should lead to 

18 

some more international cooperation to lead to more convergence, 

as we were talking earlier with Senator Perdue with some of the 

Chinese apps. 

Senator COTTON. Thank you. 

Mr. Turner and Mr. Evans, I regret my time has expired. We 

would welcome your comments on that question for the record, 

though. Thank you. 

Chairman CRAPO. Thank you. 

Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you, Mr. Chair, and thank you, 

gentlemen. This is an important discussion we are having, so I appreciate your comments today. 

Mr. Pasquale, let me start with you because Chairman Crapo 

had asked you, all of you, what the risks are, and one of the things 

that you talked about was the opaque algorithms to assess credit, 

and that was one of my questions. Can you elaborate on that a little bit, please? 

Mr. PASQUALE. Sure. So one of the big problems in the U.S. credit industry is that there are lots of people who either have no file 

or a thin file, and so they are very hard for a bank to extend credit 

to because it sees them not having adequate—we do not have adequate background information on them. And so the answer from a 

lot of fintech firms is to say, ‘‘Well, why don’t we look at other 

sources of data?’’ And there was a think tank called ‘‘UpTurn’’ that 

divided these into traditional, alternative, and fringe sources of 

data. So alternative data could be like your utility bill or rent bill, 

how often you pay your rent, et cetera. That seems pretty legitimate to me. But some of the fringe data could be things like how 

do you fill out a form online. Did you look at it for too long? 

In the others, reports of lenders saying if they see political activity on someone’s Twitter account, they say, ‘‘Oh, wow, well, maybe 

we should not lend to them. Maybe they are getting mixed up in 

things that we do not want to be involved in.’’ And sometimes even 

the content of someone’s smartphone, like the deal might be offered, just let us download everything on your smartphone and 

maybe we will give you a loan. 

And I think that these sort of business models could lead to what 

I call ‘‘big data proxies.’’ So the problem is that the companies involved may not necessarily be looking to intentionally discriminate 

against individuals, but as we know from ACOA, that is not the 

touchstone of liability there. The really key issue is: Could you use 

that sort of data like locational, other aspects of data to discriminate against people? 

And a final version of this could be that, for example, you might 

have very sophisticated algorithms that could from someone’s face, 

say, tell their age or tell different medical conditions from them. 

This sort of face recognition software is already being used, say, to 

infer criminality from faces. And so the level of advances in AI 

means that there are so many different data sources, and the opacity of these is really a challenge to fair lending. 

Senator CORTEZ MASTO. Thank you. And I know you have written extensively on data brokers, and I think that is important. I 

think it is important for all of us to understand there is so much 

data out there and the concern when it comes to credit or how we 

19 

determine somebody’s creditworthiness, if we are going to take all 

of that data into consideration, might at times create some sort of 

bias unintentionally because of the data we are collecting. Is that 

what you are saying? 

Mr. PASQUALE. Absolutely, and I think Federal Trade Commissioner Edith Ramirez was a real intellectual leader here in terms 

of pointing this out as an issue, getting the FTC to write some good 

reports on it, and the White House big data report from last year. 

Senator CORTEZ MASTO. OK. Thank you. 

Mr. Turner—and this is for Mr. Pasquale as well—how should 

policymakers think about balancing both the innovation provided 

by fintech companies and also ensuring that the same rules of the 

road that apply to traditional lenders also apply in this space? 

Mr. TURNER. Yeah, I think that is actually a very important 

question right now, and I think, you know, things like the OCC 

charter are a step in the right direction. If you look at these lenders and, you know, if their primary business is lending, they should 

be treated like other lenders. And right now, you know, there are 

about three different ways that digital lenders operate. You know, 

they are either partnering with the federally regulated bank, they 

are going State by State and getting licensed, or they are doing, 

you know, kind of a mix of both. So I think that if you want to talk 

about a fair and level playing field, you know, while continuing to 

promote innovation, it needs to be something where both the incumbent financial institutions and the lenders feel like they are 

getting a fair deal. And I think, you know, something that has been 

mentioned before that is important is as we start to have some sort 

of regulatory framework for these digital lenders, you know, it is 

important to make sure that you do not have a very high interest 

rate lender just setting up a website and calling themselves a digital lender. I think it is important that you probably define what 

those lenders actually are first. 

Senator CORTEZ MASTO. And then can you also address—and I 

will open it up to Mr. Pasquale as well—State preemption. Obviously, the crisis that we just came through—and I was working in 

the State of Nevada as Attorney General—the Federal regulators 

I think failed us to some extent. And so I am always concerned 

about some sort of State preemption in this space. And along with 

that—let me put my law enforcement hat on—fraud and money 

laundering when it comes to fintech companies and FinCEN and 

how that interaction should be involved with this process as well. 

So let me just throw that outcome there. 

Mr. PASQUALE. I completely agree with your concerns about preemption, and in my written testimony, I have talked a bit about 

some of the critiques of the potential for OCC to preempt some of 

the relevant State laws, including usury laws, because there are already some worries in exactly that area. And we saw even the Supreme Court reconsidering its embrace of preemption in Watters v. 

Wachovia in the later case Cuomo. And I think that that sort of 

signal from the Supreme Court should be a signal to regulators and 

to Congress in terms of exactly the type of concerns that you are 

raising. 

Senator CORTEZ MASTO. OK. Thank you. I notice my time is up. 

Thank you, gentleman. I appreciate the comments. 

20 

Chairman CRAPO. Thank you. 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chair. Gentlemen, thank you for 

being here. 

I want to go back. I have got a couple of things I hope I have 

time to ask about, but, Mr. Evans, I think you mentioned in response to the Chair’s questions about the sandboxes some of the 

other countries are experimenting with that, you know, you want 

to be in an environment where you can move fast and break things, 

but maybe do it with the right rails in place. 

Number one, you said that you are going to do a report that is 

due out in the winter of next year. 

Mr. EVANS. That is right. 

Senator TILLIS. That is about a dog year in technical terms. So 

one question I have is: What can we do now to potentially look at 

this with the right kind of safeguards and not wait 2 or 3 years 

where a lot of things will be different, as they were 2 or 3 years 

ago? 

Mr. EVANS. Very good question. I think you are going to see some 

competing interests on both sides of the issue when you think 

about what the appropriate regulatory approach is in the U.S. and 

what we can actually glean from other economies. 

Senator TILLIS. And do you think the current regs make it difficult for a large traditional bank to even really get into this mode 

of where they could move fast and break things? Or are they at a 

decided disadvantage until we have some sort of rationalization? 

Mr. EVANS. Yes, and I do not think that that is the appropriate 

model in the financial services space because we are not talking 

about apps. We are talking about access to credit. And so the more 

appropriate model is maybe move fast, be careful, think through 

what the landscape looks like. 

Senator TILLIS. Yeah, and I meant it actually in a more positive 

light, I think, in innovation. What you are trying to do is innovate, 

particularly for our U.S.-based entities and innovators to be globally competitive. So I am trying to find a sweet spot where you do 

that but it does not become disruptive. 

Mr. EVANS. Right. 

Senator TILLIS. I hope that if—the report takes as long as a report takes, but I hope that we have other information that is instructive to Congress so that, to the extent that regulatory or legislative action is required, we are able to move more quickly than a 

dog year in technology. 

Mr. EVANS. Yes, sir, and this will be early—— 

Senator TILLIS. Early winter? 

Mr. EVANS. Early 2018. 

Senator TILLIS. Oh, OK. Good. There are two winters in 2018, so 

you are talking about the early part. 

Mr. EVANS. That is right. 

Senator TILLIS. Good. One question I have is whether or not we 

have got a bubble with respect to cryptocurrencies, and, you know, 

you have got a thousand different cryptocurrencies out there. Can 

you talk a little bit about the need for regulation and watching how 

the industry is moving? We will start with you, Mr. Pasquale, and 

just go down the line. 

21 

Mr. PASQUALE. Yes, Senator Tillis, I think that is a really powerful concern right now. I have seen stories, for example, of people 

trying to puff a certain cryptocurrency by saying, ‘‘I am a taxi driver. I took my money out of the bank. I put it into the 

cryptocurrency and now I am rich.’’ And I think that when you look 

particularly at the diversity of the initial coin offerings and how 

they are proliferating, even boosters of the cryptocurrency industry 

like CoinDesk have published articles saying here are massive governance deficits with respect to how these ICOs work and how 

some of the cryptocurrencies work. 

So I do hope that—I think that our regulators are trying to catch 

up with it, but I think it is going to take a lot more coordinated, 

concentrated effort to do so. 

Senator TILLIS. I have got limited time. If you want to briefly 

comment. 

Mr. TURNER. So I think that when you look at cryptocurrencies, 

you need to realize, you know, the entire market is only a little 

more than $100 billion, and this is globally. So, you know, you cannot really call a bubble or anything like that, but it is not that 

much compared to other asset classes. I think that as Dr. Pasquale 

mentioned, you know, there needs to be some sort of regulation 

around initial coin offerings or token offerings, and whether that 

involves, you know, offering them only to accredited investors or 

setting up some sort of governance agency or having a current regulator look at them, I do not know. But there definitely needs to 

be something. 

Senator TILLIS. I am sorry, Mr. Evans. I want to get to a final 

question, and it relates to some of your opening comments, Mr. 

Pasquale, or maybe I inferred incorrectly from it. But with respect 

to the algorithms that are being used by some of the players and 

the concern with maybe the risk of predatory lending practices, is 

there any information out there that would suggest that the rates 

on the whole that are being charged by people that are in the 

fintech space or there are substantial outliers based on the underlying risk using maybe factors that have not traditionally been 

used in the underwriting model? In other words, is there a real 

clear base of evidence that suggests that they are engaged in any 

kind of unfair lending practices? I infer that maybe you thought 

there was or there was a potential for it, so I was curious. That 

will be my final question. 

Mr. PASQUALE. I would put it more on the potential side right 

now, Senator. I think that the issue in terms of—I briefly cited this 

2016 Federal credit survey—or a credit survey by the Fed of some 

small businesses, and there was also an interesting story cited in 

my written testimony by David Lazarus about certain people had 

used the fintech platform and then later found out that the Small 

Business Administration had suggested—or someone from the SBA 

had suggested that if they have used certain lenders vetted by the 

SBA, they could have gotten a much better deal. But I would say 

that it is very—we are still in early days. 

Senator TILLIS. More of a risk than a measured reality. 

Mr. Evans, and then I will finish. 

Mr. EVANS. Certainly if you look at some of the enforcement actions—and there have only been a few—there was one case where 

22 

the entity was a bit more aspirational than they should have been, 

and they promised benefits that did not actually pan out, and they 

were cited by the CFPB. But in terms of widespread evidence, I 

will say no, and in some cases you do see lower rates relative to 

some other higher-cost alternatives like payday lending. 

Senator TILLIS. Thank you. 

Chairman CRAPO. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

So we are here talking about innovative new financial services 

companies, and in that context, I want to ask some questions about 

the data on the cost of financial advice. 

Dr. Evans, you are the Director of the Financial Markets Group 

at the Government Accountability Office and an expert on all 

things financial markets, and you look at a whole lot of the data 

in this area. Is it your sense that it is now harder or easier for middle-income savers to access investment advice? 

Mr. EVANS. So I would say easier, and that is a qualitative assessment and is based on consensus, because if you look at traditional wealth management, it takes $250,000 to get in the game; 

whereas, the digital wealth platforms require no minimum or a 

small amount, say $500. And some of these are automated platforms that do things like automatically rebalance the portfolio, 

which means lower fees. Examples of these include Betterment and 

Wealthfront. 

Senator WARREN. Good, so getting easier. And, Mr. Turner, you 

are a research analyst at S&P Global Market Intelligence. You are 

also an expert on all things financial markets. In your expert opinion, is financial advice getting more expensive or less expensive for 

investors? 

Mr. TURNER. Thanks, Senator. I think just echoing those—you 

know, as you continue to see the growth in digital advisors, you 

know, with much lower fees, consensus seems to be that advice is 

getting less expensive. 

Senator WARREN. So here you are; you are both independent experts. I appreciate your opinions. They reflect the data. They reflect 

the facts as best we know them. But the National Chamber of 

Commerce apparently disagrees with you, and they think they 

have bought some facts to back them up. 

Last week, they hosted a meeting to complain about a new Department of Labor rule that prevents Americans who are saving for 

retirement from being cheated by their investment advisors. It is 

called the fiduciary rule. I know you are all familiar with it. And 

it requires investment advisors to offer advice that is good for the 

customers, not advice that makes more money for the investment 

advisor. 

Now, the Chamber was hyping a new study which they had 

bought and paid for claiming to show that the new rule made financial services more expensive for families. 

Now, my first guess when I saw this is that they were pushing 

around this so-called study because under the new fiduciary rule, 

financial advisors are hurting for profits. 

So, Mr. Turner, this is your area of expertise. With the new fiduciary rule in place, are investments shrinking and are financial advisors hurting for profits? 

23 

Mr. TURNER. Yes, so that is an interesting question. I think if 

you actually look in what I submitted for my written testimony, we 

predict by 2021 there will be $450 billion in digital advisors. That 

is a fourfold increase from where it was at the end of last year, and 

a lot of that growth is actually being driven by incumbent investment advisors who are looking toward these new technologies. So 

no longer is it the startups, but it is actually the larger firms that 

are offering these products. 

Senator WARREN. So this is really interesting. So startups are 

doing well. That is part of what we are learning here. And the 

CEOs for the large financial firms like UBS and Charles Schwab 

actually have now told their shareholders in earnings calls that 

their profits are great and going up with the fiduciary rule in place. 

So the new rule is obviously lowering prices for consumers. It is 

shutting down cheating. It is letting investors access new markets. 

It is great for new financial startups like Betterment. It is good for 

big guys like UBS. And yet the Chamber of Commerce is running 

around like a chicken with its head cutoff trying to kill the rule. 

I get it. There are some investment advisors who built their profit models on kickbacks and on tricking their customers. But the fiduciary rule is good for consumers. It is good for markets. It is good 

for competition. It is good for startups. And it is even good for some 

of the biggest investment companies. 

Even so, the lobbyists and the trade associations like the National Chamber of Commerce are sucking down billions of dollars 

every year in this town, and those dollars do not keep flowing unless there is a fight somewhere. So the lobbyists and the trade associations keep right on fighting, whether it makes any sense or 

not. 

If I ran one of these companies, I would take a long, hard look 

at all of the shareholder money that is wasted on trade associations 

and membership in the National Chamber of Commerce. I think 

they are being taken for a ride. 

Chairman CRAPO. Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman, and I thank all 

of you for your testimony. 

Mr. Pasquale, we are very proud to have you at the University 

of Maryland, and let me start with a question for you, because in 

your written testimony you have a section entitled ‘‘The Problems 

of Extant Data Collectors are a Reason for More Scrutiny of 

Fintech, Not Less’’, and you talk about different kinds of problems 

with a lot of the data that is being collected, accuracy, relevancy, 

and some other provisions. 

I just want to focus on accuracy for a moment because in this 

fintech world—and then I am going to ask you about the existing 

rule that is already more regulated. It seems that the burden is always on the consumer from inaccurate data, and the question is if 

a consumer is being harmed because of inaccurate information 

about them, why should they be paying the penalty? Why not the 

provider of bad information? 

So let me ask you, first, in the fintech world, is it still the Wild 

West? Do we need to have some provisions that say that those people who provide bad information that causes harm to consumers 

24 

should have to pay some penalty rather than the burden on the 

consumer? 

Mr. PASQUALE. I think that is an excellent proposal, and it really 

would rebalance things, because one of the things that I think is 

so tragic about the Equifax data breach or several data breaches 

is the amount of lost time, I mean people having to spend time 

haggling over the phone just trying to reestablish the basics of 

their identity to protect it from being exploited. And I think trying 

to rebalance the playing field—I mean, I know in Europe they have 

talked about a data levy, because the idea is that data—you know, 

we have often heard data is the new oil. But we also know that 

oil has some wonderful sides and has some terrible sides. And we 

try to deal with the environment consequences of oil. 

I think very similarly, when we have these large quantities of 

data that can create such harms once they are released, we need 

to sort of be storing up some level of reserve for regulatory efforts 

that would put the burden and the cost on the person that causes 

the accident, not the victims of it. 

Senator VAN HOLLEN. All right. So let me follow up with 

Equifax, because most of the focus understandably right now is on 

breach of privacy, everyone’s very personal information being exposed to the public and people who may want to do bad things with 

it. But you raised the issue that I hear constantly from our consumers, even before the data breach, which is that they get a question on—you know, they are denied a loan or their bank tells them 

there is a problem or whatever it may be. You mentioned an Arkansas woman in here who was denied a job. 

So even under those more regulated systems like Equifax, you 

have these problems today where consumers are stuck with the 

costs of bad information. Do you have any suggestions about how 

we can deal with that? Because if we can get it right with Equifax 

and the already more regulated entities, those sort of models could 

also be applied to fintech. I do not want to suppress the benefits 

of fintech. I just want to make sure it is not the consumers who 

are paying the costs for inaccurate information about them. 

Mr. PASQUALE. Right, and I think one idea that I have explored 

in past work is requiring certain push notifications to consumers 

if they are put in a certain suspect category. And some of those 

suspect categories could be, for example, as I discuss in the written 

testimony, lists of people with certain illnesses. There are lists of 

people with diabetes, with AIDS, HIV-positive, mentally ill, et 

cetera. If you are on one of these lists, perhaps you should have 

to get a push notification so you could dispute it or at least you 

could understand what was happening. And also, I think there 

should be further regulatory effort on the use of the data, so not 

only putting the burden on the consumer but also restricting certain usages of data that may have, say, illicit provenance or have 

not sufficiently been vetted by, say, outside auditors or others. 

So I think that those would be two options, you know, both a consumer-facing option and an option of restrictions on use without 

proper vetting and auditing. 

Senator VAN HOLLEN. All right. I look forward to working with 

you on it. There are two issues. One is the relevancy of the data, 

right? I mean, is a health condition relevant to whether you get a 

25 

loan or something? The other is the accuracy. And they are both 

important, but it does drive me crazy when something that is just 

dead wrong gets on a credit report and the credit rating agency, 

whoever it may be, does not pay any penalty other than the fact 

that after months and months of work, they may say, ‘‘Oh, yeah, 

we were wrong,’’ even though it has created incredible economic 

and other kind of pain to consumers. So I look forward to working 

with you on that. 

Just a quick question you can answer for the record, if you want. 

With respect to bank loans, for example, we have FDIC protection. 

We have got this great new area in fintech where people have, you 

know, a lot of their—you know, not a lot of wealth but they have 

money stored in these areas that are not really insured. 

For the record, Mr. Chairman, any thoughts any of you have 

about how we deal with that issue? If I have money in my bank 

account and it is lost, I have the FDIC. What is the recourse for 

a consumer who uses fintech and their money is lost? So I would 

appreciate any answers you have for the record since it looks like 

my time is out. 

Chairman CRAPO. Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. Thank you to the 

witnesses for this important hearing. 

This is a question for all the witnesses. We hope that financial 

innovation breaks down barriers and increases financial inclusion 

and ultimately does good, but sort of pursuant to Senator Tillis’ 

line of questions and what the panel has been talking about, the 

risks are real. There are security issues. As we saw with Equifax, 

our most sensitive personal information can be vulnerable, and 

there is the risk of creating a platform for predatory actors entrenching social and racial biases. And so innovation is disruptive, 

but it can be disruptive in positive and negative ways. 

I think we have an opportunity here. We can choose to lift up 

innovation that creates economic opportunity. We can make consumer protection a core value of what we do in fintech. When 

someone asks for regulatory flexibility, we can ask how is this innovation going to actually help people. 

As a starting point, I think it would be helpful to have a dedicated Innovation Office that is thinking comprehensively about 

these questions. This could be a one-stop shop in the Government 

for fintech businesses to figure out which regulations apply to them 

and a mechanism for coordinating among the regulators. It will be 

a Wild West without some attempt to coordinate. 

You already have regulators with varying degrees of aggressiveness in this space and enthusiasm for this space. But we need 

someone who is thinking around a few corners rather than just sort 

of narrow questions of compliance for particular companies. 

I would like to get each one of the panelists’ views on the potential for an Innovation Office and a one-stop shop, starting with Mr. 

Evans. 

Mr. EVANS. I will just quickly say that it is something that 

should strongly be considered. It is envisioned in the bill that is before the House. The regulators have talked about these type of initiatives, and it is worth full consideration. 

26 

Mr. TURNER. I think it is a great idea. I think as we start to look 

at potential regulation for the industry, having some sort of Innovation Office, having some sort of sandbox program in place could 

help fintechs and regulators really figure out, you know, what they 

are working toward. And I think if you look at large banks today, 

they all have Innovation Offices. 

Mr. PASQUALE. Yes, and I would agree. I think that the problem 

of interagency cooperation is a really profound one, and the Dodd– 

Frank Act took certain steps in that direction with respect to the 

Financial Stability Oversight Council. And we see also in terms of 

data sharing and the governance of data sharing and the intelligence apparatus there are some efforts to sort of understand exactly what is going on in the overall ecosystem. And I think you 

are absolutely right that that is going to be the big agenda item, 

I think, over the next decade, is how you can get these agencies 

to cooperate around something like an Office of Innovation. 

Senator SCHATZ. Let me just ask another question not on my prepared list of questions. You know, the challenge, I think, with this 

Committee, at least to a certain extent, is that the public’s eyes 

glaze over, even though all of these issues impact them directly. It 

is hard to describe why this panel and this topic matters to folks 

that we all represent, and yet it does. 

So could you just describe as concisely as you can, each one of 

you, the best opportunity when it comes to fintech and sort of the 

worst of a parade of horribles when it comes to fintech? 

Mr. EVANS. So I think that the best opportunity, of course, is enhanced and sustained financial inclusion. The horror story is 

fintech companies being used as a platform to market high-cost 

loans to individuals that further undermine access to credit. 

Senator SCHATZ. Mr. Turner. 

Mr. TURNER. I pretty much echo that. I think fintech really offers 

access. It offers ease of use. It offers reduced frictions. It offers reduced costs. And the only downside I could see in the future is bad 

actors parading as fintechs and trying to get fit into regulation that 

might be formed. 

Senator SCHATZ. Just as a quick follow-up, do we have a statutory framework that prevents those bad actors? Or are we just hoping they will not take advantage of this new aperture? 

Mr. TURNER. I think if there is to be any sort of fintech-specific 

regulation, you will need to define what a digital lender is, what 

a peer-to-peer payment company is. It needs to be—you know, this 

is probably step one in doing that. 

Senator SCHATZ. And this becomes hard because banks are going 

to be in this space already. 

Mr. TURNER. I think it could be difficult, but I think it is definitely necessary. 

Senator SCHATZ. OK. Mr. Pasquale. 

Mr. PASQUALE. Yes, I think, you know, on the bright side, I do 

think when I look—I listen to a lot of podcasts on fintech, like the 

Wharton Fintech or Fintech Insider, and you often hear on these 

podcasts very interesting entrepreneurs who are bringing to people, 

say, the opportunity to buy insurance for an hour if they want to 

borrow their friend’s car or something. And those sorts of things, 

like insurer tech, those sorts of things, are really, I think, filling 

27 

a gap for consumers and might ultimately, if the market is structured correctly, lead to much better competition for financial services if options are transparent and understandable. 

For the downside, I would just reference there is a British 

science fiction series called ‘‘Black Mirror’’, and it has a terrific episode where someone finds that their score—they keep having negative social interactions, and their score, which also acts as a credit 

score, keeps going down and ruins their life. 

Senator SCHATZ. For the record, can I find that on Netflix or—— 

Mr. PASQUALE. Yes. 

[Laughter.] 

Chairman CRAPO. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. I will tell you, Dr. 

Pasquale, I listen to a lot of podcasts as well. I am not sure Wharton Insider has been on my list recently. But let me compliment 

my friend Senator Schatz. I think the idea of this Innovation Office, this kind of one-stop shop makes an enormous amount of 

sense. I would love to help you on the—I do not—to try to accomplish that since we think about FSOC and other efforts. This notion 

of having some single point of reference in this area is a great idea. 

How we implement it is going to be a real challenge because I 

think, as Mr. Turner talked about a little bit, my old business used 

to be mobile telephony. I mean, mobile payments are a part of the 

fintech world. This is going to continue to grow in a number of 

ways, but I think it is a great idea. 

I want to come back to—I am going to try to get in two items. 

One, on the whole question of what Senator Reed raised in terms 

of trying to elevate this whole question around data protection at 

a higher level, I would simply point out I think we have got like 

9,000 public companies. Even Yahoo, when it had its massive data 

breach, did not really view that as a material fact in terms of how 

do you not have a billion users hacked into and that not be material. Now, we whacked Yahoo, but the fact is I think less than 100 

companies in the last decade have ever reported on a data breach 

in an SEC filing. So some of the things that Senator Reed has suggested are very important. 

Another piece I think is very important is—and this is not one 

that is a partisan issue. We have been working for 31⁄2 years trying 

to get a common standard around data breach. We have got 49 different State laws now on data breach. So the fact that Equifax took 

6 weeks before they notified consumers was a reflection of the fact 

that we do not have a single standard around data breach. And the 

problem has not been actually lack of need for a standard. It has 

been individual industries, and in many cases my old industry, 

telecom wanted to try to exempt themselves from the requirements 

of notification. 

I know this is a little bit off topic, but because Equifax is kind 

of in the news and as we think about fintech being a brave new 

world, do you guys have a sense about the need—and I know, Dr. 

Pasquale, you had some concerns about Federal preemption. But in 

the case of the data breach, I strongly believe that we need a single 

national standard here. Do you have a view on any of that? 

Mr. PASQUALE. I guess I would say that there are certainly—it 

is a very tough question because I do think that I want to preserve 

28 

the ability of certain States to be on the cutting edge in terms of 

expansive requirements, and I think that, you know, California to 

some extent has had a very forward-thinking privacy office there 

in the Office of the Attorney General. But I also do see your point 

that it could become very costly for companies to comply with all 

the different standards, try to understand them all. 

And I think that, you know, I would have to study it further to 

know whether the benefit of uniformity—— 

Senator WARNER. I would love to get some—because we are very 

close. The challenge has not been trying to get a standard or the 

standard has to evolve. It also has notification requirements. But 

I think the challenge in a lot of data breaches is everybody blames 

somebody else. You know, is it the institution? Is it the financial 

institution? Is it the telecom companies? Is it some other player? 

And we end up now having these circumstances where, again, in 

the Equifax case we wait 6 weeks before the public is notified. 

Mr. Turner and Mr. Evans, quickly, because I have got one other 

area I want to raise. 

Mr. TURNER. Yeah, I just want to point out that I think, as you 

mentioned, just a national standard is probably step one. So I do 

not know if it is going to be specific Federal regulation or harmonized State regulation. But if everybody is on the same page, 

you know, at least it can start down that path. 

Senator WARNER. Mr. Evans. 

Mr. EVANS. And I would just echo those sentiments. What you 

want is consistent treatment. 

Senator WARNER. One area that I have been intrigued with— 

and, again, there is a little poor guy who had all these other great, 

very specific fintech questions who is going to be upset I am not 

asking them, but this is another area. I think there is a real opportunity in fintech. One of the things I have looked at over the last 

2 years is the transformation in the nature of work and the transformation in the notion of employment. You know, back in the 

1990s, about 90 percent of Americans worked full-time in a W–2 

type environment, yet we are the only industrial country in the 

world that makes all of our social insurance dependent upon your 

labor status. So that social contract that said if you work full-time, 

you get unemployment, health care, workmen’s comp, disability, retirement, that world is changing. A third of the workforce right 

now is not in traditional work. They are in contingent work. You 

know, they are part-time, they are temp workers, they are 1099 

independent contractors, the kind of sexy areas, the gig workers. 

All of that workforce, a third of the American workforce—the estimates are it is going to go to half—have no social insurance at all. 

One of the things we have looked at is the notion of portable benefits, and I think fintech offers an enormous opportunity, as long 

as it is properly regulated, to have the ability to have that portable 

benefit system that would allow you to move from firm to firm and 

carry those benefits with you. 

Any quick comments on that, right down the path, recognizing 

I am already out of time? 

Mr. EVANS. I will pass. 

Mr. TURNER. I think technology will be a great enabler of anything that does happen in that area. 

29 

Mr. PASQUALE. And I would agree with you. I follow some of the 

work on platform cooperativism, which are a lot of groups that are 

trying to create fairer forums of platform—— 

Senator WARNER. Stride Health and others, et cetera. 

Mr. PASQUALE. Yeah, and I think that the portable benefits via 

some of these fintech firms could help them—could help individuals 

to get out of job lock, which I think is really a big drain on 

entrepreneurialism. 

Senator WARNER. I would only say, Mr. Chairman—I know my 

time is up—that, you know, I do not think we are going to be able 

to force an economy back into a 20th century model where everybody works for the same company for 38 years the way my Dad 

did. But we are going to have to recognize that we need a social 

insurance platform or new social contract that meets the workforce 

where they are at and, again, as Dr. Pasquale said, allows people 

to move from job to job, and part of that means portability of benefits. So I think fintech offers a great opportunity here. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Warner. And that concludes our questions. We have finished the hearing with 2 minutes 

to spare, so I thank our witnesses for being concise in your testimony and also for your testimony. You will probably get additional 

questions from Senators, and the Senators should note that they 

have until Tuesday, September 19th, to submit questions. I urge 

our witnesses to respond to those questions, if you receive them, as 

quickly as you can. 

This is a very critical issue, and your testimony has been very 

helpful to us. We will probably look forward to working with you 

in the future to get further help from you. 

With that, the hearing is adjourned. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

30 

PREPARED STATEMENT OF LAWRANCE L. EVANS 

DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, GOVERNMENT

ACCOUNTABILITY OFFICE

SEPTEMBER 12, 2017 

31 


Chairman Crapo, Ranking Member Brown, and Members of the 

Committee 

Thank you !Of the opportumy to be here today to discuss the financial 

technology (fintech) landscape. Advaoces in tecmology and the 

widespread use of the Internet and mobile communication devices have 

helped fuel the gro"Mh in fintech products and services. Consumer access 

to these new technologies has resulted in dlanges in their preferences 

and expectations regarding how they conduct financial transactions, such 

as using their smartphones to make payments or purchases. Fintedl 

products and services irdude small business finm ng, education 

refinancing, mobile wallets, virtual currencies, and platforms to connect 

investors and start-ups. 

My remarks are based on our April 2017 report on the fintedl industry., 

SpecificaUy, in Oll' report we provided information on four commonly 

referenced SUbseclOfS of the fintedl industry, including what a is and how 

a wOfks; potential benefits and risks; industry trends; and regulation and 

oversight The four commonly referenced subsectors of fintedl described 

in the report were marke!place lending; mob~e payment$; lligital wealth 

management; and distributed ledger tecmology. 

For our April 2017 report. we conducted background research and a 

literature seardl of publications from various sources including regulators, 

industry groups, and other knov.iedgeable parties. We also reviewed prior 

GAO reports on person-to-person lending, virtual C~~Tencies, and financial 

regulation. 2 We conducted interviews with agencies, industry groups, and 

other kno.vledgeable parties to identify information for eadl subsector 

and to obtain information on fintech oversight and regulation at the federal 

and state levels. We reviewed guidance, fUlal rulemakings, initiatives, and 

enforcement actions from agencies. We also attended and summarized 

fintecll-related fOfUffis held by federal agencies and others. 

IGAO, Rnanckl Technclcgy: Information on Stmsedors MIS ReglitJ.OI'f Olersighl, 

GA~11-381 (Waslingtoo. D.C.: Apri 19, 2017~ 

2See GAO, ~o.Penon l.Mdng: ~~&<; Regliatory Challenges Could Eme1pe 11$/he 

Industry Groll$, GA~ 11-813 (Washington, D. C.: July 7, 20111; and l'irtual Currellcies: 

Em6tgng ReglisiOI'f, Law~. and Consumer Protedion Chalfeng$S, 

GA~14-496 (WasNngt , D.C.: May29, 2014t GAO, FmandaiReglialion: Ccmp/&X and 

Fragmented Strvc/1118 Could be streanmned to Improve Effectiveness, GA~16-175 

(Washington, D.C.: Feb. 25, 2016~ 

GAQ.17-806T Rnnlal Tecllnology 
32 


Commonly 

Referenced Fintech 

Subsectors are 

Marketplace Lending, 

Mobile Payments, 

Digital Wealth 

Management, and 

Distributed Ledger 

Technology 

Marketplace /endng. Marl<etplace lenders connect consumers and small 

businesses seeking online and timelier acoess to cred~ with individuals 

and instiMions seeking profitable fencing opportunities. In addition to 

traditional aedit data, such as aedit scores or debt repayment history, 

marl<etplace lenders may also use less traditional (aHemative) data, such 

as monthly cash flow or online customer reviews, and ere~ algorithms to 

underwrite consumer loans, small business loans, lines of credi~ and 

other loan products. Although a number of marl<etplace lending models 

exist, publications we reviewed highlighted two common models: direct 

lenders and platform lenders. 3 Direct lenders, also known as balance 

sheet lenders, use capital obtained from outside sources to fund loans 

and often hold loans on their balance sheet. Platform lenders partner with 

depository instiMions to originate loans that are then purchased by lhe 

lender or by an investor through the platform. 

Mobile payments. Mobile payments allow consumers to use their 

smallphones or other mobile devices to make purchases and transfer 

money instead of relying on the physical use of cash, checks, or credn 

and deb~ cards. There are different ways to make mobile payments, 

d.~ng lhe ~ of a m®ile wallet. Using a mobile w~~et, CQOSVmers 

can store payment card information and other information on their mobile 

devices that is often needed to complete a payment for later use.• 

Consumers may use mobile wallets to make payments to other 

consumers, referred to as person-to-person payments, or to businesses, 

referred to as person-to-business payments, e~r in mobile applications, 

through mobile browsers, or in person at a store's point·d·sale termilal. 

In addition, some mobile payment providers allow individuals to create 

accounts to reoeive and make payments. 

Digffat wealth management. Dig~al wealth management platforms, 

including robo-advisors, use algorithms based on consumers' data and 

risk preferences to provide digital servioes, including investment and 

lcoogressional Research SeMce, Marlt.etplaoe Letllfng: Rnledlln Consumer 8lld smaiBusiness Lent.frtg, Sej>ten'ber 6, 2016; Department ollhe Treasury, OpporlJmities and 

Chsii~K~geS in Oo>l'ne Marl<etplace Lendng, May 10, 2016; Alan Mc<lum, Weiling Guo, 

and Daniel Castro, Pof'v:y Prirtclples fer Rntech, lnfoonallon Tecllnology & Innovation 

Foundation, October 2016; S&P Global Marttet lnlelgence, An lr!lroduction to Fintech: 

Key SeclO<S and Trends. October 2016; and S&P Global Malltet llltelligence, 2018 U.S. 

/lgtM Leming Landscsp& (Char1ol!esviUe, Va.: December 2016). 

'In a mollie wallet c:oosumers can enter paymenl information from debit and aed~ cards, gill cards, and prepaid cards. Consumers can also s1nte olhet informalion oi!Bn needed 1o 

~ a pa)1Mil. such es s!l4>plng address. e-rnai, and phOne nt.mller. 

GAQ.17-806T Rnnlal Tedlnology 
33 


financial advice, directly to consumers. Digital wealth management 

platforms provide services including portfolio selection, asset allocation, 

account aggregation, and online risk assessments. s Dig~al wealth 

management finns inrorporate te<:hlologies into their portfolio 

management platforms primanly through the use of algorithms designed 

to optimize wealth management services. Fully automated platforms have 

features that let investOIS manage their porlfoliGs v.ithout direct human 

interaction. Digital wealth management platforms typically collect 

information on a customer using on~ne questionnaires, help customers 

select a risk profile, and suggest investment strategies. Adviser-assisted 

digital wealth management platforms combine a digital client portal and 

investment automation with a virtual financial adviser typically conducting 

simple financial planring and periodic reviews over the phone. 

Distributed ledger techno/c>gy. Distributed ledger technolc>gy was 

introru:ed to fadfltate the recording and transfening of virtual currencies, 

specifically using a type of distributed ledger te<:hlology, known as 

blockdhain. 6 Distributed ledger technolc>gy has the pc>tential tG be a 

secure way of conducting transfers of cigital assets in a near real-time 

basis potentially withOut the need tor an nt~~art 1 Distributed ledger 

technology involves a distributed database maintained over a netwak of 

computers connected on a peer-to-peer basis, such thai netwolk 

participants can share and retain identical, cryptographically secured 

lalaci<Rock, llrifa/ ln.estmem AIMee: Robo Advisors Come of Age, SepteJTber 2016, 

https:lhNNI blackr~ oom'oorporate/en4111teraluretwMepape<Melll'<>iot.Qglfal.inYestme 

ot.advlce-septembet·2016.pdf; Financ:iallndus1Jy Regulatocy Authotiy, Report on Cigifa/ 

/rwestment Advice, March 2016, 

http~!wNN finra orglsiesl~fauMilesldiQ4al•nvestment~Y!Oe-report pdf; GauU>~r 

Vlncen~ RoM Geta, Deloite, llgil.a/ Ciwplion n~~ l'.lly Established 

Firms Shccid Pay Altenlion To £merring Di9fa/ Butine$$ Models F« Retal tnvestOtS, 

2014. 

'See GAO, VirtJJa/ CUITencies: Emetg/lg Regu/IJI.Of'/. Law Enloroement, and CooslNn« 

Proleclion Clu;lengss, GA0-14-496 (Washington, D.C.: May 29, 2014~ 

1 Arl intermed'mry can Include financial institutions (well as banks, brol<erldeafers, and 

O!!ler n~ons that intemct with the end~ o/ a financlallr8nsadlon) and 

lnfraslructures (such as paymen~ clearing. and settlement systems lor fllnds, securities, 

and derivatives). See Oavid Mills, Kathy Wang, Branden Maloc1e, Arljana Ravi, Jen 

Marquardt, Cioton COOn, Anton Badev, Timothy Brezinski, Linda fally, Kirrbeftey Uao, Vanessa Kargenian. Max Elilhorpe, Wendy Ng, and Maria Balrd (2016~ 'DistribtJted 

ledge< technology in paymerrts, clearing, and settlement,' F"mnce and Econonics 

Discusslon Series 201S.OOS, Washlngtnn: Board of~ ot !he Fedeml Reserw 

System, hltps.Rdotorg/10. 17016.fEDS 2016.095; Board ofGo'iemo~ oflhe Fedeml 

Reserw System, Consumer Compli8<1C4 Oultoolr. Fiillech $pedal Edition, 3rd ed. 

(Philadelphia, Pa.: 2016~ 

GA().I7-806T Rnnlaf Tecllnology 
34 


records in a d~nttalized manner.' A networ11 can consist of in<ividuals, 

businesses, or financial entities. An impor1ant feature of distributed ledger 

technology is that transactions added to a ledger are vafidated by network 

participants through a process referred to as a consensus mechanism.

9 

Consensus mechanisms incorporate security features such as 

cryptography and digital signatures. Stakeholders have identified potential 

uses for distributed ledger technology in the financial service industry 

through the clearing and settlement of financiallrarisactions, including 

international money transfers, private trades in the equity mar11e~ and 

insm nce claims processing and management. 10 

'f:inanciallnduslry Reg(jaloly A!Jthority, asiJibuled I.JJdgef Techrdogy: lmplicalions of 

8/ocl<d>ain for Ill$ Secudios lndustJy, Janual)' 2017. 

9A conse~~SUS mechanism Is the~ In which a majo<iy or all netwo11c membefs agree on 

the value of a proposed transaction, 'IIIIIch is then updated to the ledger. There are 

ditrerem mechanisms 11\at can buid consensus using algorithms. 

1

Coa>id MiDs, KalhyWang, Brendan Malone, Mjana RiM, Jeff Marq\Jaldt, Clinton Chen, 

Anton Badev, rmolhy Brezinski, l.ilda Fahy, Kinte~ey Uao, Vanessa Kargenian, Max 

Ellith01J18, Wendy Ng, and Maria Baird 2016~ ~buted ledger technology in paymoris, 

clearing. and settlement,' Flnance and Economics Disrussion Series 201&005, 

Wastington: Board of Governors of the Federal Reserve Syslem 

https:/ldOt.~10 1701M'EDS 2016.095; Financiallnduslry Regulaloly Authority, 

asiJib<Aed Ledger Technology: lmpliC81fons of IJioci<.chain for Ill$ Seani/.ies l!ldvslry, 

Janual)' 2017; Financial Stallilily Oiersight Council2016 AMulli Reporl (Washington, 

D.C.: June 21, 2016k Alan McQuinn, Weilitlg Guo, and Dar>el Castro, Pdicy Prin<iples 

for FI!Xedl, lnformaHon Tecllnology & tnnovafun Foundallon, October 2016; United 

Kingdom Govemmenl Office for Science, l)sfribu!ed Ledger Technology: be)'QI1d blodr 

chain, ~r 2015; United Stales Postal Service, Office of lnspectO< Genera~ 

8/ocl<d>ain Technclogy:Possib/S/.iesforfhe U.S.PO$/IIISeMce, Report No. RARC-WP· 

16-011, May23, 2016;WOOdEcononic FO<UI!I The FutureofRnan<ill lnfmllucture: An 

ambitious fool< at how blocl<chain can reshape fnMCial se<Vices, Augus12016, accessed 

Janual)' 11, 2017, 

https:/IINNI.werorum orgtrepol1slthe-Mu~f ~nancial-inflastracturwn-ambillous-lool<-al 

.flow.blockch31n<an-<eshape-financ131 . 

GA().17-806T Rnnlal Tecllnology 
35 


Fintech Products and 

Services Offer 

Potential Benefits and 

Pose Potential Risks 

to Consumers 

Potential benefits Increased access to financial services. Digital wealth management 

platfonns and marketplace lending providers may offer increased access 

to financial services to previously underserved populations. Digital wealth 

management platforms may expand access to underserved segments 

such as customers 'hith smaller asset amounts than those of !Jaditional 

consumers of wealth management services.n T raational wealth 

management firms may require minimum investment amounts of 

$250,000, whereas some digttal platfonns require a minimum of 

approximately SSOO or no minimum at all. 12 Similarly, marketplace lending 

may expand credit access to underserved populations that may not meet 

traditional lending requirements or that seek smaller loans th<Wl those that 

banks traditionally offer. 

Lower costs. Marketplace lending providers and digital wealth 

management platforms may offer consumers access to lower cost 

products. Marketplace lenders' online structure may reduce overhead 

costs because not all firms have brick-and-mortar locations. In addition, 

the algorithms used by marketplace lenders to unde!Vtlite credtt decisions 

may result in lower underwriting costs when compared to banks' 

underwriting costs. Also, digital wealth management platforms may 

110e!oitte, IWbo MiiSOIS: Capitalizing on a groWrlg opporllmily, 2015; EY, ~Goes 

\l!ttusl; HowMW agtaltnvestment SaMc6s Are ChMfing Tilt Wealth Msnagemtnt 

~ 

l..andscap$, 2015; Accenture, The Rise offloi»Advice: Cllangng th6 CooceptofWeiilh 

2015; BlackRock, agtallnvestment Advice: R!Jbo AIMsor$ Come of Ago, 

September 2016. 

IZSioonterg CMd<Tal<e, Rci»fftMSOIS: Tiley lnl'est by !llgotithm 8ut Don! Return Cals, 

June 7, 2016, accessed Oe<:ember 14, 2016, 

https11.w.w.bloomberg com'quiddake/robo<>dVlsers. 

GA0-17-806T Rnnlal Ttcllnology 
36 


charge lower fees for s91Vices sud! as investment trade fees than 

traartional wealth management firms.tl 

Speed. Marketplace lending, mobile payments, and <istnbuted ledger 

technology may offer consumers access to faster services. According to 

an SBA publication, some marketplace lenders can provide loans in as 

little as 24 hours." An industry orgallzation we spoke with said that faster 

service is beneficial to small businesses that may need quick access to 

credij in an emergency, such as a restaurant that needs its oven or 

refrigerator repaired to continue operations. Mobile payments can also 

streamline the checkout time for consumers. For example, consumers 

can wave their smartphone in front of an in-store terminal to make a 

purchase, 'Mlich can be faster than swiping a cre<it or debit card. 

Distributed ledger technology may also offer increased service speed as ij 

has the potential to reduce settlement times for securities transactions by 

facilitating the exchange of digijaJ assets during the same period of time 

as the execution of a trade. •s 

Convenience. Mobile payments and digital wealth management plalforms 

offer convenience to consumers. Mobile wallets offer constlllers lhe 

convenience of instant transactions without having to enter credij card 

information, PIN numbers, and shipping addresses each time they make 

a purchase. •s Digital wealth management plalforms also offer 

convenience since regardless of location or the time of day, investors with 

a smartphone, tablet or computer can make changes to their data and 

'lSecuooes and Exchange Conmssion OCfice of Investor Education and Mioc&cy, 

lr!'I9SI<X &4/elin; RdJo.Miis«s, February 23, 2017, 

https:/low.w.see.gov/oteafllwstor .. le~UetJns.lb_rol»advlse.. htn-1; Qpllm, v.flal is 

R~ (JeBey Ciy, NJ: May 5, 2016~ 

''Miriam Sega~ Small Business Admirisbation Ol5ce of Advocacy, Peet~f>.Peer Llllllfng: 

A Firtiw:ing Mema/ive for Small Businesses, Issue Bliel Nuntef 10 (Wasllington, D.C.: 

Sept. 10, 2015~ 

1'Financiallndustry Reg~tory Allttlolity, astn"buled Ledger Technclogy: Implications of 

Blocl<i:hain for the Securoeslndustly, January 2017; saP Global Ma rltellntelligence, An 

intJodJction to lntech; Key S6c!OtS and trends, October 2016. 

1tsoard of Gowmors of lhe Federal Reser.oe System, ConsumM and lrbbile Rnsndsi 

SeMoes 2014, Marc112014; Alan McQuinn, WelnWig Guo, and Daniel Castro, Policy 

Priflci[Jes for Rntech, lnfolma1foo Technology & lnnovalion Foundation, October 2016; 

and Krista Bect<er, 4tlbikl Pllone: The New Way to Pay? Federal Reser.oe Bank of Boston 

EmergWig Payments Industry Briefbg, February 2007. 

GA0-17-806T Rnnlal Tecllnology 
37 


Potential risks 

preference inputs, send instructions, access their portfolios, and receive 

updated digital adVice." 

Data security and privacy risks. Data seruity and privacy risks may exist 

in the mobile payments, distnbuted ledger technology, and digital wealth 

management sectors. Mobile payment technologies pose potentia data 

security risks 'hilich indude the possibility of payment and personal data 

being lost or vulnerable to theft because of consumers' reliance on the 

use of smartphones or other mobile communication devices. Distributed 

ledger technology also poses potential security risk. According to a 

Financial Industry Regulatory Authority report, given that distributed 

ledger technology involves sharing of information over a networl<, it poses 

security-related risks. •a The Financial Stability Oversight Council (FSOC) 

also noted that market participants have limned experience working with 

distributed ledger systems, and it is possible that operational 

'/Unerabillties associated with such systems may not become apparent 

until they are deployed at scale. 11 Dignal weaHh management platforms 

pose potentia privacy risk since their use reqLires customers to enter 

personal information. According to an investor alert issued by the 

Securities and Exchange Commission (SEC) and Financiallnwstry 

Regulatory Authority staff, digital wealth management platforms may be 

collecting and sharing personal information for purposes unrelated to the 

platform. The alert cautions customers to safeguard personal 

information. 20 

Use of alternative data in credit decisions. Use of alternative data in cre<it 

decisions may carry the risk of potential fair lending violations. U~ike 

tradoonallending companies that look at a person's credit reports, some 

marketplace lenders also take into account or have considered using 

17 Aoc«dlng to Securities and Exchange Commssion (SEC) staff, 111e instructiolls Inputted 

into the platform may not be carried oot until the relevant maJ1tets open. Blacf<Rodc, Clgtal Investment Mice: Robo AdVisotS Come of Age, Septenter 2016. 

"financial Industry Regutatol)' AlithO<ity, astJibutlld /.Bdge( TechnOlogy: lmplica/iorls of 

8/oci<dlaln for the SeciNilie$/ndustty, Janual)' 2017. 

1

9flnancial Stabiiy Ovelsight Cotlnci, 2Qf6 Annual Repott IW;Isflilgton, D.C.: June 21, 

2016). 

20Securities and Exchange COflllission Office of investor Education and~ and Financial Industry Reg<Aatoty Alrtllorily, Investor Alert: AJAomallld Investment Tools, May 

8, 2015. 

GA0-17-806T Rnnlal Tecllnology 
38 


alternative data, such as utilities, rent, telephone bills, and educational 

history, d!Jing the underwriting process.

21 According to Treasury, data--

driven algorithms used by mar1<etplace lenders, that ii1COI'pOOite the use of alternative data, C/iJIT'f the risk for potential fair len<ing violations. 22 

According to staff from the Federal Trade Coolmission (FTC), 

mar1<etplace lenders must ensure that their practices meet fair lending 

and aed~ repolting laws. Zl The use of alternative data also introduces the 

risk that the data used are inaccurate and concerns that consumers may 

not have sufficient recourse ~ the information being used is incorTect. 

Human error and confusion. According to publications we reviewed, 

mobile payment methods can aeate operational risk for human erTOr. 24 

For example, consumers can d~ or send money to the v.rong person 

v.tlen using person-to-person payments, ff, for example, they type in the 

v.rong phone number. Mobile payment methods can also inaease 

consumer contusion reg<Vding protections based on the underlying 

funding source. According to the Federal Oepos~ Insurance Commission 

(FDIC), consumers may not understand v.tlidl regulators supervise the 

parties providing mobile payments and may be unsure v.tlich consumer 

protedions apply. 

25 

Insufficient or incomplete information from customers. In the case of 

digital wealth managemen~ a lack ol human interaction could result in 

inveslment decisions based on insufficient or incomplete customer 

information. A traditional wealth manager is able to ask and darify 

questions and request follow-up information to capture a custome~s full 

finances and goals. However, automated responses may not allow a 

21Consumer fmncial Proledion Bureau, Request for Information Regardl>g Use ol 

Alternative Data and Model~g Techniques in Ute Crecf~ Process, 

httpJ/Iiles.coosunerfinanee.goviVdocuments/20170214_apb_Ait-lJa1a.Rflpdl 

22tlepartment of Ute Treasury, ~es 8lld Challenges in C1nPJI$ Marl<eiJ/IIC$ 

Lendklg, May 10, 2016. 

~edeml Trade Comrlssion, Fifltech Fotum: A doser/00/< ti. marl<etplact~len<fng, 

https:/lwiNI ft~~s/blogsfoumess-blog/2016/08/lintech-lorun>dosef-lool<-m 

arketplace-lendtng_ 

24federal Deposi Insurance Corporation, &Jpervisory Insights, Mobile Payments: An 

EvoMng Llmdscape, Winter 2012; Professor Mark E. Bu<lnitz, Pew Charitable TtVSt~ The 

Legal~ 01 !.Wio Payments: ~ Ambiguilies, 8lld Overlap, February 10, 

2016. 

ZSfedemt Deposi lnsutance Corporation, &Jpervisory Insights, Mobile ~Is: An 

EvoMng Landscape, Winter 2012. 

GAQ.17-806T Rnnlal Tecltnology 
39 


Trends Have 

Emerged in the 

Fintech Landscape, 

Some of Which Cut 

Across Multiple 

Sectors 

digital wealth management platform to capture a lull pictu:e of the 

customer's circumstances or short-term goals, for example, vmether the 

customer may need investment money to buy a new home. If the 

customer does not understand a question, or does not ansmr it 

completely, the platform may not assess customers' lull f111ancial 

circumstances; for example, if a customer provides conflicting information 

on his or her finanoes, the digital wealth management platform may not 

have a lull picture of the dienfs financial condition or a customer may end 

up v.ith an undesired portfolio. 2e 

Pat1nerships. Partnerships have started to form between traditional 

financial institutions and fintech providers. Acoor<ing to Treasury, some 

mcrtetplace lenders have sought partnerships with trad~ional barts and 

community development financial institutions (CDFI) in various models. 27 

Aocording to a Congressional Research Service report, in a v.flite label 

partnership, a traditional bank sets underMiting standards, originates the 

loan, and holds the loan once issued. 28 The bank can integrate a 

mcrtetplaoe lending firm's technology services to originate the loan. In 

referral paflllerships, banks refer customers v.flo do not meet a bank's 

underMiting standards, or vmo are seeking products the bank does not 

offer, to a mcrtetplaoe lender. Partnerships have also formed in the 

mobile payments space. Some industry stakeholders we spoke with said 

that the relationship between banks and mobile payment firms has 

evolved into more partnerships because banks and mobile payment firms 

recognize mutual benefits. For example, mobile payment fms can 

benefit from banks' experience with regulatory compliance and banks can 

remain competitive by meeting the needs of their customers. Distributed 

ledger technology related partnerships have developed in v.flich financial 

2SSecumes and Exchange Coomssion Office of Investor Education and Mvocacy and 

Finanoiallndu$Vy RegiAatoJY AIJ1!1ority, ltweStor Nett AJAomtl.8d tnYestment Tools, May 

8, 2015, accessed Janual}' 3, 2017, 

https II<NNfsec.govloiealiwestor.alerts.wOetins/autol~oolslrtmhtm; Financial 

Regulatory Authority, Repo~t en Oi9tfi Investment~. March 2016. 

2

7

COFI certi!ica1!ons are issued by Treasury to ilanolallnstilutions serving eeononicaly 

distressed COillmlniies and Jow.lncome people across the oounlry. CDFI certification allows financial ins!Mions to apply lor teohnicalassislance and &nardal assis1anoa 

awatds, as well as training provided by the CDFI Fund. 

28Congressional Research SeMce, Ma/Mip/ace Len<ing: Rntech in Consumer and 

Sma/1-Businass LMISng, Septe1rl>er6, 2016. 

GAQ.17-806T Rnnlal Technolclgy 
40 


Regulatory Oversight 

of Commonly 

Referenced Fintech 

Subsectors Is 

Complex and Spread 

among Federal and 

State Entities 

institutions have joined a multiparty consollium or announced 

partnerships to examine the technology's potential. 

Hybrid seiVices. Hybrid services have formed in the digital wealth 

management and marketplace lending sectors. Hybrid services have 

evolved that combine traditional weahh management and digital wealth 

management. For example, in 2015 one l~¥ge traditional investment firm 

implemented a service that offers investors an option of consulting with a 

human advisory representative in addition to its automated investment 

platform. Trad~ional weahh management firms also offer g~al wealth 

management services. For example, in 2015, one large wealth 

management firm developed a product, available to customers with 

$5,000 in savings, and a large bank launched a ro!Jo.advisor within its 

online investment platform. Hybrid models have also emerged in 

marketplace lending. For example, some direct lenders have developed 

hybrid models, selling some whole loans to institutional investors while 

retaining servicing responsibilities. 

Self-regulatory effotts. A number of seW-regulatory marketplace lending 

effcl'ls were established with the intent of developing responsible 

innovation and mitigating and repolling risks to potential borrowers 

seeking marketplace lending products. For example, the Marketplace 

Lending Association was established in 2016 with one of its goal being to 

support responsible growth in the marketplace lending sector. However, 

limited information is available on the impact of these efforts. 

Regulation of the commonly referenced s~sedors depends on the 

extent to which the firms provide a regulated service and the format in 

which the services are provided, with responsibilities fragmented among 

mljtiple entities that have overlapping authorities. 

29 Federal oversight 

authorities that apply to regulated activities generally indude risk 

management oversight related to services provided to federally regulated 

depository instiMions, consumer protedion oversigh~ and securities and 

derivatives markets oversight State licensing laws and oversight 

mechallsms, including oonsumer protection, vary by state. 

Some agencies have taken a number of steps to understand and mon~or 

the fintech induslly. They have published papers for induslly commen~ 

29for add~io al lnfoonation on the U.S. financial regulatocy structure, see GAO, Financial 

Regutalion: Complex and Frsgmenled Slructrn Could Be Slmtrtlined to Improve 

fffodiveness. GA0-1&-175 (Wa$hing1ooO.C.: Feb. 25 2016~ 

~10 GA0-17406T Rnnla!Ttcllnology 
41 


established agency offiCeS to pelform outreach with tinted! firms, 

organized forums, darified authority for considering a specia-PIIJ)Ose 

national bank charter for fintedl firms, issued gl.ldance, and formed 

wor1<.ing groups, among othe.-acti'lities. Specifically, in October 2016, the 

Consumer Financial Protection Bureau (CFPB) released ~s first report on 

Project Catalyst, the project to encolfage conslfner-friendly innovation in 

marl<ets for consumer financial products and services. 30 In December 

2016, the Office of the CornptroOe.-of the Currency (OCC) published a 

paper discussing issues related to ch<rtering special-purpose national 

banks and soficited public comment to help inform ~s path moving 

focward.

31 

Officials from the Conference of State Bank Supervisors we spoke with 

noted that the states are working on developing tools that ca1 facil~e 

compliance with state-by-state licensing medlanisms, sudl as the 

Nationwide Mortgage Licensing and Registry System (NMLS). NMLS is 

intended to enable firms to complete one record to apply for state 

licensing that fulfills the requirements of each state, for states that 

participate in the system. 3:2 As mentioned previously, a number of self· 

regulatory efforts have emerged with the intent of developing responsible 

innovation and mitigating and reporting risks to potential borrowers 

seeking marketplace lending products. 

Marketplace Lending. Regulation of marketplace lende.-s is largely 

determined by the lenders' business model and the borrower or loan type. 

Marl<etplace lenders may be subject to federal and state reg~ations 

related to bank supervision and securities reg~ation. The depository 

30coosumer Fmnclal Procedion Bureau, Projecl Cli.;Jyst r&pcrl: Promoling con~­

lriendyirmvfllion (Washington, D.C.: Ocl2016). 

310ffice of lhe Comptroll« of the Currency, Exploring Speael Ptxpose Nafionel Bad< 

Charf~NS lor Rntech Ccmpanies (Washinglon, D.C; Dec. 2016). The OCC issued a 

SlJII'I1l8l)' of comments and explanalocy statsment regarding the Special Purpose National 

&nk charters for hnclal oompanies in MaJCh 2017. Office of the Cornptrollet of lhe 

Currency, OCC Swnm&y of Comments and fx(iotrJoty Statement Spoclel Ptxpose 

NalionBISal!k Charters for Finand/11 Technology Ccmparies (WashirYj.on, D.C.: Mar. 

2017), 

3:2NMLS was originally developed as a voluntary system for state lioensing and 

then became mandatory for mortgage licensing in the Secure and Fair 

Enforcement for Mortgage Lioensing M. or 2008, whicll was part or the Housing 

and Economic Recovery Actof2008. Pub. L. No. 110-289, T~ V, 122 Stat. 

2654, 2810 (2008). 

~11 
42 


institution regulators other than the National Credit Union Administration 

(NCUA) have authority to regulate and examine certain services provided 

by third parties. 33 Marketplace lenders that provide services through an 

arrangement with federally regulated depository instiMions may be 

subject to examination by the deposftory institution's regulator in 

connection v.ith the performance of those services. The depository 

institution regulators also provide third-party guidance or vendor risk 

management guidance that deposftory institutions should adhere to."' 

Some marketplace lenders that originate loans directly to consumers or 

businesses (e.g., a direct marketplace lender) are generaDy required to 

obtain licenses and register in eadh state in which they provide lending 

services. 

31 According to officials from CSBS, state regulators then have 

the ability to supervise these lenders, ensuring that the lender is 

complying with state and federal lending laws. Marketplace lenders may 

be subject to federal consumer protection laws enforced by CFPB and the 

Federal Trade Commission (FTC). Certain regulations generally apply to 

consumer loans but may not apply to small business or other commercial 

loans, though, FTC does have the authority under Section 5 of the 

Federal Trade Commission Act to protect, among others, small 

businesses lhat are consumers of mallletplace lending products or 

services from unfair or deceptive acts or practices. lastly, SEC regulates 

33NCUA does not have formal aulhority owr 6ntecll firms lhat partner>li1h federally 

ilsured ctedil unions. The Bank Sel\'ice Cofr!>any Ad-lo examine and regulate certain 

services provided by lhird parties to iMured deposiOf)' lnstiutioM to lhe $3l1l8 elden! as l 

lhe adMiies were perfonned by lhe mandai instiution itseU -does not apply to t-ICUA In 

addition, lhe Federal Credit Urion Ad does not provide comparable aulhority. Pre'liously, 

we have asked Congress to consider granting NCUA with ttis authority, birt no actions have been taken to date. t-~Cl!As abiiy to influence complianoe is limited towo~ng >li1h cte<l4 unions engaging with inteeh pajmMI proWlers to ensure !hat lhe insli!utlons monRor lhe risks oflhese relalionships. See GNJ, Cybeneaility: Bank and Oilier 

Depwlrxy Regliatrxs Need &Iter Data AnWy6cs and Depositrxy Institutions Wan More 

Usable Thfeat lnf«mation, GA0-15-509 (Washington, D.C.: July 2, 20 ~ 

"'FOf exarnple, OCC's Thini Patty Relalionships ~ Alanagemetll Glidant;e says that a 

bank should adopt risk management processes conmensurale with lhe leYel of risk and 

~of ls lhird-party relations, and ensure cornprehensm risk management and 

oversight of third-party relationships involvi>g aiical actMties, and through the ti~le 

of the relalionslip. FDIC's Gl.idanoe for Manllging Thim-Patty Risk. pnM'des four main 

elemenls of an effective ttlrd-party rislt management process: (1) riSk assessmer( (2) 

due i~nce in setec00g a third party, (3) con1rad structuring and review, and (4) 

<mrsight. Office of lhe Comptroller ofthe Currency, Thifi1.Pany Relationship$, OCC 

Bulletin 2013-29 (Waslilgton, D.C.: Oct. 30, 20 ~ FDIC Fllallcial lnstiution Leflers 44-

2008, Guidance For Managitg Third Party RiSk (Washington, D.C.: June 6, 2008). 

liOepartment of !he Treasul)', Oppo1Wni1ies and Chalte<lge$ in Qlfne Marl<e/Ji8C6 

Lllnlfng, May 10, 2016. 

,.12 GA0-17406T Rnnla!Tecllnology 
43 


public offerings of securities by the marketplace lenders, unless an 

exemption from registration applies. 

38 

Mobile Payments. The regulatOI}' and oversight framework for mobile 

payments consists of a variety of federal and state regulation and 

oversight Detennining which laws apply to mobile payments is 

compiH:ated by several factors, induding agency jurisdiction, mobile 

payment providers' relationship to depository institutions, and the type of 

account used by a consumer to make a mobile payment. Three of the 

federal depositOI}' institution regulators- Federal Reserve, FDIC, and 

OCC-are authorized to examine and regulate the p!'ovision of certain 

services provided by mobile payment providers to federally insured banks 

and tlvifts. 37 CFPB has oonsumer p!'otection authority over certain 

nonbank institutions and enforoement jurisdiction over entities that offer or 

provide consumer financial products or services. Nonbank p!'oviders of 

financial products and services, including mobile payment providers and 

prepaid card providers, may be subject to FTC consumer protection 

enforcement actions. Additionally, state regulators oversee mobile 

payment providers licensed in each state in which they operate as a 

money service business. 

Digfta/ Wee«h Management. SEC regulates investment advisers, which 

generally includes finns that provide cigital wealth management 

platforms. SEC subjects digital wealth management finns to the same 

reg ations as tladitional investment advisers and requires digital wealth 

management finns that manage over $110 mDiion in assets to register as 

investment advisers. 38 SEC's supervision of investment advisers includes 

evaluating their compliance lvith federal securities laws by conducting 

examinations, including revie-Mng <isclos es made to customers. It also 

investigates and imposes sanctions tor violations of sewities laws. State 

securities regulators generally have registration and oversight 

responsibilities for investment adviser finns that manage less than $100 

lion in client assets, if they are not registered with SEC, and can bring 

enforcement action against finns lvith assets of any amount for violations 

36At the slate teve( state securities regUlators are genetaHy responsible lor registering 

ce<tail Se((Jrilie$ produds and, along with SEC, Investigating securities fraud. 

r~ As mentioned abcm, NCUA does nol have fotmal aulllorily-fintecll firms that 

partner \\it~\ federally ilsured credit unions. 

31sEC RUle 2(13A.2(e) petrnh Internet investment advisers to register v.ih SEC n the 

adviser pr<Mdes investment advice to al of its clients ~th ough the acMset's 

interactive webs~e. except that the investment adviser may~ investment advice to 

fewer than 15 clients through other means during the preceding 12 months. 

~13 GA0.17406T Rnnla!Ttcllnology 
44 


of state fraud laws. The FINRA also has regulatory authority over brokerdealers that use digital investment advice tools to provide investment 

services to dients. The Commodities Futures Trading Commission has 

oversight authority over commodty trading advisers, of I'Alich CFTC 

officials stated that cigital wealth management firms that meet the 

statutory definition would be subject to the same ove.-sight and 

compliance obligations of other traditional commodity trading advisers. 

Digital wealth management firms are stilject to consumer protection laws 

that are enforced by FTC. 

Distributed ledger technology. Continued development of DLT is needed 

to understand how DLT and its components 'Mil be regulated by the 

existing legal and regulatory system.» Additionally, ~is unclear I'Alether 

new regulation will need to be created because a distributed ledger 

technology network can present new and unique challenges. According to 

FSOC, financial regulators should mon~or and evaluate h<7N a distributed 

ledger technology network can affect regulated entities and their 

operations . .oWe have previously reported on the regulatory oversight of 

virtual CUTencies that use distributed ledger technology." With respect to 

virtual CUTencies, wlich use distributed ledger technology, federal and 

state regulators have taken varied approaches to regulation and 

oversight 02 Representatives of financial regulators have noted the 

importance of implementing distributed ledge.-technology in a manner 

that is transparent and satisfies regulatory requirements. 

Jaoavid Mils, KalhyWang, Brendan Malone, Anjana Ra'oi, Jeff Marquardt, Clinton Chen, 

Anton Badev, Trnotlly Brezinski, l.ilda Fahy, Klmbedey Uao, Valle$$3 Ka~genian, Max 

Ellithoq>e, Wefldy Ng, and Maria Bail! (20 16~ 'ootrilluted ledge< technology fn paym&JiS, ~nng, and setl!«nent; Finance and Economics Discussion Se!ies 201&WS, 

Waslington; Board of GoYemors of lhe Federal Reserve System, 

http$:lldoi.otg/10.17016tfEDS.2016.095; Financial Slllbility Oversight Council, 2016 

IWifls/ Repotf (Washington, D.C.: Jme 21, 2016~ 

<Orhe Financial Slllbilily Ovmight Colrlcilwas created by the Dodd.frankWal Street 

Refonn and Conslrner Protection fd in 2010 as a body designed to identify risks and 

respond to emergilg threats to the Un~ed states' financial stabily. Pub. L No. 111·203, § 

112, 124 Stat. 1376, 1394-1398 (2010). 

GA0.1~96. 

<2TIIis testinmy dOO!$ not OO'N al appicable regulatOI}' requirements and oversight 

~s related to virtual currencies. F01 mo<e infolmatlon see GA0-1~96. 

~14 GAQ.17406T RnanclaiTecllnology 
45 


Contacts and 

Acknowledgments 

Chairmen Crapo, Ranking Member Brown, and members of the 

Committee, this completes my prepared statement! would be pleased to 

respond to 8fly questions that you may have at this time. 

If you or your staff have any questions about this testimony, please 

contact Lawrance Evans, Jr. at (202) 512·8678 or evansl@gao.gov. 

Contact points for our Offioes of Public Affairs and Congressional 

Relations may be found on the last page of this report. GAO staff who 

made key contributions to this testimony include Harry Melina (Assistant 

Dire<:tor), Christopher Ross (Analyst in Charge), Nam~a BhatiaSabharwal, Chloe Broi'KI, Lauren Comeau, Pamela Davidson, Janet 

Eackloff, Cody Goebel, Davis Judson, Erika Navarro, Silvia Porres, T ovah 

Rom, Jessica Sandier, and Jena Sinkfield. 

GA0-17-806T Rnnlal Ttcllnology 
46 


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48 

PREPARED STATEMENT OF ERIC W. TURNER 

FINANCIAL TECHNOLOGY RESEARCH ANALYST, S&P GLOBAL MARKET INTELLIGENCE

SEPTEMBER 12, 2017 

49 


Industry Background 

Financial technology, more commonly known as fintech, is one of the fastest growing industries 

in the U.S. Close to Sl3 billion was invested in U.S.-based fintech companies in 2016 alone.' 

Building on the increased ubiquity of the internet and connected devices, fintech companies 

leverage advanced technology to provide innovative financial products to consumers. 

Defining all areas of fintech is a difficult, if not impossible task. Technology has long enabled 

innovation by financial institutions, and in many ways fintech is a new name for old ideas. But it 

is useful to define emerging subsectors of the space that have the most potential to provide 

benefits to consumers and the financial industry as a whole. 

Some key segments of the fintech landscape are digital lending, mobile payments, digital 

investment management, insurance technology, and distributed ledger technology. 

1 KPMG," U.S. Fintedl funding And Deal Volume Drop Significantly In 2016: KPMG Q4'16 Pulse Of Fintedl Report" 

https://home.kpmg.oom/us/en/home{!nsights/2017/02/us·fintech·funding·and·deal volume-drop.~gnificantly-in

2016-kp"'i.q4·16-pulse-of· finte<h-reporthtml 
50 


Digital Lending 

Overview 

Digital lenders primarily operate as non-bank lenders offering loans through web and mobile 

platfonns. They rely on robust analytics and alternative data sets to create proprietary credit 

scoring models. Alternative data is information not contained within a traditional credit report 

!hat can better show a borrowe(s capacity to repay a loan. Many of lhese lenders have also 

integrated advanced technologies reliant on big data, machine learning, and artificial intelligence 

in order to enhance underwriting. 

Our estimates show !hat thirteen of lhe largest digital lenders in the U.S. together originated 

$28.39 billion in loans last year. Through the end of20 16, they had originated a cnmulative 

$68.75 billion since their respective inceptions.

2 

Cumulative loan originations by key US digital tenders (SB) 

~- -- ----·····••1111111 Borrowers include individuals looking to refinance high interest credit card debt, small and 

medium sized enterprises (SMEs) in need of working capital, and penple consolidating student 

debt at lower rates. Mortgage and auto loan refinance are also emerging areas of digital lending. 

's&P Global Market Intelligence, 'Q4'16 Loan OriginatiOrl$ Fall YO'I For Oig~alle<>ders, Capping Off A Rocky Year' 

https://mar1<etinteligence.spgjobal.rom/our·thinking/ideas/q4-16-loan-originations-lall·yoy-for-digital-lenderscapplng-off·a·rocky-year Origination volumes are based on company-provided data from lendingCiub (all periods), 

OnDecl< (all periods), SoFi (Q4'11, Q3'12-Q4'16), Prosper (all periods), Kabbage (QI'I4 and Q2'16), Upstart (all 

periods), Credibly (Q3'16), Earnest (Q3'16), Square Capital (Q2'LS-Q4'16), CommonBond (Q2'1S), and lendingPoint 

(Q4'1S). This includes infonmlion hom company contacts, press releases, SEC filings and websites. Upstart 

otiginations have been updated for all h~toriul periods as of March 27, 2011, to reflect company-provided 

numbers. BestEgg originatiorl$ were updated for Q3'16 based on a Kroll Bond Rating Agency pre-sale report dated 

March 23,2011. 
51 


Although moot leode11i offer term loans, SME-focused lende11i also offer line of credit products. 

Individuals can borrow up to $100,000 on some platforms, while SME loans can go up to 

$500,000. Student loan refinancing depends on outstanding balance, with loan amounts generally 

capped at $500,000. 

Maximum loan amount by category($) 

- - - o.u~ .... lO.lOll'---·nd-f.U. OlOlU P~---AI..,..moMd. 

Digital lenders charge interest rates that are comparable to those charged by banks or credit card 

companies, with variance based on a borrowe~s credit grade, the loan size, and the term of the 

loan. We have observed an average APR range of 7.3% to 26.9'/o for pe11ional-focused lenders, 

8.3% to 53.6% for business term loans, and 3.5% to 7.3% for fixed-rate student loan 

refioancing.

3 

Average minimum and maximum Interest rates (APR%) 

Doto-l*d•O<lO.lOrlm_-.. ... ,..o~~efiop. 

O!Ole.SIPGioiiiiMo.-.~.AI"""-

Digital lending platforms provide instant credit decisions, allowing for visibility inro the rare 

borrowers will pay, the amount they can borrow, and the total amount they will pay back 

Because these platforms rely on automated credit models and electronic documents, loans can be 

funded in as little as a day. By contrast, many traditional lenders can take days or weeks to fund 

loans. 

' s&P Global Marl<et Intelligence, '2016 U.S. Digital lending landscape" 

httpsj/www.snl.com/w<b/cflentlauth•inherit#nrtm/document?Keyl>roductlilkType=2&id•38632470 
52 


Marketplace lenders and direct lenders are two categories of digital lenders. Loans are funded by 

groups of individual or instiiUiional investors in the case of marketplace lenders and by internal 

capital for direct lenders. 

Marketplace lenders generate revenue from origination and servicing fees and do not retain 

credit risk in most cases. The risk and corresponding return are instead passed on to investors. 

Banks and other instirutions generally purchase whole loans, while individuals typically invest in 

fractional shares ofloans. 

Direct lenders rely on balance sheet capital or lines of credit held at commercial banks. These 

lenders hold loans until marurity and generate revenue through interest payments from 

borrowers. At their core, these businesses make money the way any lender does, by collecting a 

spread between interest income and their cost of borrowing. 

As the market has matured, many digital lenders have also entered the securitization market. This 

market, which neared SS billion in 20164

, has become an imponant source of capital for digital 

lenders, which often find that demand for loans outstrips available capital. 

Benefits 

Digital lending staned as a way for consumers to consolidate high interest credit card debt into 

lower rate tenn loans. This remains a focus of personal lenders today, with the service now also 

extended to recent graduates with student debt Automation and a lack of physical offices allow 

digital lenders to offer competitive rates, potentially saving borrowers thousands of dollars in 

interest. 

Speedy funding is especially important for small businesses needing access to working capital. A 

sUJvey fielded by S&P Global Market Intelligence earlier this year shows that63% of small 

businesses that took a loan in 2016 did so to obtain funding for payroll, supplies, materials, or 

inventory.

1 Working capital is the lifeblood of any small business. 

' Pee<IQ, 'Maltetplace lending Securitization Tracker: 402016' 

httpJfw<iw.peeriq.corn/assets{PeeriQ%20MPL%21lSec:uritization%20Tractei1Q0(4Q2016).pdf 

' s&P Global Market lnteOigence, ' 2017 small bu~ness survey shows importance of branches, relationship lending' 

httpsJ/w<lw.snl.com/web/dient?auth=inherit#news/artide?id=40682569&KeyProductUnkType=2 
53 


The borrow1ng process 

How much moooydid 'JO'J tWfy for? 

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Alternative data sets and unique credit scoring models also allow digital lenders to provide credit 

to the underbanked. These individuals or businesses may lack the robust credit history needed for 

an accurate credit score from credit bureaus. While many digital lenders use at least the basic 

details provided in a standard credit report, these inputs are au!lJllented with potentially hundreds 

of other data points and fed into proprietary scoring systems ln the case of a small business, for 

example, lenders can look at accounting statements, user reviews on social media sites, and even 

shipping volumes in and oot offacilities. 

Opportunities 

Banks started to take notice of digital lenders as the latter experienced years of rapid loan 

origination growth. While many financial institutions initially considered these companies a 

threa~ partnerships have increased between startups and incumbents. Many digital lenders now 

otTer access to their technology to help banks create branded lending platforms. 

Through these partnerships, banks benefit from access to custon1ers that had previoosly been out 

of reach due to geography or acquisition cost. Digital lenders capture new revenue strean1s and 

further promote awareness of their offering. And the overall economy benefits from increased 

financial inclusion and access to credit. 
54 


Challenge$ 

Questions around the underlying credit quality of loans originated by digital lenders began to 

emerge early last year. Some previous vintage$ of loans started to underperfonn expectations, 

leading many lenders to reassess their underwriting models. Fw1her pre$sure has come from 

legal challenges, state regulators, and industry groups. 

The largest looming challenge for digital lenders today is regulation, since they have no clear 

regulatory framework Many lenders rely on regulated banks to issue loans on their behalf. Other 

lenders have sooght state-level licensing for their businesses, but this can be an expensive and 

time-consuming process and make it difficult for lenders to offer consistent rates to their 

borrowers. Some lenders have attempted to find regulation through industrial loan company 

(ILC) charters, which has already elicited pushback from incumbents. 

Fintech companies themselves have increasingly called for regulation. Many digital lenders 

crave a clear framework in which they can operate. This will involve addressing distinctive 

characteristics of their business models such as a lack of physical locations, no access to insured 

deposits, and differing sources of capital. This is one area where the proposal of a limited bank 

charter from the OCC could be helpful, although it remains to be seen what implementation 

would look like. 

The digital lending industry is still young. Lenders are constantly improving their credit models 

and the algorithms that drive them. This has led to periods of higher than expected losses for 

certain lenders. Many lenders have found it difficult to reach a steady levd of profitability due to 

these issues, and investors are less enthusiastic about the space than they were a few years back. 

Maintaining a high and consistent level of credit quality is imperative for the success of the 

industry. This is also important as individuals and institutions increasingly invest in these loans, 

both directly and through securitizations. 

Losses can also come from borrowers who stack loans or do not use loan proceeds for their 

stated purpose. Loan stacking, which is usually considered fraudulent, happens when borrowers 

take loans from multiple lenders in a short period of time. Automated processing, a delay in 

credit reporting, and digital lenders' online-only presence have made this easier. 

Some other borrowers take loans for the purpose of repaying other debt and but actually use the 

funds for something else or max out balances soon after paying down debt. This is hard to track 

as lending platforms do not require borrowers to use a loan for its stated purpose. 

The industry has taken steps to enhance transparency when it comes to borrower habits and to 

prevent issues like loan stacking. Even so, the potential for fraud will remain an issue for lenders 

in the space. 
55 


Mobile Payments 

Oven•iew 

Mobile payments encompass a wide range of services The most popular mobile payment 

activities include paying bills, making purchases in a retail store or online, and making peer-topeer payments.' Users access payment platforms through mobile devices such as phones, tablets, 

and smartwatches. 

Millennials, or people under 35 years of age, tend to be the most active mobile payment users, 

according to our survey results. More than 60% of users we surveyed have an annual income of 

less than $75,000 per year, with more than 20% making less than $35,000.

7 

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, .............. """' ....... "'uw. ... IIMCt-.-tN ...... •tcwt•w.t',....... ........ . ~ _.,.._ .......... ,.....Mli.JOt:J.IHFta.tl!tii.NUPGaHtU.-

...... f3011.SVc..l.,.,.....,.. _ .... ,...lttiiMO 

' s&P GloNI Market lnteU~ence, "2017 US mobile p.1yment survey !II~ PayPaldominates diverse man nets" 

https;JJwv,w sn l.com/wtb/cflent?auth:inherit•n~artide?id:40854S98&KeyProductUnkType:2 

7

1bid. 
56 


Many of these services started as standalone applications but have become increasingly 

integrated into apps from financial institutions, retailers, and hardware providers. Aocess to 

mobile bill pay, for example, comes primarily through a bank or credit card app and has become 

a feature that consumers expect from these apps. 

Retail payment options have grown over the past five years as mobile wallets became a standard 

feature in new smartphones. People use these wallets, which digitize bank or credit card 

information, by scanning or tapping their mobile devices at payment terminals. Alongside these 

built-in wallets, retailers have started to otTer their own branded apps for purchases. These apps 

store user payment information and include additional features such as transaction histol)' and 

rewards balances. 

Standalone payment apps run by fintech companies represent the most popular peer-to-peer 

payment platforms. These services allow users to send small amounts of money to friends or 

family for free. Such transfers are usually instantaneous, allowing users to see their balances in 

real time. Apps increasingly allow users to immediately transfer funds to a bank account or hold 

a balance for future use. 

Benefits 

Millions of consumers use mobile payment services because they reduce transaction costs and 

frictions while ofiering an enhanced user experience. Paying a bill with the tap of a button will 

always be easier than filling out and mailing a check. Splitting a dinner bill with friends can be 

completed just as easily. 

Most functionality in peer·t<>-peer payment apps is free. For international transfers, specialized 

peer·t<>-peer apps charge low fees for the conversion and transfer of funds across borders and 

currencies. This benefits underoanked and immigrant communities. 

Mobile wallets in pa11icular help to create more secure transactions. Transactions involve the 

transmission of just token data through a payment terminal, with the actual approval happening 

through internal servers. Each transaction is unique. This prevents fraudsters from skimming 

card data or stealing PIN information. Additional features like biometric and tw<>-factor 

authentication have ful1her enhanced user security. 

Challenges 

Much like digital lenders, many mobile payment providers lack clear regulation at a federal 

level. Sta11Ups instead must register with every state in which they plan to operate. This process 

can be onerous and take years to complete, which for a young company can be too long. 

Security is a significant issue for mobile payment providers. More than half of our survey 

respondents who did not use mobile payments cited security concerns as the primal)' reason. 

Mobile payment platforms offer aocess to bank accounts, debit cards, or other forms of payment 
57 


Peer-to-peer payments are subject to fraud or identity theft that can lead to irrevocable spending 

in client accounts. This problem becomes more pronounced as platforms speed up settlement 

times and allow users to withdraw funds instantly. 

This places a heavy burden on mobile payment providers to ensure secure storage of user data. 

These issues are fun her compounded by applications that access user data held at other financial 

institutions. There are also questions about data ownership. Many have argued that this data is 

owned by the individuals who created i~ and not the institutions that store it. European 

legislators have addressed these issues through the recent Revised Payment SeiVices Directive 

(PSD2}8 

Despite sleek new interfaces and ways to complete payment transactions, these platforms rely on 

existing infrastructure like card networks and the ACH system. Merchants still have to pay 

processing fees, as they would with any traditional card payment, for retail purchases. Mobile 

payment platforms absorb costs in the case of peer-to-peer seiVices but must eventually monetize 

these ofl"erings. 

These applications also lack a degree of transparency when it comes to the storage of user funds. 

If a user has a balance in a peer-to-peer app, that money is not in an insured deposit account. 

Instead, the payment company invests it in low-risk assets such as U.S. Treasurys or agency 

debt. Payment platforms retain the returns from these investments and do not pass the gains on to 

customers in the form of interest.9 

• https://ec.eiA'opa.eu/info/law/payment-sefVices-psd-2 -directive-eu-2015· 2366 _en 

' Fost Com pony, 'The Sneaky Psythology Of Apple Pay-And How n Could Cost You• 

https://www.fastcodesign.com/'YJ128304/the-subtle·psychology-of .. pple-pay·and·how·it·could-<:ost·you 
58 


Digital Investment Management 

Oven•iew 

Digital advisors, sometimes referred to as robo-advisors, are automated invesunent management 

platfonns primarily focused on retail investors. Users can create diversified ponfolios of 

exchange-traded funds by answering simple questionnaires about invesunent goals and risk 

1olerance. Features like automatic rebalancing and tax loss harvesting allow a hands-otT approach 

to investing wilh minimal inpul needed from use~ Fees for 1hese pla1forms are usually much 

lower !han what an investor would pay a lraditional financial advisor. 

We estimate that these advisors will manage more !han $450 billion by 2021, a fouJfold increase 

from where !he indusuy s1ood in 2016.10 This growth is due largely to !he entry of incumbent 

asset managers into the space, with more companies planning to launch digital advisory services 

in the coming years. 

Digital wealth management assets to surpass $4508 by 2021 

Assets under managemental U.S.·based digital investment managers 

that target retail investors ($8) 

500 

4SO 

400 

150 

100 

250 

200 I !50 I tOO I 50 

2016 2017E 20t8E 201GE 20lOE 2021E 

D:Ucomplod.ldy 11,21117. 

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thtda 

F«1iltmoo1part,-tsll\dtrlll111118tnlllartlltcttdllciV!i:lnllyAU14 1oaraw-swllo<l dlo:Jtlionaly.llJ wa otat-t,holrl!ltl; ""-d~Al.Nwosusod. 

So""" S£Citillp.othor-<itcl>loJts,"""~COIUtti,P"'I~tstima!H 

02017. saPGiobaiMart:ot AIIrfirtsr10 S&P Glob~ Market Intelligence, ' U.S. ig~al Adviser f<>recast: AUM To Surpa~s $4508 Sy 2021' 

httpsj/www.spglobal.rom/our·insighls/US·Oigitai·Advise<·Forecast·AUM·To-Surpass-4SOS.Sy·202Lhtml 
59 


Benefits 

According to the SEC, a 1% annual fee can reduce the value of a Sl 00,000 ponfolio by S30,000 

over a 20-year period when compared to a fee of0.25%.

11 Digital adviSOJS charged annual fees 

ranging from 0.01% to 0.&9% as of mid-2016.

12 Many investors do not understand the 

compounding effocts of high fees over time. Overall fees can often end up higher after 

accounting for the underlying expenses of investment vehicles. The firms managing these 

vehicles often offer a commission to advisors who recommend them to clients. 

Portfolto Value From lnvesMg $100,000 Ove.- 20 Years 

$1)0,001 

----------------1 SltO,OOO 

$100,001 

Sl90.001 

--,h ..__..,. SIIIO!IOO 

mo.CJOO 

------ ;£.. ..,:.;__ ____ -4 SI~IIOO 

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tolOyon.O.<u'>.-lfocsrolacc 

pat(obcmhot(r<d hot)by$10,000 

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Digital advisors also serve people who may not meet minimum investment thresholds at a 

traditional advisor. Minimums tend to be low or even non-existent on some platforms, allowing 

investors to receive ponfolio advice they previously could not access. 

alle ge~ 

The use of model ponfolios and a relatively hands-off approach provide benefits but also present 

potential issues. As digital advisors continue to grow their assets under management, incorroct 

assumptions in a model ponfolio or overconcentration in an investment that goes bad could lead 

to substantial investor losses. Many incumbents have pointed out that these newer advisors have 

come into favor during a bull marltet and have yet to weather a substantial economic event like a 

roces.sion or crisis. 

u Se"'rities and Excha<~&e Commission, ' tnves1or Bulletin: How Fees and Ex~ses Affect Your lnwstment 

Portfolio' https://www.sec.gov{lnvestor/alerts/ib_fees.expenses.pdf 

"s&P Global Market Intelligence, "An introduction to fin tech: Key sectors and trends" 

https://mar1<etinteligence.spglobal.com/dowments/our-thinking/research/an-introduction·to-fintech-keysectors-and·trends.pdf 
60 


This could create problems wilen outside shocks impact markets, something an algorithm might 

not recognize. Questions have been raised about a digital advisor's ability to act in a clien(s best 

interest during times of market turmoil, or the extent to which a digital advisor is even required 

to adhere to a fiduciary standard. 

The role of the modern financial advisor is as much about education as it is about portfolio 

management. Investment managers are often trained to ascertain a client's willingness and ability 

to take certain risks based not only on their statements but also contextual clues. 

Digital advisors, while often providing multiple portfolio options, still rely on investors' answers 

to questions about investment goals and risk tolerance. Computers lack the opportunity to gain 

other clues from investors that are available through in-person interactions or a long-standing 

relationship. This could lead to issues with investment suitability. Some digital advisors have 

made human representatives available by phone to help overcome some of these issues. 
61 


Insurance Technology 

Ove.n,iew 

Insurance technology, more commonly known as insurtech, is an emerging area of fintech 

targeting the property and casualty, life, and health insurance sectors. The goals of startups in 

these areas include reducing inefficiencies in existing systems, offering a more customer-friendly 

experience, and collecting data and analytics 10 improve services and profitability. 

Some insurtech companies offer web and mobile platforms for users to purchase coverage, track 

their policies, and file claims. Much like with digital lenders, algorithms underlying these 

insurtech platfonns make quick coverage and pricing decisions based on a variety of data points 

supplied by the applicant and readily accessible through other channels. These companies benefit 

from decreased overhead related to human-<! riven sales, underwriting, and claims adjustment 

processes. 

Various insurers have adopted tools like telemarics technology and the internet of things. This 

allows them to better track the underlying behaviors such as driving habits and physical activity 

that help quantify risk related to insured individuals. 

Benefits 

lnsurtech allows for faster, more customized, and potentially less expensive access to insurance. 

Many platforms offer the ability to obtain insurance in only minutes with simple questionnaires 

and automated assistants 10 guide applicants. Some insurers ofl'er on-<iemand policies that can be 

turned on or off via a mobile app to allow for savings when insurance is not needed. 

Such innovations make it easier and more appealing to switch providers for necessary coverage 

such as auto and homeowners insurance. They may also encourage more consumers to apply for 

and follow through on purchasing more discretionary coverage such as term life insurance. 

Telematics and other connected devices offer the ability for users to receive customized rates, 

allowing for potential savings on premiums. Insurers benefit from increased understanding of 

their risk pools and faster pricing adjustments. 

Challenges 

Insurance is a heavily regulated industry, and startup carriers in the space must find ways to 

comply with these regulations, which vary by state. 

lnsurtech startups are operating in a crowded marl<et. Incumbent insurers have been adopting 

new technology, to varying degrees, for many years, and direct-h>-consumer platforms are not 

new to the industry. As in other areas of fintech, partnerships have emerged that pair insurtech 

companies' technological innovations \vith established carriers' capital resources and marl<et 

knowledge. So far, many insurtech startups have acted primarily as platforms for customer 
62 


acquisition and rely on established insurers to underwrite policies.

13 For insurtech companies that 

write their own business, profitability has been a challenge.

11 But they have been writing 

business for a relatively short time, and the property and casualty insurance industry as a whole 

produced net underwriting losses in the latest quarter. 

Underwriting arrangements of sslect startups focused on homeowners, 

renters and condominium Insurance markets 

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Olt11.SIPGIIi>oi-......... AII .... rAs insurers increasingly rely on data from connected devices, data privacy issues can emerge. 

Telematics and connected devices like fitness trackers are already allowing insurers to track 

driving habits and user health. This data is important to users, and it should be clearly defined 

how it will be used. losurtech companies may also encounter challenges from regulators and 

consumer groups to the use of certain alternative data points in underwriting and pricing 

decisions. 

13 S&P Global Market Intelligence, ' Lemonade not the only tech startup eyeing homeowne" insurance market' 

https://www.snl.com/web/dient?auth,inherit#news/artide?id'-10780313&KeyProductUnUype'2 1

' S&P Glob~ Market Intelligence, ' Profitability elusive for 3 insurtech startups• 

https://www.snl.com/web/dient?aulh,inherit#news/artide'id=41757792&KeyProductUnkType'2 
63 


Distributed Ledger Technology 

Oven•iew 

Distributed ledger technology, including blockchain technology, can best be described as a 

decentralized network of participants responsible for approving and recording transacrions. In 

most implementations, network participants maintain nodes, with each holding a copy of a 

shared ledger. These nodes work together to verify and record transactions. Elements of 

cryptography such as public/private key pairs and digital signatures underpin most DLT 

solutions. 

These networks allow participants to transact directly \\itb each other, removing the need to pass 

transactions through a trusted third party. Once recorded, transactions are immutable and 

permanently stored in the ledger. 

Removing the central counterparty with decentralized ledger technology 

Traditional ledger De<entratized ledger 

As tlte technology evolves, it \viii enable new features such as smart contracts. 11tese software 

applications are built into distributed ledgers and can automate processes based on certain 

conditions being met, such as the transfer of money or the title to other items of value. 

Benefits 

If implemented as planned, DLT \viii revolutionize many parts of our financial system. 

Efficiencies will emerge in payments and international remittances, reducing costs and 

seulement times. Enhanced transparency will allow users to track payments as they pass from 

sender to receiver. Securities senlement and issuance will see significant reductions in cost and 
64 


processing time while audit trails are created automatically. Compliance with Know Your 

Customer (KYC) and Anti-Money Laundering (AML) regulations will be easier for financial 

institutions, and individuals will be able to control their financial data. 

Many of these benefits have yet to be realized as we have just started to see the launch of 

enterprise-level DLT solutions. What is notable compared to other areas of fintech is the mix of 

startups and incumbents exploring the technology. Many businesses across a range of industries 

have joined together to fonm conSOitia focused on DLT implementations 

As new advances such as artificial intelligence and the internet of things develop, many in the 

industry believe DLT will play an active role in underpinning these technologies. DL Twill 

become not only a tool to increase access and decrease costs in the financial system but to drive 

innovation as well. 

Challenges 

As with any emerging industry, much of this technology is still untested and very few live 

applications are running today. It is still unclear how participants will work together to create 

these networks. Compounding these problems are competing implementations of the technology 

that could end up lacking the compatibility necessary to realize true benefits. 

The idea of a shared ledger has also raised concerns around data security. Because nodes need to 

work in tandem to approve transactions, private data could become exposed. As processing 

power evolves, current cryptographic standards could become weak. 

DLT represents a dramatic shift from our current financial world. Transactions can be completed 

within minutes or seconds. The question remains whether that should be possible. Because 

ledgers are generally immutable and transactions instant, there is in most cases no way to reverse 

an incorrect input. Reversing a transaction involves creating an o!Tseuing entry and must be 

agreed upon by both parties. 
65 


Conrlusion 

Fintech offers tremendous benefits including increased access to financial services, lower costs, 

and reduced frictions. Financial institutions have moved from seeing fintechs as a threat and 

have learned how to harness their technological advances. Consumers are already seeing benefits 

from technologies like digital lending, mobile payments, digital investment managemen~ and 

insurance technology. We are on the cusp of seeing all of these sectol1i potentially impacted by 

DLT. 

Regulation has been unevenly applied to the sector, and in many ways the introduction of a clear 

regulatory framework could help further boost innovation. This may require firms to define their 

stake in the financial system and could l~ad to technology-only platforms exiting certain lines of 

business like lending. Overall, this will lead to a more fair and defined playing field for startups 

and incumbents alike. 

Issues like cybersecurity, data ownership, and data privacy are important not just to fintechs but 

to the financial industry as a whole. Clear standards and regulation can provide clarity in these 

areas as well. 

Once again, thank you for the opponunity to testify. I hope the Committee finds our input useful. 
66 

PREPARED STATEMENT OF FRANK PASQUALE 

PROFESSOR OF LAW, UNIVERSITY OF MARYLAND FRANCIS KING CAREY SCHOOL OF

LAW

SEPTEMBER 12, 2017 

67 


Consumers have limited ability to identify and contest unfair credit decisions, and 

little chance to understand what steps they should take to improve their credit. 

Recent studies have also questioned the accuracy of the data used by these tools, in 

some cases identifying serious flaws that have a substantial bearing on lending 

decisions. 

Big-data tools may also risk creating a system of'creditworthiness by associatioo' 

in which consumers' familial, religious, social, and other affiliations determine their 

eligibility for an affordable loan. These tools may furthermore obscure 

discriminatOI)' and subjective lending policies behind a single 'objective" score. 

Such discriminatory scoring may not be intentional; instead, sophisticated 

algorithms may combine facially neutral data points and treat them as proxies for 

immutable characteristics such as race or gender, thereby circumventing existing 

non-discrimination laws and systematically denying credit access to certain groups. 

finally, big-data tools may allow online payday lenders to target the most 

vulnerable consumers and lure them into debt traps. 2 

The problem of"big data proxies" is a serious one recognized by leading privacy scholars.l 

Regulators should do much more to assure that next-generation technology does not simply 

reproduce old biases. 

4 The alternative is a "scored society" where individuals lack basic 

information about how they have been treated in the credit granting contexts 

These problems are troubling in the abstract. Their concrete implications are 

chilling, as a recent Privacy International Report revealed. Outside the United States, 

fintech firms have already scored creditworthiness based on the following factors: 

• "If lenders see political activity on someone's Twitter account in India, they'll 

consider repayment more difficult and not lend to that individual." 

• ''The contents of a person's smartphone, including who and when you call and 

receive messages, what apps are on the device, location data, and more." 

• "How you use a website and your location. [One firm] analyses the way you till in 

a form (in addition to what you say in the form}, and how you use a website, on 

what kind of device, and in whatlocation."6 

1 Mikella Hurley & Julius Adebayo, Credit Scoring the Era of Big Data, 18 YALE l.L. & TECH. 

148 (2017). 

' See, e.g., Nicolas Teny, Big Data Proxies and Health PriVacy Exctpti{)IJ(I/ism, HEAL rn MATRIX (201;). 

'For an up-to-the-minute overview of this and related problems. see Peony Crosman, Is AI a 

threat to fair lending?, at bttpsj \\"~v americanbaoker comlnewslis-atti6cial intelligenee-a

threat-to-fair~ending. 

s Danielle Keats Citron & Frank Pasquale, The Scored Society, 89 WASH. L. REV. I (2014). 6 Privacy International, Case Study: Fintech a!Ki the Financial Exploitation of Customer Dota, at 
68 


Moreover, machine learning systems are cooSiantly developing even more invasive fonns 

of assessing creditworthiness, or factors influencing it A recently published paper claims 

to inferpropensitytocriminalitymerely from the features of persons' faces.

1 Sexuality and 

health are also now being predicted by machine learning researchers entirely on the basis 

of a picture of a person's face-something relatively easy to gather via a Google image 

search, or Facebook search. 

8 Regulators need to be able to audit machine learning 

processes to understand, at a minimum, whether suspect sources of data like these are 

influencing fintech firms. 9 

/. Neil~r Machine Leaming Nor Predictive Analytics are too Complex to Regulate 

Some fintech firms which rely on artificial intelligence may counter that the 

computation involved in their decisionmaking now amounts to a form of cognition as bard 

to explain as that of a human decision-maker. Genetic algorithms may, for instance, 

themselves spawn, each second, dozens of ways of processing information, which are then 

evaluated on some metric, and Darwinianly given a chance to persist based on their 

performance. Iterative machine learning processes may be similarly complex and opaque. 

Their view is that, just as we can't map all the brain's neurons to connect a person's 

decision to eat a slice of cake to some set of synapses, we can't map or unravel the sequence 

of events that leads to a given algorithmic score or sorting. 

I believe that we should be suspicious of the deregulatory impulse behind 

characterizations of machine learning as "infinitely complex," beyond the scope of human 

understanding. The artificial intelligence that commercial entities celebrate can just as 

easily evince artificial imbecility, or worse. Moreover, there are several practical steps we 

can take even if machine learning processes are extraordinarily complex. 

hnps :l/priiiiC)intcmatiooal.o!Wnodeii499?Pag Speed=!loscri~ (Aug. 30, 20 17). See also Josh 

Chin & Gillian Wong, China's New 7'ool for Social Control: A Credit lliltingfor Ew1')1hing, 

\Vall St. J, Nov. 28,2016, at bnps:l/l"'" "~j com/atticles/chinas-oew-tool.for-social<Ontro -acredit-ratiog-for-evel)1bing-1480351590; lan Bogost, Cryptocumncy Might be a Path to 

A1llhoritarianism, The Adantic, May 30, 2017, at 

https:/AI~V\v theatlantic.oom/tcchnology/mhive/20 17105/blockchain~f<Ommand/528543/. 1 Blaise Agiiera y Areas, Margaret Mitchell and Alexander Todorov, Physiognomy's New 

C/111hes, at https:ffmodium.ooml@blaisca/physiognomys-new-<:lothes-f2d4b59fdd6a (May 6, 

2017). 1 Sam Levin, LGBT groups denounce 'dangerous' AI that uses your face to guess sexualiiy, 1ht 

Guardian, at hnpsl/111\w.theguardian.oom/world/2017/sep/08/ai-gay-gaydar-algorithm.facialrocognition-<:riticism-Sianford, Sept 8, 20 17; 8aJbara Marquand, How Yo11r Selfie Can Ajfoct 

Health Insuronce. USA Today, at 

hnps:/!l"vw.usatoday.oom/story/money/peJSOnalfinance/2017104/25/how-)·our-self.e<Ouldaffect-your-life-insurance/100716704/. 

• To be clear, I am not alleging any particular tintech finn in the United St.1tes is using such 

approaches in the United St.1tes at present I am just pointing out that the possibility exists, and 

must be monitored. 
69 


For example, we may still want to know what data was fed into the computational 

process. Presume as complex a credit scoring system as possible. Regulatoo could still 

demand to know the data sets fed into it, and, for example, forbid health data from being 

included in that set. We already know that at least one credit card company has paid 

attention to certain mental health events, like going to marriage counseling.

10 When 

statistics imply that cooples in coonseling are more likely to divoroe than cooples who 

aren't, coonseling becomes a "signal" that marital discord may be about to spill over into 

financial distress.

11 This is effectively a "marriage coonseling penalty," and poses a 

dilemma for policy makers. Left unrevealed, it leaves cardholders in the dark about an 

important aspect of creditworthiness. Onoe disclosed, it coold discoorage a coople from 

seeking the coonseling they need to save their relationship. 

There doesn't have io be any established causal relationship between coonseling 

and late payments; correlation is enough to drive action. That can be creepy in the case of 

objectively verifiable conditions, like pregnancy. And it can be devastating for those 

categorized as "lazy," unreliable," "struggling," or worse. Runaway data can lead to 

cascadi11g diSOIAYmtages as digital alchemy creates new analog realities. 12 Onoe one piece 

of software has inferred that a person is a bad credit risk, a shirlcing worker, or a marginal 

consumer, that attribute may appear with decision-making clout in other systems all over 

the economy. There is also little in current law to prevent companies from selling their 

profiles of consumers.

13 

2. The Problems of Extant Data Collectors are a Reason for More Scrutiny of Fin tech. Not 

Less 

Having eroded privacy for decades, shady, poorly regulated data miners, brokers 

and resellers have now taken creepy classification to a whole new level. They have created 

lists of victims of sexual assaul~ and lists of people with sexually transmitted diseases. 

Lists of people who have Alzheimer's, dementia and AIDS. Lists of the impotent and the 

depressed. 

10Cballes Duhigg, ''What Does Your Credit Card Compao)• Know about You?" New YorlcTimes, 

May 17, 2009, bttp:/A'""·"ltimes.com/2009105117/magazine/17credili.html1pagewanlcd=all. 

For a oompclling account for the crucial role !hat !he FTC plays in regu4tting unfair consumer 

pmctices and establishing a common law of privacy, see Daniell. So love and Woodrow Hanzog, 

"The FTC and the New Common LawofPril'llC)'," Columbia Law Review 114 (2014): 583-676. 11 Cballes Ouhigg, "What Does Your Credit Card Company Know abootYou?", N.Y.'limes, May 12, 2009. 

" Calhy O'Neil, Weapons of Math Desmtction (2016). 11 Kashmir Hill, ''Could Truget Sell Its 'Pregnancy Prediction Score'?" Forbes. February 16, 

2012, http://w1vw.forbes oom/siteslkashmirhill/2012102/l fl/could targel~ll·its-pregnancy· 

prediction-score!. 

6 
70 


There are lists of"impulse buyers." Lists of suckers: gullible consumers who have 

shown that they are susceptible to "wlnerability-based marketing." And lists of those 

deemed commercially undesirable because they live in or near trailer parks or nursing 

homes. Not to mention lists of people who have been accused of wrongdoing, even if they 

were not charged or convicted. Typically sold at a few cents per name, tbe l.ists don't bave 

to be particularly rel.iable to attract eager buyers. And there is increasing risk that your 

spouse, friends, boss, or acquaintances could buy such data. 1

• 

There are three problems with these lists. First, they are often inaccurate. For 

example, as The Washington Post reported, an Arkansas woman found her credit history 

and job prospectS wrecked after she was mistakenly listed as a methamphetamine dealer. 

It took her years to clear her name and find a job. 

15 Second, even when the information is 

accurate, many of the lists have no business being in the bands of fintechs. Having a 

medical condition, or having been a victim of a crime, should not be part of credit decisions, 

since such dara use generates risk of compounding, self-reinforcing disadvantage via 

digital stigma. 

Third, people aren't told they are on these lists, so they have no opportunity to 

correct bad information. The Arkansas woman found out about the inaccurate report only 

when she was denied a job. She was one of the rare ones. The malket in personal 

information offers little incentive for accuracy; it matters little to list-buyers whether every 

entry is accurate-they need only a certain threshold percentage of"bits" to improve their 

wgeting. But to individuals wrongly included on derogatOJy lists, the harm to their 

reputation is great. 16 

The World Privacy Forum, a research and advocacy organization, estimates that 

there are about 4,000 dara brokers. They range from publicly traded companies to 

boutiques. Companies like these vacuum up data from just about any source imaginable: 

consumer health websites, payday lenders, online surveys, warranty registrations, Internet 

sweepstakes, loyalty-card data from retailers, charities' donor lists, magazine subscription 

lists, and information from public records. 

It's unrealistic to expect individuals to inquire, broker by broker, about their tiles. 

Instead, we need to require brokers to make targeted disclosures to consumers. Uncovering 

14 Theodore Rostow, What Happens When an Acquaintance Buys Your Data?: A New Privacy 

Harm In the Age of Data Broken, 34 YALE JOURNAL ON REOUI.AllON (2016). 

" Ylan Q. Mi, IJII/e-btown firms tracking data used In credit scores, W ASII. POsT, July t 6, 20 I t, 

at https:/flnnv.washingtonpost.comlbusiness/economy/little-known·finns-tracking.<Jata·used·in· 

crodit-scon:s/2011105/24/giQAXHcWU_story.bbnl?utm_temJ=.db2a64c53cfd. 16 Note tbat info1111ation generated for or 11ithin a credit context may spread outside it-and vice 

versa Amy Traub, Discredited: HIYW Employment Credit Checks Keep Qualified Workers Out of 

a Job (20 12), bttp:/flwlw.demos.oigldiscrodlted-how-employment-crodit-dlecks·keeJHJUalified· 

wo!ke~S-out·job. Such data and inferenoes an: ,·ery important 
71 


problems in Big Data (or decision models based oo that data) should not be a burden we 

expect individuals to solve on their own. 

Privacy protectioos in other areas of the law can and should be extended to cover 

lhe consumer data now fueling fintech underwriting. The Health Insurance Portability and 

Accountability Act, or HlPAA, obliges doctors and hospitals to give patients access to !heir 

records. The Fair Credit Reporting Act gives loan and job applicants, among others, a right 

to acoess, correct and annotate files maintained by credit reporting agencies. 

It is time to modernize these laws by applying them to all companies that peddle 

sensitive personal infonnation. If the laws cover only a narrow range of entities, they may 

as well be dead letters. For example, protections in HlP AA don't govern the "heallh 

profiles" that are compiled and traded by data brokers or fintecb !inns, which can learn a 

great deal about our health even without access to medical records. 

Congress should require data brokers to register with the Federal Trade 

Commission, and allow individuals to request immediate notification once they have been 

placed on lists that contain sensitive data. Reputable data brokers will want to respond to 

good-faith complaints, to make their lists more accurate. Plaintiffs' lawyers could use 

defamation law to hold recalcitrant finns accountable. 

We need regulation to help consumers recognize the perils of the new infonnation 

landscape without being overwhelmed 'vith data. The right to be notified about the use of 

one's data and the right to challenge and correct errors is fundamen!al. Without these 

protections, we'll continue to be judged by a big-data Star Chamber of unaccountable 

decision makers using questionable sources. 

Policymakers are also free to restrict the scope of computational reasoning too 

complex to be understood in a conventional narrative or equations intelligible to humans 

They may decide: if a bank can't give customers a narrative account of how it made a 

decision on their loan application, including the data consulted and algorithms used, then 

the bank can't be eligible for (some of) the array of governmental perquisites or licenses 

so common in the financial field. They may even demand !he use of public credit scoring 

models, or fund public options for credit. Finally, they should look to Europe's General 

Data Protection Regulation (GDPR), which provides several standards for algorithmic 

accountability.

11 

17 Sec, e.g., Bryce W. Goodman, A S1ep 1'q.,ards Acoountable Algorithms?: Algorithmic 

Discrimination and the &~ropean Union General Dara Proreclion, 31 

httpJ/www.mlandtbelaw.org/papersigoodman Lpdf ("lf implemented propedy, the algorithm 

audits supported by the GDPR could play a critical role in making algorithms less discriminalory 

and more accounl3blc."). 

8 
72 


B. Emerging Issues in Preemption and Regulatory Arbitrage 

Some fintech advocates advocate radical deregulation of their services, to enable 

their rapid entry into traditional banking malkets. However, there is a risk of the fintech 

label merely masking "old wine in new bottles." The annals of financial innovation are 

long, but not entirely hallowed.13 When deregulatory measures aocelerated in the late 

1990s and early 2000s, their advocates argued that new technology would expenly spread 

and diversify risk. However, new quantitative approaches often failed to perfonn as billed. 

Most fundamentally, a technology is only one part of a broader ecosystem of financial 

intennediation.

19 

I do believe that some fintech may promote competition and create new options for 

consumers. But we should ensure that it is fair competition, and that these options don't 

have hidden pitfalls. In my research on the finance and internet sectors, I have explored 

patterns of regulatory arbitrage and opaque business practices that sparked the mongage 

crisis of2008. 20 I see similar themes emerging today. 

In the run-up to the crisis, federal authorities preempted state law meant to protect 

consumers. 21 The stated aim was to ensure financial inclusion and innovation, but the 

unintended consequences were disastrous. Federal authorities were not adequately staffed 

to monitor, let alone deter or punish, widespread fraudulent practi~ Agencies like the 

Office of the Comptroller of Currency (OCC) also Oattened diverse staie policies into a 

one.size-fits-all, cookie-cutter approach. We all know the results.

22 It now appears that the 

OCC may be repeating iiS past mistakes. 

11 FINANCIAL CRISIS INQUIRY COMMISSION, ANAL REI'oRT OF TilE NATIONAL COMMlSSION ON 

TI!ECA~ESOI'TilE FiNANCIAL AND EcoNOMJCCRlSISINTilE UNfiEDSTATES {2011) 19Tom C.W. Lin, Infinite Flnanciallnrermediarfon, 50 WAKE FORESTL. REV. 643 (2015). This 

article's scctions on '1inked stability," "financial cybe~curity," and "intennedia!)' 

independence" (pages 661 onwatds) should be of particular interest to the committee. See also 

Tom C. IV. Lin, 1be New Financial Industry, 65 ALA. L. REV. 567, 595 ff. (2014) (offering 10 

"regulatory principles for the new financial industry). 

"' Frank Pasquale, 1be Black &x Soi;fery (20 I 5). Chapter 4 (Finances Algorithms: The 

Emperor's New Codes) describes th~ problems in delail. Chapter 5 offers n:gula!ory propo5als. 11 FCIC Report, 112 and passim ("Once OCC and OTS preemption was in place, the two federal 

agencies 11~re the only n:gula10rs 11ith the po11~r to prohibit abusive lending practices by national 

banks and thrifts and theirdirec:t subsidiaries.'); id., at 350 ("The Office of Thrift Supervision has 

acknowledged failures in its oversight of AIG .•• a fonner OTS director[) told the FCIC that as 

late as September 2008, he had "no clue-no idea-~>ilat (AIG's] CDS liability was.").). 

t! Fortunately, the Supreme Court quickly signalled after the crisis that its proiJreemption 

approach here bad gone too fur. See Arthur E. Wilmarth, 010mo v. Cleoring HOIISe: The Supreme 

Court Responds to rhe Subprlme Financial Crisis and Delivers a Major Victory for the Dual 

&nklng System and Consumer Prolection, in THE PANJC OF 2008: CA~ES. CONSEQUENCES 

AND IMPUCATIONS FOR REFORM, Lawrence E. Mitchell and Arthur E. Wilmarth Jr., eds., 

Edward Elgar Publishing. 2010, at https:/lpapers.ssm.com/sol31papers.cfm?abstract_id=l499216. 
73 


The OCC bas released a White Paper, Exploring Special Purpose National Bank 

Charters for Fintech Companies, in 2016 ("White Paper'').

23 The OCC believes that~ 

charters "could advance important poticy objectives, such as enhancing the ways in which 

fmancial services are provided in the 21st century, while ensuring that new fintech banks 

operate in a safe and sound manner, support their communities, promote fmancial 

inclusion, and protect customers."24 The OCC is, to be sure, well-intentioned. Its Office of 

Innovation has energetically helped entrepreneurs to understand regulatory mandates by 

offering informal, candid discussions "with OCC staff regarding financial technology, new 

products or services, partnering with a bank or fintech, or any other matter related to 

financial innovation."25 However, several negative consequences could arise out of OCC 

efforts to go beyond informal counseling about extant legal obligations, by substantively 

altering these obligations via special purpose national bank charters for fintech firms 

For example, such fintech charters could enable regulatory arbitrage around state 

restrictions on payday lending. As 270 entitie5-(()mmunity, labor, civil rights, faith-based, 

and military and vetenms groups--OOserved earlier this year, 90 million Americans "live in 

jurisdictions where payday lending is illegal." 26 These state consumer protection laws help 

consumers "save billions of dollars each year in predatory payday loan fees that trap people 

in long-term, devastating cycles of debt."21 OCC should not take action to preempt them.lt 

ll Office of the Comptroller of lhe Cunenc)•, ll.xploring Special Purpose National Bank Cllarters 

for Fintech Companies (2016), https fl lw oee.~reas.govltopicslbank· 

operationslinnovalioolspecial-pul)lOsenational~-cllarte~·for-fintech pdf("\Vhitc Papef'). 

:' ld., at2. 

u OCC Office of Innovation Office Hours, 31, e.g., https fll~l oee govhopicslresponsible

innovationlinnovation-office.llours.pdf; sec also CFPB's Project Catalyst. 26 Center for Responsible Lending, States 11ilhout Payday and Car-title Lending Sa1'C Over 

$5 Billion in Fees Annually, at 

hup:lfl>>~~ n:sponsiblelcnding org/sitcsldefault/filcslnodcslfilcslresean:b· 

publieationlerl_payday_fee_savingsjun2016.pdf(2016): Comment Lclterof0ver200 

Community, labor, and Nonprofit Groups, at hup:/fi"IW .neweconom)nyc.org/111Jcontent/uplo..:!s/2017/0 IICOOJment_ occ _fintech _ 0 I 1320 17.pdf (20 17) (''\Vhile the 

fintech induSII)' has the potential to encourage iMovation, we have also seen costly payday 

lende~ hide 

behind the costume of"fintech."). %7 1d. 

~t Americans for Financial Refonn, ll.xploring Special Pul)XlSC National Bank Charte~ for 

Fmtech Companies, Commeni Letter ,Jan. 15, 2017, at bttps1fl""v.oee.gov/topicslresponsible· 

innovalion/commentslcomment-amerieans-for.financial-refonn.pdf(cxplaining broad array of 

legal and policy concerns lhat woold arise if such cbane~ wen: granted); Center for Digital 

Democracy and U.S. PIRG, Exploring Special Purpose National Bank Charte~ for Fintech 

Companies, Comment Letter, at https:l/Mm.oee.govltopicslresponsible· 

innovation/commentsleomment-(dd-uspiJi.pdf ('lack of transparency around the processing of 

data and automated algorilhms may lead to increasing infonnation as)mmetries between the 

financial institution and lhe individual and lhus consume~ are left with less awareness and a lack 

of undc~ ng and control over imponant financial decisions."). 

10 
74 


These are not mere hypothetical concerns; as the New Economy Project has documented, 

online lenders "have been subject to a long list of stale and federal enforcement actions, 

settlement agreements, and investigations."29 Moreover, they may lure unsuspecting 

borrowers away from much more sustainable alternatives, including publicly vetted 

options.JQ 

Nor should the Senate rush to consider a proposed bill to legislatively ovettum the 

2nd Circuit's decision in Madden v. Midltmd Fundi1tg, UC, which applied New York state 

usury law to loans purchased by a debt collector who believed that those laws would be 

preempted, sinoe the loans were originated by a national bank.31 As Adam Levitin has 

explained, there are not sound legal or policy arguments to ground present challenges to 

Madden. 11 As Levitin explains, "Preemption is part of a package with regulation, but once 

the loan passes beyond the hands of a National Bank, it loses its preemption protection and 

becomes subject to state usury laws."ll There is little reason to undermine the dual banking 

system by applying a talismanic shield against usury laws to loans even onoe they have 

been sold by the intended beneficiary of preemption.~ 

One more aspect of regulatory arbitrage is now in fintech news: recent applications 

by Square and SoFi for Industrial U>an Company (ILC) charters. Walmart's 2006 

19 New Eoonomy Project, Testimony Of New Eoonomy Project Before The New Yom Senate 

Committees On Banks And Consumer Protection and the Assembly Committees On Banks, 

Small Business, and Consumer Affairs & Protection, Public Hearing on Online Lending 

Practices, at http1/www.neweconom)nyc.orglresourocltcslimony-nys-senate-assembly-hcaringregarding-online-lending/. For more on New Yom concerns, see Daniel Alter, The "Business of 

Banking" in New York-An Historical Impediment To the OCC's Proposed National "Finteeh 

Cbaner,''Nolice & Commen~ Blogofthc Yale J. Reg., June 29,2017, at 

httpJ/yalejreg.comlnc/the-busincss-nf-banking-in·new-york-Qll-historical-impcdiment~o-the· 

oees-proposed-narional-fintech-cllarter-by-daniel-s-alter/. 

» David Lawus, Pricey 'fintceh' !coders putlhe squeeze on cash-strapped small businesses, LA 

Times, June 16, 2017, at http://M'".Iatimes.eomlbusinessllazaruslla-6-lazarus-small-busincssloans-20170616-story.html (reporting that an --associate administrator for the federal Small 

Business Admini.stialion 's Office of Capital Acoess, advised startin.g the hunt for capital not with 

a fintech finn but 11ith the agency's LINC seareh tool (that's LJNC as in Leveraging lnfonnation 

and Networks to access Capital)," in response to Lawus's story of a small business owner 

charged amounts that "translated to an annual pcrtentage rate of 55%" by a fintech firm). 11 Madden v. Marine Midland Funding, No. l4-2l31 (2d Cir. 2015). 

Jl Adam Levitin, Madden v. Marine Midland Funding, 

bttp:/!l\111v.creditslips.ol&"creditslips120 15/07/madden-v-marine·midland-funding.htnll. 

n ld.: see also Adam Levitin, Hyd1'01Jiic RegulaTion: Regulating CrtdiT Morl:ers Upstrtom, 26 

Yale Journal on Regulation (2009). 

J.l Adam Levitin, Guess Who 's Supporting Predatory Lending. Credit Slips, 

hnp1/wll,v.creditslips.oi&"creditslips/20 17/08/guess whos-supporting-predatory~ending htnll 

(2011) ('1TJhere's no problem with !he world post-Madden, so why rocss wilh things. But if a 

"fix" is needed, it ought to he (I) narro111y 13ilored, and (2) ensure maximum oonsumer 

protection •. .. [A ]ny fix that goes beyond protecting StQiritizations by banks in which sen•icing 

is relaincd is facilitating predatory lending./ . 

11 
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application for an ILC charter was eventually 1\ithdrawn, but it led to a compelling policy 

argument about the optimal separation between banking and commerceJl Arthur E. 

Wilmarth, Jr., warned that aU owing commercial tinns to acquire ILCs would conflict with 

the general American financial policy of separating banking and commerce, generate 

systemic risk, and enable tbe resulting JLCs and their parent !inns to avoid necessary 

regulatory scrutiny, since "FDIC does not have authority to exercise consolidated 

supervision over commercial owners of ILCs."36 Professor Mehrsa Baradaran countered 

that, in some instances, allowing finns to merge banking and commerce functions could 

enhance the safety and soundness of the banking systern.

37 

However, in this case, neither SoFi nor Square appear to be the type of commercial 

finns which would fit Baradaran's account, since they would not inject the source of 

strength that was praised by Baradaran in the Walmart scenario (a large and viable nonfinancial business) into the banking system. I agree with Professor Wilmarth that 

"Banking-industrial combinations would ... create unfair competitive advantages for large 

commercial and industrial !inns that can afford the costs of acquiring and operating 

banks,":!$ Far more study of fintech as a sector is needed before the FDIC grants such 

applications. As Rep. Maxine Waters has observed, in a detailed letter to the FDIC calling 

for a public hearing on the issue, premature granting of applications for ILCs "would set a 

precedent that a wide variety of other fintech companies may choose to follow even though 

concerns related to financial inclusion, consumer benefits, supervision, and regulation of 

such entities are still unresolved."39 

The Fed was right to call for the closure of the ILC loophole last year. Though there 

was an interesting scholarly debate after WaiMart applied to obtain an ILC charter in 2006, 

some more recen~ post-moratorium applicants do not appear to have the redeeming 

characteristics of a large commercial firm. They could also be acquired by other finns, 

further eroding the division between banking and commerce that lies at the heart of U.S. 

financial regulatory goals. As Professor Wilmarth has argued, given high concentration 

levels in the economy in general, and the technology sector in particular, "If we pennit the 

formation of new banking-industrial conglomerates, we will be putting more of our eggs 

JJ WaiMart and se1~ral odJercommercial fmns applied to acquire ILCs from 2005-2006. 

l6 Al1hur E. Wilmarth, lr, Wal-Mart and the Separotion of Banking and Commerce, 39 Conn. L. 

Rev. 1539 (2007). 31 Meh~ Baradaran, Reconsidering the Separation of Banking and Commerce, 80 George 

Washington law Review 385 (2012}. 

lt Al1hur E. Wilmarth, Jr., Be~are the Return of the ILC. American Banker, Aqg. 2, 2017, at 

haps://Mvw.americanbankcr.comiQPinionlbeware-dlc·n:IUm-of·tbe·ilc. 39 Press Release, Waters Calls on FDIC 10 Hold Public Hearing on SoFi's Application for Bank 

Charter, at hnpsJ/democrals· 

financialservices.house sov/nc,~documcn!single.aspx DocumcntiiF400739. 

12 
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into very few baskets, and federnl regulators will be under great pressure to protect those 

baskets during future financial and economic disruptions."40 

ID. Futurist Fintec:b 

Though sober reports from the World Economic Forum, Deloitte, and 

governmental entities give a good sense of the incrementalist side offintecb, it is important 

to realize that much of the excitement about the topic of financial technology arises out of 

a more futuristic perspective. On Twitter, hasbtags like #legaltech, #regtech, llinsurtech, 

and #tintech often convene enthusiasts who aspire to revolutionize the financial 

landscape-« at least to make a good deal of money disrupting existing "trust institutions" 

(e.g., the intennediaries which help store and transfer financial assets). 

Futurist fintech envisions "smart contracts," which would be executed via some 

degree of automatic, code-based enforcement. 41 As one article puts i~ ''Where a smart 

contract's conditions depend upon real-world data (e.g, the price of a commodity future at 

a given time1 agreed-upon outside systems, called oracles, can be developed to monitor 

and verify prices, performance, or other real-world events."12 However, until robotic 

assessments of physical reality are far less delayed, corroded by a lack of data, and 

contestable (thanks to the messy complexity of discordant human meanings), the 

prevalenoe of totally automated, smart contracts is likely to be limited. 

There are many contractual relationships that are too complex and variable, and 

require too much human judgmen~ to be reliably coded into software. Code may reflect 

and in large part implement what the parties intended, but should not itself serve as the 

contract or business agreement among them. 

Still, some technologists and lawyers aspire to that subsumption, echoing older 

movements for financial deregulation . .u The rise of Bitcoin as an alternative currency has 

.., Arthur E. Wilmarth, Jr., Beware the Return of the ILC, American Banker, Aug. 2, 2017, at 

hnps:/!l"'"'.americanbanker.comlopinionlbewarc-the-rerum-Qf-the-ilc 

•• Joshua Fairfield, Smart Cootraets, 8/tcoln /Jots, an4 Cons11mer Protection, 71 W ASfL & LEE L. 

REv. ONLINE 35,38--39 (2014) ("Smart contracts-automated progrnms that transfer digital 

assets within the block d~ain upon certain triggering conditions-represent a new and interesting 

form of 01p1izing contraciUal aetivity. i- <Z Nicolette De Sevrcs, Bart Chilton & Bradley COOen, The 8/ockchain Revolution, Smart 

Contraets and Financial TransacJions, 21 NO. 5 CYBERSPACE LAwYER 3, 3 (June 20 16).A smart 

contract is created by encoding the terms of a traditional contract and uploading the smart 

oonllacl to the blockchain. "Conbactual clauses are automatically executed when pre· 

programmed conditions arc satisfied." and because the transactions are monitored, validated, and 

enforced by the blockehain, there is oo need for a trusted third party, such as an eserow agent./d . 

.u DAVIDGoi.UMBlA, Th!EPo!.mCSOfBITCOIN (2016) (describing pataUels between 

crytocunency mo1'ement, Cf)1lto-anarchist beliefs, and older II)Ovements to discredit or dismande 

financial regulation and ecntlal banking). 

13 
77 


sparked an interest in automation of transactions and recordation . +t Software can allow 

distributed computers to transfer infonnation en masse and monitor one another.

45 Bitcoin 

is a particular case of using blockchain technology to ensure a durable record of ownership, 

which is intended to be regulated by code.# Blockchain enthusiasts envision it scaling en 

masse to serve as a distributed ledger of all manner of transactions. 

Given enthusiasm expressed for blockchain at the highest levels of international 

finance,

47 governments may soon explore more extensive use ofblockchain-based, public 

ledgers of ownership transactions, such as land records." Such a digital transition would 

cut out a fair number of time-<:onsuming steps in current financial processing. Using 

technology to modernize transactions would seem to be a huge opportunily for saving 

personnel cos1s and reducing inconvenience. 

Yet there are also reasons for caution. As James Grimme! mann observed in 2005, 

"software is vulnerable to sudden failure, software is hackable, and software is not 

"Joshua Fairfield, Birproperty, 88 S. CAL. L. REV. 805, 805 (May 2015) ("lncl\:ased interest in 

Cl)ll(OCURencies has dri1-en the e~-elopment of a series of technologies for creating public, 

cryptographically secure ledgers of property interests that do not rely on bust in a specific entity 

to curate the list.j . 

'

5 Michael J. Madison, Social So .fro· art, Groups, and Guvemnnct, 2006 MJCH. ST. L. REV. I 53, 

156 (2006). 

* Nioolerte De Sevres & Bart Chilton & Bradley Cohen, 1ht Bloclcchain Revolution, Smari 

Conrracts and Financial Transactions, 21 NO.5 CYBERSPACE LAWYER NL 3, 3 (June 2016). A 

blockchain is a pc:cr-to-pccr network where each computer in the network verifies and records 

erecy trnnsaction on the ootworlc, where trnnsactions are only recorded on the ledger once the 

network oonfinns the validity of the trnnsaction, thus preventing third party manipulation and 

stn:amlining the n:cord. 

'"Wodd Economic Forum, The [uh1rt of finonc/al infros/rnc/urt: An ambitious look at how 

blackchain can reshape financial servictS, {Aug 2016) 

http://l\\"v3.weforum.orgldocs/IVEF _lbe _futul\: _of _financial_infrasbuctllre.pdf; South African 

~rve Bank, Position Paper on Virtual ~~rrencies, (Dec. 3, 20 14), 

httpsJ!Imw.resbank.co.za/RegulationAndSupervision/NationalPa)mentSystem(NPS)IlegaUDoc 

uments/Position%20PaperNirtuai%20Currencies%20Position%201'aper%20%20Final_ 02ofl0 14 

.pdf, see also David Mills. et. al., Distributed ledger technology in payments. cloorlng and 

se/1/ement, Federal Reserve Board (20 16) /IV(///Mie ot 

httpsiill~vw federalreserve gov econresdalaifeds/2016/filcsflOI609Spap pdf. 4 It is at this point unclear \\tether decentralization via distributed ledger technology would 

address or exacerbate key problems identified in the Mortgage Electronic Registration S~~tems, 

Inc. (MERS) in the wake of the financial crisis. Its implementation of"cloud computing" 

technology was meant to Cllable instantaneous trnnsfers of owne~hip rights within the confines of 

a ~ntralizl:d database. MERS aspin:d to remove recording responsibilities from the stale to a 

pri1<ate entity owned by parties (mongage lende~) with an interest in owne~hip disputes. 

Christopher L. PeleJWn, Two Faces: Demyslij)1ng the Mongage Electronic Registration Systems 

Land Title Theory, 53 WILLIAM AND MARY LAW REVIEW Ill (20 II). 

14 
78 


robust"~ No technology has developed that would make the blockchain environment 

impervious to these problems. Waves of hacking and illicit intrusions have rocked health 

care institutions, so banks,SI and even campaignss

2 and govemments . 13 While blockchain 

enthusiasts claim that distributed ledgers help avoid the "honeypot" problem of database 

centralization (which is an inviting target for backers), woceotration of "mining power" 

could lead to a 51% attack on even a distributed ledger system. Excessive forking is also a 

threat to the integrity of such networks. 

Moreover, some early adopters of this ideal of self-executing or coded law have 

experienced troubling and telling failures. 

14 Investors in a "decentralized autonomous 

organization" (DAO) run on code have already experienced the turbulent and troubling 

aspectS of software-governed legal orders. In early 2016, a hacker managed to take millions 

of dollars in a fashion unanticipated by the drafters of the code governing the organization. 

The main organizer of the DAO, Vitalik Buterin had to code a "hard fork" for the 

organization, which essentially shifted funds from the hacker's account to an account 

where the original investors in the project could withdraw their funds. u 

According to Buterin and other organizers of the DAO, this intervention was a 

success story: it proved the recoverability of their system. But for advocates of futurist 

fintech, this was a Pyrrhic vie1ory. The post hoc intervention violated the principle of 

autonomy supposedly at the core of the DAO. 

16 Persons managed the smart contJae1-not 

mere code. 17 In other words, the only way the supposedly smart, incorruptible, automated, 

49 James Grimmelmann, Regulation bySofo.·are, 114 YALE W. 1719, 174244 (200S); see also 

James Grimmelmann, Anarchy. Status Updates. and Utopia, 35 PACE L. REV. 135 (20 IS) 

(demonsimting the pemsience of governance problems in social software). 50 &e Jessica J:udine Wilkes, The Creation of HIP M C11I1Ure: Priorih'zing Privacy Paronoia 

m-er Patient Core, 2014 B.Y.U. L. R£V. 1213 (2014) ("In 2009, the Office of Civil Riglltss1311ed 

recording incidents ofPHl breaches and created the "Wall of Shame," which publicly exposes 

breaches affecting 500 people or more"). 11 Paul Mcrrion, NY Fed's role In SWTFr cyber heist prompiS House panel data request. WL 

3085306. CQ ROLL CALL 2016. (describing hack of Bangladesh's central bank). 11 Anthony J. Gaughan, Romshaclcle Federolism: America's Archaic and Dysfonctii»>II 

Presidential Election System, 85 FOROHAM L. REV. 1021 (2016). (discussing Russian hackers); 

Melissa Eddy, After a Cyberanack, Germany Fean Eleciion Oisntption, N.Y .n MIS, Dec. 8, 

2016. 13 Tun McCormack, The Sony and OPM Double Whammy: lnternationall.aw and Cyber 

"Anocks~ 18SMU Sci. &'ru:H. L. REV. 379(2015). 

" Nalhaniel Poppe·r, A Hacking ofMore Than SSO Million Doshts Hopes In the World of Virtual 

Cmnncy, N.Y.llMES(June 17, 2016). 11 ~ficbael del Castillo, The Hard Fort: What's About to Happen to Ethereum and the DAO, 

COINDESK July 18,2016, hnp:IIMI'w.eoindesk.comlb:ud-fork-ethcreum-dao/; Vitalik Buterio, 

Hard Fork Completed, En1EREuM BLOG (July 20, 2016), 

httpsltblog.cthcreum.org/2016107n0Jbard-fork-eompletcdl. 

" Matt Levine, 8/ockchain Company's Smart Conrracts Were Dumb, BLOOMBERG NEWS (June 

17, 2016), https;/!lmw.bleomherg.com/view/articlcs/2016-06-17tblockcbain-eompany-s-smarteontmcts-were-dumb. S! /d. 

15 
79 


and immutable contract actually protected investors was by allowing human interve111i011 

to change its tem1s and amsequences. Rather than demonstrating the dispensability of 

human interventions, the DAO has proved the opposite-the vital necessity of human 

governance over even extensively coded and computerized forms of human cooperation. 

When Primavera De Filippi and Samer Hassan speak of the "incorporation oflegal 

rules into code" and "regulation by code," culminating in a reliance on code "not only to 

enforce legal rules, but also to draft and elaborate these rules," they do not present lbese 

phenomena as unalloyed goods. 5

1 Rather, they are cautious about the "the prospect of 

automated legal governance" because it may "reduce the freedoms and autonomy of 

individuals."59 The answer to these concerns is not to double down on the translation of 

legal rules into code. Rather, the preservation of human control over financial systems will 

require an alternative paradigm- a vision of software as a tool to assist persons, rather than 

a machine replacing them. Nor should policymakers abandon long-standing principles of 

financial regulation to make way for fonns of financial automation that have yet to be 

proven. There is little evidence that regulation means their "revolutionary promise" would 

be lost, as it was probably never there in the first place. 60 

IV. Conclusion 

This testimony has presented reasons to be cautious about legislative or regulatory 

effons to federally preempt state laws now applying to both incrementalist and futuristic 

fintech. I know that advocates for deregulation will likely argue that imposing a level 

playing field on fintech and non-fintech firms will harm innovation in the fintech sector. 

But innovation is not good in itself. The toxic assets at the core of the financial crisis were 

innovative in many ways, but ultimately posed unacceptable risks.41 So, too, may the 

superficially attractive services of many fintech firms. 

To be sure, promoters of fintech deregulation may claim that such worries are 

anecdotal. But many tech firms have only themselves to blame for obscuring what we know 

about the sector. As I explain in my book The Black Box Society. aggressive assertion of 

trade secrecy claims-both about data collection and use, and the algorithms used to make 

judgments about us-keep regulators and legislators in the dark about the full range of 

lt Primavera De Filippi & Samcr Hassan, Blockchaln Technology as a Regulatory Technology: 

FromCodeislm to lAw is Code, FIRST MONDAY, 21 (12·5) (2016); 

hnp:/lfilS!rnOnday.orglojslindex.php/fin!articlc/viewn 11 315657#author. !II Jd. 60 ADAM GREENFIELD, RADICAL 'J);ciJNOLOGIES 303 (10 17) ("lbe im-enlors of the blockchain 

overtly intended to erode statism and central administration. Virtually everywhere, decision 

algorithms are touted to us on the pi'Oillise that they will pcnnancntly displace human subjccti1ity 

and bia11. And yet in every instance we find that these ambitions are Oouted, as the technologies 

that were supposed to enact them are capturcd ... by existing conceutralions of power.). 61 JENNJFERTAUB, 0nJER PEOPI.E'SHOOSES (2015). 

16 
80 


risks in fintech. 

62 If there is any message I can deliver to the committee today, it is to 

empower agencies like CFPB and the OFR, and to expand their funding, as they try to 

come to grips with a mpidly financial landscape. 

Data gathering is importan~ because nearly tNery story oftechnologized "financial 

inclusion» can be countered with other stories of exclusion, via digital redlining. As Cathy 

O'Neil's book Weapo11s of Math DeslntcliOfl shows, consumers often are in the dark about 

what new algorithms are judging them, and how they can respond if they think they've 

been treated unfairly.

63 Regulators need to understand more fully what these firms are 

doing, and how they are performing. Moreover, as the recent Equifax hack shows, 

conoentration of information in almost any firm creates great risks to consumers. 

Improving financial cybersecurity should bean essential goal in fintech policy.64 I applaud 

the GAO for highlighting security issues in its report, and Senator Jack Reed for proposing 

forward-thinking legislation on this front. 

We should not have faith that accelerated deregulation will free the financial sector 

to solve important social problems. The value proposition of some fintechs merely points 

out larger problems in existing credit provision that could be solved by more direct action. 

For example, if fintechs can make a hefty profit by refinancing student debts owed to the 

U.S. government, perhaps that is less an indication of fintecbs' business prowess, than it is 

evidenoe that the government is overcharging students for loans.

65 If consumers are 

despe111te for marketplaoe lending to cover next month's utility bills, maybe we need to 

ensure work pays more fairly, rather than plying them with digital loans. I am confident 

61 FlW« PASQUALE, ntE BLACK BOX SOCIETY (2015). 

6l CATIIYO'NEIL, WFAPONS OI' MAlll DESTRUC110N(2016). 61 Kristin Jolmson,ManaRingCyber Riskr, 50 Ga. L. Rev. 541 (2016), at 

https#papers.ssm.com/so13/papcrs.cfin?abstract_id=2847234 (discussing SEC cybcr-risk 

man<l8ement disclosure obligations); Kristin Johnson and Steven Ramirez, !iJIStainobility: A New 

Guiding Principle for Financial Market Regulalfon, II U. ST. 'O!OMAS L.J. 386 (2015). 61 Michael SimkO\ic, The Knowledge Tax, U. Chi. L. Rev. (2015), at 

http://cbi~ounbound.uchicago.eduluclrev voi82Jiss4 41: Marc Nerlove, Some Problt/71$ in ihe 

(}.;e of/nccme-ctJntingent Loans for rhe Fino~ of Higher F.tf11cction, 83 J. POL. ECON. 157, 

160, 180 (1975). When private sector refmancers can "cheny pick" or"cream skim" the most 

creditwonhy borrowers from a federal credit progmm, that risk S~:lectioo C\~otually leaves the 

government dependent on repayment by the worst credit risks. That erodes the suSiainability of 

the federal loan progrnm- and its borrower protections, like income based repa)ment. &e Frank 

Pasquale, Democratizing Higher £d11rotion: Defending & Extending lnccme Based Repayment 

Programs, 28 LOY. CONSUMER L. REV. I (2015), a1 

httpJ/lawecnmmoos.luc.edullclri''OI28/iss1/2, for more on the politics of public finanoe 

accounting and the role of private lenders in undennining the pen:eived and adual suSiainability 

of federal credit progmms. 

17 
81 


lhat a system of postal banking would do far more than the fintech seaortodelivertinancial 

inclusion to lhe mimons of Americans without adequate access to deposit accounts.66 

In conclusion: Fintech should not be an excuse for more regulatory arbitrage. We 

need far more information about how fintech firms are gathering and processing data. And 

we should be wary about the ability of technology alone to solve much larger social 

problems offmancial inclusion, opponunity, and fair, non-discriminatory credit provision. 

f6 Ma!RSA BARADARAN, lloWTHEOlliER HALF BANKS (2015). Over 25%ofUS bouseboldsare 

unbanked or underbanked. FDIC, FDIC Nationol SJI/vey of Unbanked ond Underbanked 

Hollseholds(20l6}. 

18 
82 

1For additional information on the Rule see https://www.ftc.gov/tips-advice/business-center/ 

guidance/financial-institutions-customer-information-complying. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM LAWRANCE L. EVANS 

Q.1. The Equifax data breach which impacted more than 143 million U.S. consumers revealed weaknesses in the company’s data security protocols. In your opinion, do consumer reporting agencies 

have sufficient data security standards and infrastructure to effectively protect the sensitive personal data they hold? Are there any 

existing legislative or regulatory gaps that contribute to this problem? 

A.1. While we cannot opine on the sufficiency of data security 

standards and infrastructure at consumer reporting agencies at 

this time, we are initiating work in response to a request from the 

Ranking Member of the Subcommittee on Financial Institutions 

and Consumer Protection that will allow GAO to address these concerns. Based on our existing body of work we can comment on infrastructure, data security and the regulatory landscape more 

broadly. 

Regarding oversight of critical infrastructure (which includes 16 

key sectors, including the financial services sector) the National Institute of Standards and Technology Cybersecurity Framework is a 

voluntary standard intended to establish a common taxonomy for 

building cybersecurity programs. Outside of that, each industry is 

driven by its own regulatory requirements and Federal/State oversight structures. 

Current regulations impose requirements on financial institutions to protect consumer data and these safeguards explicitly 

apply to consumer reporting agencies. Specifically, the Gramm– 

Leach–Bliley (GLB) Act restricts, with some exceptions, the disclosure of nonpublic information by companies defined under the law 

as ‘‘financial institutions’’. The Act also requires the Federal Trade 

Commission (FTC) and certain other Federal agencies to establish 

standards for financial institutions relating to administrative, technical, and physical information safeguards. As part of its implementation of the GLB Act, the FTC issued the Safeguards Rule, 

which requires financial institutions under FTC jurisdiction to 

have measures in place to secure customer information and ensure 

affiliates and services providers also safeguard this information. 1

The Rule applies to many companies of all sizes that are significantly engaged in financial products and services, including consumer reporting agencies. FTC has also used its statutory authority to address unfair and deceptive acts and practices under section 

5 of the FTC act to enforce data security compliance. 

Currently, there is no Federal law that governs breach reporting 

but the prudential banking regulators have issued interpretive 

guidance requiring their regulated institutions to report breaches 

promptly to allow breach victims to take steps to protect themselves. Similarly, the Securities and Exchange Commission and the 

Commodity Futures Trading Commission have also issued rules 

that require compliance with the notification requirements of GLB 

Act. 

83 

2The FTC is seeking comment on the Safeguards Rule, including whether the elements of 

an information security program should include a breach response plan. See 81 FR 61,632. 

Moreover, States have varying laws associated with privacy/data 

breach notification. It is important to note that the FTC Safeguards 

Rule establishes standards but does not place requirements on institutions to notify customers within a specified timeframe. 2 While 

banks are subject to regular examination of their information security practices, the nationwide consumer reporting companies 

(Equifax, TransUnion, and Experian) may not receive the same 

level of supervisory scrutiny. The Bureau of Consumer Financial 

Protection (CFPB) has supervisory and enforcement authority over 

the national consumer reporting companies but the extent to which 

this oversight includes regular examinations of information security practices will be the subject of future GAO work. CFPB does 

not have authority to enforce the GLB Act’s data security provisions, but the agency has taken an enforcement action under its 

unfair, deceptive or abusive acts or practices authority against a 

payments company for allegedly deceptive statements about data 

security practices. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM ERIC W. TURNER 

Q.1. The Federal Deposit Insurance Corporation (FDIC) found that 

in 2013 nearly 30 percent of Americans households were 

‘‘unbanked’’ or ‘‘underbanked,’’ with the highest rates among nonAsian minorities, low income households, and unemployed households. What technological advancements in the Fintech industry 

can promote financial inclusion among the ‘‘unbanked’’ and underbanked’’? 

A.1. Innovations in financial technology can provide increased financial inclusion through the ability to obtain services and the use 

of alternative data sources or underwriting methodologies. 

Traditionally consumers have obtained financial services from 

physical branch locations. As banks continue to close branches, 

many consumers have lost access to important financial services. 

U.S. bank branches decreased by 1,981 locations during the period 

between June 30, 2016, and June 30, 2017. As this trend continues, 

fintech innovations are filling the gap by providing traditional 

banking services such as deposit accounts, payments, and lending 

through digital channels. 

Regardless of their location, users can now access these services 

through online or mobile channels. This especially benefits people 

in rural or other areas that have a low number of bank branches 

due to the economics of keeping a physical location. Mobile banking 

technology can also help community banks serve more customers 

even without the extensive branch networks of large banks. 

According to a survey fielded by S&P Global Market Intelligence 

earlier this year, 65.5 percent of mobile banking users had an annual income of less than $75,000 and 54.2 percent of users held 

less than $10,000 in their combined checking and savings accounts. 

84 

These statistics are similar to those of mobile payment users, 

who instead of using cash or checks to complete transactions rely 

on mobile applications to do things such as pay a bill, send money 

to another individual, or complete a purchase. According to S&P 

Global Market Intelligence survey results, 63.7 percent of mobile 

payment users had an annual income of less than $75,000. 

85 


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1https://www.snl.com/web/client?auth=inherit#news/article?id=42127613&KPLT=6&sldata=si%3D2%26kpa%3D4db0879a-62d3-40e0-b6fd9e14f2ab7bee%26sa%3D 2https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/ 

2017/wp17-17.pdf 

In both cases, it is clear that lower income individuals have 

found mobile banking and payment technologies beneficial to their 

financial well being. 

Furthermore, increased access to term loans, as opposed to payday loans, can benefit the traditionally unbanked or underbanked. 

Digital lenders rely on mobile or web-based platforms and nontraditional underwriting models to deliver loans to consumers and 

small businesses that may otherwise be denied credit by traditional 

banks. Square Capital, for instance, sees 54 percent of loans go to 

women, compared to the 16 percent quoted by the Small Business 

Administration. 1

Digital lenders offer credit to borrowers based on advanced analytics, nontraditional underwriting, and alternative data. These 

platforms leverage quantitative models that look to create proprietary credit scores outside of those provided by models such as 

FICO or even Vantage scores. While some platforms use inputs 

from national credit reporting bureaus, they may also include alternative data or weight credit factors differently than more well 

known models. 

Alternative data presents the opportunity to gain a more holistic 

view of a borrower. For example, information such as utility or rent 

payments can be included in the underwriting decision. For low-income borrowers who may choose to rent housing and where utility 

bills may be a large monthly expense, these are important and likely more predictive factors when it comes to the ability to repay. 

According to a Federal Reserve research paper published in July 

2017, alternative data sources allowed borrowers with few or inaccurate credit records to access credit. 2 This report further reinforced that these borrowers were from areas that lacked access to 

credit due to low income levels or disproportionate branch closings. 

Q.2. Fintech companies are subject to anti-discrimination laws related to the services and products they provide. However, there are 

concerns that using new data and algorithms could result in a company unintentionally discriminating against a protected group. 

What steps are companies taking to ensure that their services and 

products do not discriminate against protected classes? 

A.2. The use of new data and algorithms primarily applies to providing credit to individuals in the digital lending space. These lenders have sought ways to provide credit to previously underserved 

individuals using alternative sets of data. As the industry has matured, there have been numerous cases where it was decided that 

some data sets could potentially discriminate against protected 

classes. For example, offering personal loans based on the college 

from which you graduated was largely considered a valid input for 

lenders years ago, but many have shifted away from this. Other inputs like social media usage were once considered but never ultimately made it into underwriting criteria due to similar concerns. 

Digital lenders have made great effort to ensure that underwriting algorithms are accurate and provide the best financial inVerDate Nov 24 2008 14:27 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\09-12 EXAMINING THE FINTECH LANDSCAPE\HEARING\91217.TXT
87 

3https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-first-no-action-letterupstart-network/ 1This answer was prepared by Jennifer Smith, Ryan H. Easley Research Fellow at the University of Maryland School of Law, after a request with initial guidance from Frank Pasquale, 

the witness. Professor Pasquale has reviewed the response and believes it to be a fully responsive response to the question. 2Press Release, Off. Comptroller of the Currency, Dept. of the Treasury, ‘‘OCC Issues Responsible Innovation Framework’’ (Oct, 26, 2016), https://www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016-135.html. 3Frank Pasquale, ‘‘Ending the Specialty Hospital Wars: A Plea for Pilot Program as Information-Forcing Regulatory Design’’, in The Fragmentation of U.S. Health Care: Causes and Solutions 235, 272 (Einer Elhauge, ed., 2010). 

clusion possible. In order to ensure that this continues, regulators 

should create a friendly environment for innovation. This could be 

through a regulatory sandbox or innovation office. The recent noaction letter from the CPFB to personal-focused digital lender Upstart is a good example of how regulators can better understand 

the space. 3

Many of the underwriting inputs used by fintech startups today 

are similar to those used by traditional lenders, but in cases where 

alternative data is used, it will be up to the lenders and regulators 

to closely monitor adherence to fair lending practices. 

Thank you again for the questions; I hope that our response has 

been useful. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM FRANK PASQUALE 

Q.1. Senator Crapo asked about regulatory sandboxes that would 

allow financial technology companies to experiment in real markets, and you mentioned some pilot programs have ‘‘proven their 

worth in health care policy.’’ Can you describe the types of pilot 

programs that have worked in other sectors; how such programs 

navigated conflicts between State and Federal law; and under what 

parameters or considerations a financial technology pilot program 

would need to operate in order to protect consumers and the marketplace? 

A.1. Pilot programs can be important tools for gathering data necessary to evaluate products and services in various sectors, such as 

the health care and financial sectors. 1 Regulators in these sectors 

need to understand more fully what technology firms are doing and 

how they are performing to ensure proper regulations are in place 

that safeguard individuals but do not stifle innovation; pilot programs can be a tool to do this. Effective pilot programs support ‘‘responsible innovation’’ and provide transparency of process necessary to expose any potential pitfalls or unanticipated issues. 2

Pilot programs are particularly important in gathering information from sectors that are not apt to be transparent with data. As 

in health care, where the average consumer does not have the information necessary to ‘‘ ‘second guess’ his or her [medical] provider 

about the amount or nature of care needed, 3’’ the average consumer does not know how his or her financial and personal data 

is being used, or what data is even being mined, in order to make 

informed decisions and protect his or her financial health. Due to 

this knowledge gap, consumers of both health care and financial 

services depend on regulations that are based on a thorough and 

thoughtful understanding of the industry being regulated. Pilot 

88 

4Scott Gottlieb, ‘‘FDA Announces New Steps To Empower Consumers and Advance Digital 

Healthcare’’, FDA Voice (July 27, 2017), https://blogs.fda.gov/fdavoice/index.php/2017/07/fdaannounces-new-steps-to-empower-consumers-and-advance-digital-healthcare/; Press Release, U.S. 

Food & Drug Admin, ‘‘FDA Selected Participants for New Digital Health Software 

Precertification Pilot Program’’ (Sept. 26, 2017), https://www.fda.gov/NewsEvents/Newsroom/ 

PressAnnouncements/ucm577480.htm. The nine companies selected are Apple, Fitbit, Johnson 

& Johnson, Pear Therapeutics, Phosphorus, Roche, Samsung, Tidepool, and Verily. Id. 5Digital Health Software Precertification (Precert) Program, U.S. Food & Drug Admin. (Sept. 

27, 2017), https://www.fda.gov/MedicalDevices/DigitalHealth/DigitalHealthPreCertProgram/ 

default.htm. 6 In a bundled payment model ‘‘a group of providers receives a fixed payment from participating health plans. The payment is designed to cover the average cost of a defined ‘bundle’ 

of services related to a procedure or course of treatment.’’ M. Susan Ridgely et al., ‘‘The IHA 

Bundled Episode Payment and Gainsharing Demonstration’’, AHRQ Delivery System Research: 

Study Snapshot 1 (AHRQ Pub. No. 15-0016-2-EF, 2015). 7M. Susan Ridgely et al., ‘‘The IHA Bundled Episode Payment and Gainsharing Demonstration’’, AHRQ Delivery System Research: Study Snapshot 2 (AHRQ Pub. No. 15-0016-2-EF, 

2015). 8M. Susan Ridgely et al., ‘‘The IHA Bundled Episode Payment and Gainsharing Demonstration’’, AHRQ Delivery System Research: Study Snapshot 2 (AHRQ Pub. No. 15-0016-2-EF, 

2015). 

programs can provide State and Federal regulators with the data 

and information necessary to formulate thorough and thoughtful 

regulations that do not stifle innovation and protect consumers. 

In the health care sector, pilot programs are used to promote innovation and test new models of patient care and service. Although 

the health care and financial industries have their own unique 

issues and obstacles, health care pilot programs provide lessons 

that can assist the development and implementation of fintech pilots. For a recent example, the Food and Drug Administration 

(FDA) announced the launch of the Pre-Cert for Software Pilot Program in July 2017 and in September announced the nine companies selected to take part in the pilot program. 4 One of the pilot 

program goals is to ‘‘enable [the FDA] to develop a tailored approach toward regulating [digital health] technology by looking 

first at the software developer and/or digital health technology developer, rather than primarily at the product, which is what [the 

FDA] currently [does] for more traditional medical devices. 5’’ Although this pilot program is in the beginning stages, the impetus, 

framework, and eventual outcomes may serve as guidance for developing pilot programs for fintech firms and regulators. 

An example of a completed health care pilot program that may 

provide guidance for fintech pilots is a program testing a bundled 

payment model for care. 6 This program was through the Agency 

for Healthcare Research and Quality (AHRQ) at the Department of 

Health and Human Services (HHS). Some of the takeaways that 

may inform the development and implementation of fintech pilot 

programs are: ensure the number of stakeholders and volume of 

participants are sufficient to provide good data; build consensus 

around key definitions and issues, such as assumption of risk; and 

build trust among participants. Additionally, the bundled payment 

model pilot program faced ‘‘delays and uncertainty related to State 

regulations.’’ 7 Specifically, California hospitals and health care 

plans participating in the pilot program worried physician payments through the bundled payment contracts would violate California regulations prohibiting the ‘‘corporate practice of medicine. 8’’ 

In response to this concern a model contract template was created 

and participants in California developed a split-bundle model. The 

‘‘development and successful deployment of a common contracting 

89 

9M. Susan Ridgely et al., ‘‘The IHA Bundled Episode Payment and Gainsharing Demonstration’’, AHRQ Delivery System Research: Study Snapshot 2 (AHRQ Pub. No. 15-0016-2-EF, 

2015). 10See Hong Kong Fintech, ‘‘Sandboxes’’, http://www.hongkong-fintech.hk/en/sandboxes.html 

(last visited Oct. 3, 2017); ‘‘Monetary Authority Singapore, Fintech Regulatory Sandbox’’, http:// 

www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/FinTech-RegulatorySandbox.aspx (last visited Oct. 3, 2017); Fin. Conduct Authority (U.K.), ‘‘Regulatory Sandbox’’, 

(last updated Aug. 8, 2017), https://www.fca.org.uk/firms/regulatory-sandbox. 11Stephanie Forshee, ‘‘OCC Has Banking Sandbox-like ‘Pilot’ for Fintechs in the Works’’, 

Law.com (Aug. 10, 2017), http://www.law.com/sites/almstaff/2017/08/10/occ-has-bankingsandbox-like-pilot-for-fintechs-in-the-works/?slreturn=20170902083457. See also Fin. Conduct 

Authority (U.K.), ‘‘Regulatory Sandbox’’, (last updated Aug. 8, 2017), https://www.fca.org.uk/ 

firms/regulatory-sandbox. 12Fin. Conduct Authority (U.K.), ‘‘Financial Conduct Authority Provides Update on Regulatory Sandbox’’ (June 15, 2017), https://www.fca.org.uk/news/press-releases/financial-conductauthority-provides-update-regulatory-sandbox. 13 Hong Kong Fintech, ‘‘Sandboxes’’, http://www.hongkong-fintech.hk/en/sandboxes.html (last 

visited Oct. 3, 2017). 14 Hong Kong Monetary Authority, ‘‘Fintech Supervisory Sandbox’’ (FSS) (Sept. 29, 2017), 

http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/fintech-supervisorysandbox.shtml. The Hong Kong Monetary Authority operates a Fintech supervisory sandbox for 

‘‘Fintech and other technology initiatives intended to be launched in Hong Kong by banks.’’ Id. 15Sec. & Futures Comm’n, ‘‘SFC Regulatory Sandbox’’ (Sept. 29, 2017), http://www.sfc.hk/ 

web/EN/sfc-fintech-contact-point/sfc-regulatory-sandbox.html. The Securities and Futures Commission operates a regulatory sandbox ‘‘to provide a confined regulatory environment for qualified firms.’’ Id. Qualified firms are ‘‘both licensed corporations and start-up firms that intend 

to carry on a regulated activity under the [Securities and Futures Ordinance].’’ Id. 16 Ins. Auth. (H.K.), ‘‘Insurtech Corner’’, https://www.ia.org.hk/en/aboutus/ 

insurtechlcorner.html (last visited Oct. 3, 2017). The Insurance Authority’s ‘‘Insurtech Sandbox’’ was created to ‘‘facilitate a pilot run of innovative Insurtech applications by authorized insurers to be applied in their business operations.’’ Id. 17Monetary Authority Sing., ‘‘Understanding and Applying to the Sandbox’’, http:// 

www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/FinTech-RegulatorySandbox/Understanding-and-applying-to-the-sandbox.aspx (last visited Oct. 3, 2017). See also 

‘‘Monetary Authority Sing., Fintech Regulatory Sandbox Guidelines’’ (Nov. 2016), http:// 

www.mas.gov.sg//media/Smart%20Financial%20Centre/Sandbox/ 

FinTech%20Regulatory%20Sandbox%20Guidelines.pdf. 

template that largely satisfied the contracting parties and State 

regulators’’ is cited as one of the programs’ successes. 9

In addition to examining domestic pilot programs in various sectors, it is informative to look at international regulatory sandbox 

and pilot programs. Internationally, regulatory sandboxes/pilot programs are utilized to promote innovation in fintech and develop 

regulations. 10 The United Kingdom’s Financial Conduct Authority 

(FCA) is often cited as a model for regulatory sandbox programs. 11

To date, the FCA has completed one cohort of testing, is in the 

process of testing for the second cohort, and is reviewing applications for inclusion in cohort three. 12 Hong Kong also utilizes supervisory sandboxes to ‘‘encourag[e] financial institutions to make use 

of Fintech and support[] initiatives that drive Fintech adoption and 

innovation. 13’’ Hong Kong’s supervisory sandboxes are run through 

three regulators: the Hong Kong Monetary Authority, 14 the Securities and Futures Commission, 15 and the Insurance Authority. 16

Additionally, the Monetary Authority of Singapore (MAS) supports 

regulatory sandboxes that ‘‘provide appropriate regulatory support 

by relaxing specific legal and regulatory requirements . . . for the 

duration of the sandbox. 17’’ 

In conclusion, pilot programs can be important tools for gathering data necessary to evaluate and refine fintech. Regulators 

need to understand how fintech firms operate and how they perform in order to properly regulate fintech and ensure innovation is 

supported and consumers are protected; pilot programs can support 

and advance responsible innovation. 

90 

1Fed. Deposit Ins. Corp., ‘‘2013 FDIC National Survey of Unbanked and Underbanked Households: Executive Summary’’ (2014), https://www.fdic.gov/?householdsurvey?/ 

2013??execsumm.pdf. 2This answer was prepared by Jennifer Smith, Ryan H. Easley Research Fellow at the University of Maryland School of Law, after a request with initial guidance from Frank Pasquale, 

the witness. Professor Pasquale has reviewed the response and believes it to be a fully responsive response to the question. 3 Rob Nichols, ‘‘BankThink: Bank or No Bank, Fintech Must Be Regulated’’, Am. Banker (Feb. 

18, 2016, 9:30 AM), https://www.americanbanker.com/opinion/bank-or-no-bank-fintech-mustbe-regulated. 4 A recent global survey on fintech adoption by EY found the global average of fintech adoption as 33 percent, up from 16 percent in 2015. EY, ‘‘EY Fintech Adoption Index 2017’’ 6 (2017). 5Fed. Deposit Ins. Corp., ‘‘2015 FDIC National Survey of Unbanked and Underbanked Households’’ 15–16 (Oct. 20, 2016). 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM FRANK PASQUALE 

Q.1. The Federal Deposit Insurance Corporation (FDIC) found that 

in 2013 nearly 30 percent of Americans households were 

‘‘unbanked’’ or ‘‘underbanked,’’ with the highest rates among nonAsian minorities, low income households, and unemployed households. 1 As new companies begin to market products and services 

to unbanked and underbanked households, what actions should 

Federal or State regulators pursue to ensure that consumers receive sufficient protections? 

A.1. Fintech can be a means of building financial inclusion, especially for those Americans currently unbanked or underbanked; but 

there must be proper protections to ensure consumers are protected 

and information is obtained and used in a secure manner and in 

a way that does not unintentionally discriminate. 2 Federal and 

State regulators need to ensure consumers are protected from technical and privacy issues we know about now, as well as those we 

have yet to encounter. In order to build consumer trust and ensure 

protections, Federal and State regulators can take a number of actions, including: addressing regulatory confusions; extending privacy protections in other areas of the law to cover consumer data 

compiled and used by data brokers and fintech firms; require data 

brokers register with the Federal Trade Commission (FTC); and 

empower and expand funding to Federal agencies like the Consumer Financial Protection Bureau (CFPB) and the Office of Financial Research (OFR). But State and Federal regulators should not 

rush to deregulate in order to spur innovation and, further, the 

Federal Government should not preempt State laws aimed at protecting consumers, especially the unbanked and underbanked. 

Consumers encounter confusion regarding regulations of the traditional banking sector and fintech sector. For example, Rob Nichols, president and chief executive of the American Banker Association stated: ‘‘consumers [] face potential confusion when dealing 

with two sectors that have differing regulatory regimes’’ and Nichols views this confusion as ‘‘leading to gaps in consumer protections.’’ 3 As more consumers use fintech services regulatory confusion is likely to grow. 4 Regulatory confusion may be particularly 

acute with the unbanked and underbanked, who are more likely to 

have lower levels of education than banked individuals. 5 Addressing regulatory confusion on the State and Federal level is necessary to ensure consumers are protected. 

Unbanked and underbanked individuals who may utilize fintech 

services instead of traditional banking services can benefit from exVerDate Nov 24 2008 14:27 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00094 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\09-12 EXAMINING THE FINTECH LANDSCAPE\HEARING\91217.TXT
91 

6 Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 

1936 (codified as amended in scattered sections of 18, 26, 29, and 42 U.S.C.). 7Fair Credit Reporting Act, 15 U.S.C. §1681 (1970). 8For a discussion of regulatory arbitrage and opaque business practices that sparked the 2008 

mortgage crisis, see Frank Pasquale, ‘‘The Black Box Society’’ (2015), specifically Chapters 4 and 

5. 9 ‘‘Exploring Special Purpose National Bank Charters for Fintech Companies’’, Off. Comptroller Currency (Dec. 2016). For comments to the OCC’s paper, see ‘‘Public Comments On Exploring Special Purpose National Bank Charters For Fintech Companies’’, Off. Comptroller Currency, https://www.occ.gov/topics/responsible-innovation/fintech-charter-comments.html (last 

visited Oct. 3, 2017). 10See Comment, ‘‘New Economy Project on Behalf of Signees, Re: Exploring Special Purpose 

National Bank Charters for Fintech Companies’’ (Jan. 13, 2017), https://www.occ.gov/topics/ 

responsible-innovation/comments/comment-new-economy-project-fintech-charters.pdf (comment 

letter from over 200 consumer, civil rights, and community groups opposing the proposed OCC 

nonbank lending charters, stating that ‘‘[s]tate laws often operate as the primary line of defense 

for consumers and small businesses’’ and they ‘‘have also seen costly payday lenders hide behind 

the costume of ‘fintech.’ ’’); Comment, ‘‘Am. For Fin. Reform, Re: Exploring Special Purpose National Bank Charters for Fintech Companies’’ (Jan. 15, 2017), https://www.occ.gov/topics/responsible-innovation/comments/comment-americans-for-financial-reform.pdf (comment letter 

‘‘urging the OCC to refrain from issuing charters to nondepository fintech lenders’’ and explaining a broad array of legal and policy issues that could arise); Comment, ‘‘Ctr. For Digital Democracy & U.S. Pub. Int. Res, Group, Re: Exploring Special Purpose National Bank Charters for 

Fintech Companies’’ (Jan. 15, 2017), https://www.occ.gov/topics/responsible-innovation/comments/comment-cdd-uspirg.pdf (comment letter opposing the proposed OCC nonbank lending 

charters, stating ‘‘lack of transparency around the processing of data and automated algorithms 

may lead to increasing information asymmetries between the financial institution and the individual and thus consumers are left with less awareness and a lack of understanding and control 

over important financial decisions.’’). 

tension of existing privacy protections. Specifically, the Health Insurance Portability and Accountability Act (HIPAA) 6 and the Fair 

Credit Reporting Act 7 can be modernized to apply to all companies 

that peddle sensitive personal information. For example, HIPAA 

protections do not govern health profiles compiled and traded by 

data brokers and fintech firms. Further, Congress should require 

data brokers to register with the FTC and allow individuals to request immediate notification once they have been placed on lists 

that contain sensitive data. In addition to expanding already existing regulations, Congress should empower and expand funding to 

Federal agencies, including the CFPB and the OFR, to ensure 

these agencies have the resources necessary to come to grips with 

a rapidly changing financial landscape. 

Fintech can be a means of opening up the financial industry to 

unbanked and underbanked consumers but Federal and State legislatures must be cautious about rushing to deregulate as a means 

of spurring innovation. Some fintech may promote competition and 

create new options for consumers, but it must be fair competition. 

Further, Federal authorities should not preempt State law meant 

to protect consumers. Although preemption may be aimed at ensuring financial inclusion and innovation, preemption of consumer protections can have disastrous unintended consequences, as we saw 

in the mortgage crisis of 2008. 8 For example, the Office of the 

Comptroller of the Currencys’ (OCC) proposed plan to charter 

fintech companies could have unintended consequences, such as enabling regulatory arbitrage around State restrictions on pay day 

lending. 9 Regulatory arbitrage around State restrictions could have 

negative impacts on the unbanked and underbanked individuals 

the OCC is attempting to open the financial industry to. 10

It is important to remember consumer protections build consumer trust. Consumer trust is an essential factor in encouraging 

the unbanked and underbanked to utilize financial services in general. For example, research by the FDIC reveals unbanked and 

92 

11Kristopher M. Rengert and Sherrie L.W. Rhine, Fed. Deposit Ins. Corp., ‘‘Bank Efforts To 

Serve Unbanked And Underbanked Consumers’’ (May 25, 2016), https://www.fdic.gov/consumers/community/research/qualitativeresearchlmay2016.pdf; Fed. Deposit Ins. Corp., ‘‘2015 

FDIC National Survey of Unbanked and Underbanked Households’’ (Oct. 20, 2016), https:// 

www.fdic.gov/householdsurvey/2015/2015report.pdf. According to the FDIC 2015 survey of 

unbanked and underbanked households, one in four unbanked households ‘‘do not trust banks’’ 

and ‘‘[l]ack of trust in banks was the second most frequently cited main reason for being 

unbanked.’’ Id. at 60. 12Mobil Financial Services, Consumer Fin. Protection Bureau (Nov. 2015), http:// 

files.consumerfinance.gov/f/201511lcfpblmobile-financial-services.pdf. 13This answer was prepared by Jennifer Smith, Ryan H. Easley Research Fellow at the University of Maryland School of Law, after a request with initial guidance from Frank Pasquale, 

the witness. Professor Pasquale has reviewed the response and believes it to be a fully responsive response to the question. 14Mikella Hurley and Julius Adebayo, ‘‘Credit Scoring in the Era of Big Data’’, 18 Yale J.L. 

& Tech. 148, 149 (2017). This article is the result of collaboration among lawyers and data scientists on the issues of big data’s use in credit scoring. 

underbanked households have limited trust or a complete lack of 

trust in the banking industry, which influences how and if they utilize banking or other financial services. 11 Additionally, ‘‘concern 

over security—real or perceived—is one of the most significant barriers to [mobile financial services] adoption for consumers.’’ 12 Deregulation, even if it is done with the goal of innovation and inclusion, can lead to unintended consequences that weaken trust in the 

financial system and eventually lead to more unbanked and underbanked Americans. 

In conclusion, fintech can help build financial inclusion, especially for the unbanked and underbanked; but there must be proper 

protections to build and sustain consumer trust and ensure consumers are protected. Diminishing regulatory confusion, extending 

existing privacy protections, and providing resources to agencies to 

keep abreast of the evolving financial sector are all ways Federal 

and State regulators can help protect the unbanked and underbanked and build consumer trust. But regulators should not rush 

to deregulate to spur innovation, nor should Federal regulators preempt State laws aimed at protecting consumers, especially the 

unbanked and underbanked. 

Q.2. Are you concerned that fintech companies’ use of new data 

and algorithms could result in unintentional discrimination against 

protected classes under Federal anti-discrimination laws? If so, 

should Congress or Federal regulators consider legislation or regulatory guidance to ensure compliance? 

A.2. The breadth and scope of data being accumulated and used by 

companies to determine broad aspects of a person’s life is expanding, often without consumers’ knowledge. 13 Further, algorithms 

utilizing this data are opaque and consumers cannot easily determine the types of data being used or if the data is correct. The 

opaque process coupled with more varied datasets has the potential 

to produce ‘‘discriminatory scoring.’’ 14 The potential for discriminatory results is especially troublesome in the fintech industry, where 

discrimination, even if unintended, can have far reaching financial 

implications. 

Fintech companies’ use of new and nontraditional data and algorithms could result in unintentional discrimination against protected classes under Federal anti-discrimination laws. A firm’s best 

intentions to abide by fair lending, nondiscriminatory practices 

may be usurped by machine learning systems that use neutral data 

93 

15Mikella Hurley and Julius Adebayo, ‘‘Credit Scoring in the Era of Big Data’’, 18 Yale J.L. 

& Tech. 148, 190 (2017). 16Penny Crosman, ‘‘Is AI a Threat to Fair Lending?’’, Am. Banker (Sept. 7, 2017, 4:21 PM), 

https://www.americanbanker.com/news/is-artificial-intelligence-a-threat-to-fair-lending. 17 ‘‘Case Study: Fintech and the Financial Exploitation of Customer Data’’, Privacy Int’l (Aug. 

30, 2017), https://www.privacyinternational.org/node/1499. See also Bethy Hardeman, 

‘‘Lenddo’s Social Credit Score: How Who You Know Might Affect Your Next Loan’’, Huffpost 

(June 15, 2012, 9:30 AM), http://www.huffingtonpost.com/bethy-hardeman/lenddos-social-credit-scolbl1598026.html (describing Lenddo’s use of a person’s ‘‘Trusted Network’’ and an algorithm ‘‘to measure truthfulness, behavioral and demographic clues’’ to determine if a person 

qualifies for a loan). 18 ‘‘Case Study: Fintech and the Financial Exploitation of Customer Data’’, Privacy Int’l (Aug. 

30, 2017), https://www.privacyinternational.org/node/1499. See also Jeff John Roberts, ‘‘Bad 

Credit Is a Bonanza for Online Lender, But Critics Cry Foul’’, Fortune (July 9, 2015), http:// 

fortune.com/2015/07/09/elevate-online-loans/ (describing Elevate’s tool, Rise, which uses a person’s FICO score and nontraditional data, such as if ‘‘someone appears too hasty to fill out the 

loan form,’’ to assess creditworthiness). 19 ‘‘Case Study: Fintech and the Financial Exploitation of Customer Data’’, Privacy Int’l (Aug. 

30, 2017), https://www.privacyinternational.org/node/1499. See also Mugdha Variyar and J. 

Vignesh, ‘‘The New Lending Game, Post-Demonetisation’’, Econ. Times: Tech. (Jan. 6, 2017, 3:05 

PM), http://tech.economictimes.indiatimes.com/news/technology/the-new-lending-game-postdemonetisation/56367457 (quoting a lending platform’s founder as stating ‘‘[i]f someone is politically active and engages in political campaigns, which are visible through their social media profiles, it is not a good sign.’’). 20Mikella Hurley and Julius Adebayo, ‘‘Credit Scoring in the Era of Big Data’’, 18 Yale J.L. 

& Tech. 148, 177 (2017). 21See Megan Rose Dickey, ‘‘Algorithmic Accountability’’, Techcrunch (Apr. 30, 2017), https:// 

techcrunch.com/2017/04/30/algorithmic-accountability/; 

but ‘‘treat them as proxies for immutable or sensitive characteristics,’’ such as gender, race, or socioeconomic status. 15 For example, 

Penny Crosman, Editor at Large at American Banker, recently 

wrote about the potential threats to fair lending by machine learning systems and artificial intelligence, stating ‘‘a system that considers college data could start recognizing that graduates of a particular school are a good credit risk, and those students may be 

from mostly privileged socioeconomic backgrounds.’’ 16 Further, Privacy International recently reported on types of nontraditional data 

being used to determine creditworthiness, which many consumers 

may not realize is being accumulated, including people’s networks 

on social media, 17 the manner in which a person fills out an online 

form, 18 and if a person posts about political issues on social 

media. 19 As Mikella Hurley and Julius Adebayo acknowledge an 

‘‘overabundance of data points . . . may lead to increased accuracy 

in the modeling, [but] it can also increase the incidence of spurious 

correlations.’’ 20

Congress and regulators need to understand the types of data 

being used by fintech firms as well as how the data is being used. 

Knowledge of what fintech firms are doing is very important, especially relating to data collection, data use, and security and privacy. Based on this knowledge Congress and regulators should develop guidance and/or legislation to ensure suspect sources of data 

are not influencing fintech firms’ decisions in discriminatory ways. 

Machine learning and predictive analytics are not too complex to 

regulate. Regulations should make firms more accountable. Specifically, firms should have ‘‘algorithmic accountability,’’ meaning 

firms are transparent with what data is being used and how algorithms use the data. 21 Further, although a computational process 

may be complex, regulators can demand to know what datasets are 

used in the process. 

Existing privacy protections in other areas of the law can and 

should be extended to cover the consumer data now fueling fintech 

94 

22 Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 

1936 (codified as amended in scattered sections of 18, 26, 29, and 42 U.S.C.). 23Fair Credit Reporting Act, 15 U.S.C. §1681 (1970). 24See ‘‘Fed. Trade Comm’n, Data Brokers: A Call For Transparency And Accountability’’ 14 

(May 2014). 25 ‘‘Fed. Trade Comm’n, Data Brokers: A Call For Transparency And Accountability’’ viii (May 

2014). 26Solon Barocas and Andrew D. Selbst, ‘‘Big Data’s Disparate Impact’’, 104 Cal. L. Rev. 671, 

676 (2016). 

underwriting. Specifically, the Health Insurance Portability and 

Accountability Act (HIPAA) 22 and the Fair Credit Reporting Act 23

can be modernized to apply to all companies that peddle sensitive 

personal information. For example, currently, HIPAA protections 

do not govern health profiles compiled and traded by data brokers 

and fintech firms. A data broker could obtain information concerning a consumer’s health related purchases, such as diabetic 

testing strips, pregnancy tests, or medications. 24 This data could 

create ‘‘inferences about sensitive consumer preferences and characteristics.’’ 25

Congress should require data brokers to register with the Federal Trade Commission and allow individuals to request immediate 

notification once they have been placed on lists that contain sensitive data. Regulations can help make consumers aware of the 

vast information landscape their data is being brokered and used 

in and the potential for unintentional discrimination based on this 

data. Further, consumers should have the ability to challenge and 

amend incorrect data. The right to be notified about the use of 

one’s data and the right to challenge and correct data errors is fundamental. 

In addition to the above, Congress and Federal regulators should 

empower and expand funding to Federal agencies like the Consumer Financial Protection Bureau (CFPB) and the Office of Financial Research (OFR). These agencies require the resources necessary to come to grips with a rapidly changing financial landscape. Empowering and expanding funding will allow the CFPB 

and OFR to develop and implement strategies to ensure compliance 

with Federal anti-discrimination laws and consumer protections. 

In conclusion, Fintech companies’ use of new and nontraditional 

data and algorithms could result in unintentional discrimination 

against protected classes under Federal anti-discrimination laws. 

Use of expanding and varied datasets and new algorithms can be 

beneficial and may ‘‘force[] decisions onto a more reliable empirical 

foundation by formalizing decision-making processes, thus limiting 

the opportunity for individual bias to affect important assessments.’’ 26 But there is also the real potential for unintentional discrimination. Congress and Federal regulators need to understand 

the types of data being used by fintech firms as well as how the 

data is being used in order to determine appropriate regulations 

that will protect consumers from inappropriate and inadvertent 

discrimination. 

95 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY 

BANKERS OF AMERICA 

96 


~ hlifll'l•l\111'\'1' \II\ 

l'o\\1\t ~' '\\II 1-:1• \ 

inappropriate commingling of banking and commerce," it is unclear whether this prohibition would extend to the 

owners or afllliates of the fintech company in the same way that the Bank Holding Company Act restricts the 

commercial activities of a bank holding company. Allo111ng corporate conglomerates like Google to own banks 

\1olates the U.S. policy of maiotaining the separation of banking and commerce, jeopardizes the impartial allocation 

of edi~ creates conflicts of interes~ and unwisely extends the federal safety net to commercial interests. If the OCC 

truly wants to separate banking and commerce, the agency should issue a rule that states that any special purpose 

national bank charter and/or its owners or affiliates will be subject to the same restrictions as those that apply under 

the Bank Holding Company Act. 

ICBA supports the development of a fintech regulatory framework that is no less stringent than that which applies to 

insured depository institutions. TheOCC should publish transparent capital and liquidity requirements for these firms 

that specifically address minimum levels considered appropriate for a fimech firm to be well capitalized. Fintech 

capital and liquidity requirements will be no Jess rigorous than those that apply to insured depository institutions. 

Such a framework would promote a fair regulatory system, protect consumers, maintain the separation of banking 

and commerce, and support safety and soundness at these companies. 

AJJy lintech charter should have statutory authority 

ICBA believes that the OCC should have specific legal authority from Congress before taking a step that could 

fundamentally change the financial market place, put safety and soundness at risk, and jeopardize consumers. 

Furthermore, the OCC should issue rules, subject to notice and com men~ which would prescribe the scope and 

requirements of the new special purpose national bank charter. 

Historittlty, limited purpose charters have evolved far beyond their original purpose and intent 

The industrial loan company charter should provide a cautionary example for financial regulators. Special purpose 

bank charters have the potential to evolve beyond their original purpose and intent and end up having all of the 

advantages and benefits of a full-service bank charter with limited supervision and regulation. 

Oosing 

Thank you again for convening today's hearing. lCBA hopes that Congress will exercise thoughtful oversight of the 

emergence of fintech and its implications for consume11i, businesses, and the broader economy. We are pleased to 

have the opportunity to offer the community bank perspective and look forward to working with this Committee as 

consideration of this important issue unfolds. 

www icba erg/advocacy 2 
97 

LETTER SUBMITTED BY THE ELECTRONIC PRIVACY INFORMATION 

CENTER 


epic.org 

September II, 2017 

Electronic Privacy l"nformatlon Center 

1718 Conntctlcut Avenue HW. Suite 200 

WiShll18tOn, DC 20009, USA 

The Honorable Michael Crapo, Chairman 

The Honorable Sherrod Brown, Ranking Member 

U.S. Senate Committee on Banking, Housing, & Urban Affairs 

534 Dirben Senate Office Building 

Washington, DC 20510 

Dear Chairman Crapo and Ranking Member Brown: 

I. +1 202 4831140 

.,_ +1 202 483 1248 

'I OfPICPrlvacy 

e https~/epic.org 

We write to you regarding the upcoming hearing on "Examining the Fintech 

Landscape. "

1 The financial sentices indusby is one of many indiiStries that are rapidly changing 

due to new technologies. While financial technology ("fintech") can bring financial services to 

consumers in new and innovative ways, it also presents substantial privacy and safety concerns. 

The recent breach of 143 million consumer records maintained by Equifax - containing the most 

sensitive personal data - is a starlc reminder of the ongoing risks to Americans consumers and the 

nation's economic security.

2 

The Elecrronic Privacy Information Center ("EPIC") was founded in 1994to fOCIIs 

attention on emerging privacy and related human rights issues, and to protect privacy, the First 

Amendmen~ and constitutional values. EPIC has long advocato.l for cybersecurity safeguards 

for consumer information held by financial and commercial orgwizations. EPIC has played a 

leading role in developing the authority of the .FTC to address emerging privacy issues and to 

safeguard the privacy rights of consumers. EPIC has previously testified before Congress on the 

need for financial institutions and companies to protect consumers against data breaches.

3 

1 Examining !he Fintech Landscape. liS" Con g. (20 17), S. Comm. on Banking, Housing, & 

Urban Affairs, Di~>rupter Series: Jmprovilrg Cotlli11mer :S FilliiiiCK!l Options With Fin Tech, 115" 

Con g. (20 17), hnps://www.banking.senate.gov/pubficimdex.cfm'bearings?ID=E 1121351-E71 E4016-B 171-35C22052CF75. 2 EPIC, "143 Million US Consumers Suffer Massive Data Breach, E!]uifa.x at Fault" 

https:l/epic.Oig/2017/(1)/143-million-us-consumers-suffe.html 3 See, e.g., Testimony and Siatement for the Record of Marc Rorenberg, Exeattive Director, 

Electronic Privacy Information Center on "Cybersecurity and Data Prolection in the Financial 

Sector," Before the Senate Committee on Banking, Housing, and Urban Affairs, June 21, 20 II, 

https:l/epic.O!Wprivacy/testimony/EP!C _Senate_ Banking_ T estimony%20 _ 6 _21_11 .pdf; 

Testimony and Statement for the Record of Marc Rotenberg, Executive Director, Electronic 

Privacy Information Center, Hearing on the Discussion Draft ofH.R. __. A Bill to Require 

Greater Protection for Sensitive Consumer Data and Timely Notification in Case of Breach, 

Before the House Committee on Energy and Commerce Subcommittee on Commerce, 

Manufacturing, and Trade, June 15, 2011, 

hnp://epic.org!privacyltestimony!EPIC Testimonv House Commerce 6-11 Final pdf: EPIC 

EPIC Statement to U.S. ~nate Ex3lltining the Fintech Landscape 

Committee on Banking, Housing, & Urban Affairs September II, 2017 

Defend Priv acy . Support EPIC. 
98 


Fintech has transformed the financial services industry and, in some instances, has 

improved consumer access to financial services. However, privacy and security is now a primary 

concern for financial services. As this Committee examines tintech, there are several security 

issues that should be considered. 

Some fintech companies use unoonventional methods to determine who to approve or 

reject for loans. While traditional loan determinations are made based on familiar factors such as 

salary and assets, many frnancial services companies now include other sources, such as social 

media, to make determinations about consumers.• Furthermore, the Committee should be 

concerned about algorithms that are used to determine if an individual qualifies for a loan.s Any 

algorithms used to make such determinations should be transparent in order to ensure consumer 

fairness, especially if they rely on non-traditional factors. 

Security should also be a priority. The serious threat that hacks and data breaches pose to 

the oonsumer information held by financial institutions cannot be overstated.' Fintech and all 

companies in the financial services industry should be subject to strict privacy rules to protect 

consumers. Current rules and regulations for financial services companies should be revised so 

that they are mandatory, not merely guidance, and require consumers to be informed in the event 

of a data breach.1 

Finally, the Committee should inquire into how fintech companies deal with lending 

money to individuals whose credit scores or financial situations would lead them to be denied by 

loans from traditional lenders. There is already ample evidence that individuals who may be 

struggling financially are frequently exploited by predatory lenders.

8 As technology has 

Statement to the U.S. House Committee on Energy & Commerce, lmprovi11g Consumer's 

Financial Options With Fi11Tech, Jun. 9, 2017, https:J/epic.orgltesrimony/oongressiEPIC-HECFinTech-Jun2017.pdf 4 Elizabeth McGinn et al., Consumer Pril'(lcy Should Be Top-Of-Mind For Fin Tech Firms To 

AI'Oid Scrutiny, Bloomberg, May 8, 2017, httpsJ/www.bna.com/consumer-privacy-topofmind· 

n73014450574/. 

s Algorithmic Transparency: &Ill Secret Profiling, EPIC, bttps:l/epic.org/algorithmiclransparency/. 6 Portia Crowe, JPMorgan Fell Victim to the lArgest 7heft of Consumer Data from a Financial 

Institution in US History, Business Insider, Nov. 10,2015, 

httpj/www.businessinsider.comlj pmorgan-hacked-bank-breach-20 15-11; Greg Masters, 

Disco1-er FitKDicia/ Services Reports Two Breaches to CalijomiaAG, SC Media, Mar. 2016, 

https:llwww.scmagazine.com/discnver-financial-services-reports-two-breaches-to-califomiaag/arricle/529021/. 7 FiiKDICiallnstitutions and Customer Information: Complying with the Safeguards Rule, Federal 

Trade Commission, Apr. 2006, httpsJ/www.ftc.gov/tips-advicelbusiness. 

center/guidanceifinancial-insritutions-customer-information-complying. 8 Richard D. Ralls, Payday Le111iing Traps f.n.v·lncome Families In Tragic Cycle OJ Debt, 

Kansas City Star, Aug. 2, 2016, bttp:Jiwww.kansascity.com/opinion/readers-opinioolguestcommentary/arricle93346342.html; Paul Kiel, 7he 181 Perce/11 Loan: How Installment Lenders 

EPIC Statement to U.S. Senate 2 

Committee on Banking, Housing & Urban Affairs 

Examining the Fintech Landscape 

September 11 , 2017 
99 


advanced, lenders lake exlreme steps to obtain payment and added fees, For example, a 

complaint tiled by EPIC with the CFBP focused on the use of"starter interrupt devices" that 

allow auto lenders to disable a vehicle when a payment is past due. This practice 

disproportionately affects low-income borrowers.' 

We ask that this letter from EPIC be entered in the hearing record. 

EPIC lonks forward to working with the Subcommittee to ensure that necessary privacy 

and security standards are developed to safeguard consumers. 

Sincerely, 

Is/ J.1arc 'Rotm6erg 

Marc Rotenberg 

EPIC President 

fs/ Caitriona. ritzgera(t[ 

C1itriona Fitzgerald 

EPIC Policy Director 

fsl Xim J.1 iffer 

Kim Miller 

EPIC Policy Fellow 

Put Borrfftl'ers in a World of Hurt, Pro Publica, May 13,2013, 

https://www.propublica.org(articlelinstallment-loans-world-finance. 9 Complain~ Request for Investigation, Injunction, and Other Relief Submitted by The Electronic 

Privacy Information Center (uEPIC") to the Consumer Financial Protection Bureau (CFPB), In 

the Matter ofCAG Acaptance, UC. and Gordon Howard Associates, Inc., d!Wal Pass Time 

USA (Mar. IS, 2017), https://epic.org(privacyfcfpb/EPIC-CFPB-SID-Complaintpdf. 

EPIC Statement to U.S. Senate 

Committee on Banking, Housing & Urban Affairs 

Examining the Fintech Landscape 

September II, 20 I 7 
100 

LETTER SUBMITTED BY THE MILKEN INSTITUTE CENTER FOR 

FINANCIAL MARKETS 


MILKEN INSTITUTE 

CENTER fOR fiNAWCill llRK£TS 

September 12, 2ll17 

The Honorable Mike Crapo 

Olairman 

Coolmittee on Banking. Housing. and Urban Affairs 

United States Senate 

Washington, DC 2llS10 

The Honorable Sherrod Btown 

Ranklt~g Member 

Coolmittee on Banking. Housing. and Urban Affairs 

United States Senate 

Washington, DC 2llS10 

Dear Olairman Crapo and Ranking Member Btown, 

On behaK of the Millten Institute Center for financial Markets, we appreciate the opportunity to 

contribute to the Coolmittee's hearit~g on •wminirc the FinTedllardscape. • 

Advancements in technolorf,lnciudirc the prolrreration and use of mobae phones and the internet, 

coupled with biD ions of dollars in venture capital investment, have propelled the growth offinanc:ial 

tecllnology (Fin Tech) firms across the globe./U the same time, digital platforms levera&itl& the Internet 

of finanre are challenging underlyirc precepts of existing regulatory approaclles, requiring fresh thinking 

in how regulation can best foster the responsible development of Fin Tech. T oday's hearirc can help 

provide insight into the magnitude and velocity of dlange in financial markets being driven by Fin T edt 

Below the Institute has provided insights and considerations within tl.e evolving Fin Tech landscape 

based on our years of -k (see Appendix) and would be honored to discuss these and other Fin Tech 

developments as the Committee continues to examine this space. 

The Evo!y!nc flnTtd! Landsqpe: Insights and Considerations 

• Defining "Finedl•. There is no standard definition of fonT eel> and given the ever·expanding number 

of sub·verticals underneath the more generic, umbrena term, it makes it difficuh to pinpoint exactly 

what policymakers, regulators, and even industry stakeholders rt>!an when they refer to "f11 Tech". 

FinT ech has evolved beyond payments, lending. and virtual curretdes to the blockdlain, artifiCial 

lntelligence,lnsurTedl, Regtech, and more. 

• FinTech's Role as a Catalyst for Olarce. There has always been imovatlon In the financial se.vices 

space. tt can be argued that Fin Tech is merely another period of innovation, but it can also be 

argued that this period of innovation is different for the followircreasons: 

o Innovation and Adoplion. The ftnandal services ecosystem is increasingly turning m«e 

disital with the entrance of advanced technologies, tedlrologists, and computer/data 
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m MILKEN INSTITUTE 

CENTER FOR FINANCIALIIARKETS 

scientists to the field of finance. Current platfonns, largely bui~ outside of traditional 

incumbents and networks, are able offer the end user a more effident experience where 

products and seM::es can be more tailored to the individual user in a timely manner across 

multiple platforms (mobile devices and the internet). 

o Disintermediation. Fin Tech platfonns are increasingly presenting dlallenges to tradftional 

intermediaries, or gatelceepers, that regulators have relied on (and regulated) for more than 

a century. The ability to bypa~ such intermediarie$ continues to pose dlailenges to 

regulators on how to appropriately regulate these new actors. 

o Conve~~ence. Fin Tech platforms are increasingly breaking down financial silos and operating 

aero~ multiple verticals to oompete for customers. Advancements in data collection and 

analysis ha¥1! allowed platforms like Square and PayPal to move beyond focusing solely on 

payments and into lending, for instance. Policymaking and regulatory guidance and rules 

will increasingly ha¥1! to focus on the activities the entity is engaged in rather than the entity 

ftseH. 

o (Low) Barriers to Entry. The cost of launching a dig~al platfonm has fallen considerably over 

the last 20 years from $5 million in initial inYI!stment to start operations to less tha.n $5,000 

by 2011.

1 These platfonm.s don't rely on the brick-and-mortar approach to attracting 

customers and are able to offer finandal services and products over the internet. 

o Borderlm Platforms. Fin Tech platfonms aren't bound by certain geographies or borders 

and are capable of reaching customers aero~ borders or globally in quick fashion. The 

internet of finance raises serious questions concerning federalism and international 

coordination. For example, global regulatory bodies ha¥1! commented In the past of their 

concerns as it relates to safety and soundness due to the speed and proliferation of digital 

platfonms. In addition, the battle continues OYI!r state preemption in the U.S. w~ the U.S. 

Ofrtce of the Comptroller of the Currency's recent effort to charter certain Fin Tech 

platfonms,' and the Conference of the State Bank Supervisors effort to streamline current 

state-by-state licensing requirements lor Fin Tech firms.• 

o Dernocratftation of Opportun~. Increased connectivity, deaeased transaction costs, and 

the ability for unaccred~ed in~ors to partake in investment offerings offers users w~ 

greater acce~ to financial services and products, but, at the same time, increases the 

potential for consumer and inYI!stor hanm. This puts increased pressure on regulators to 

prevent/weed out bad actors, while at the same time ensuring that there is an appropriate 

balance between innovation and protection. 

• Venture ()pita! Investment. In 2014, global investment in finT ech ventures surpassed $12 bUiionnearly three times the level of global inYI!stment from a year prior.• A year later, Fin Tech inYI!stment 

hit $46.7 bdlion. Ho~vever, at the end of 2016, global investment fell back to $25 billion.' Payments 

and online finance platforms continue to receive the majority of investment, but those spaces are 

increasingly becoming saturated, leaving VCs to search for other opportun~ies. nsurTech, Reg Tech, 

SANTA IIONICA I 1'01.511 NGTCN I lONOOI I S NGAPORE 
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m MILKEN INSTITUTE 

CENTER FOR FINANCIALIIARKETS 

and artificial intelligenre are amooe some of the other sub-sectors of Fin Tech where VC interest and 

investment is increasing. 

• Collaboration and Competition with Traditional Financial Institutions. In 2010, roughly 60 percent 

of investment went to competitive Fin T echs, meaning dig~al platforms competing against 

trad~ional incumbents. Sinre then, however, the tables have turned. Roughly 60 percent of 

investment wentto collaborative Fin T echs in 2015 and that figure is likely higher as FinT echs are 

increasingly likely to collaborate more with incumbent financial institutions.• So much so, that the 

Federal Deposit lnsuranre Corporation and the OCC have issued recent guidanre related to third 

party partnerships and risk management guidance. 

• Domestic Growth. There are more "tech• hotspots in the U.S. than just Silicon Valley, though most 

of the venture capital investment activity is stJll concentrated in that area. New York (Silicon Alley) 

often rivals, and is incneasingly challenging. Silicon Valley every financial quarterfor Fin Tech 

investment The City of Atlanta, known as •transaction alley', launcfled the first transatlantic 

payments initiative with the City of london back in February, .. whicll is a hotbed for payments 

platforms, with the T ethnology Association of Georgia and Invest Atlanta contributing in efforts to 

further develop the city's RnTech scene.•Other areas of the U.S. Include Silicon Slopes (Utah) and 

Silicon Prairie (Te~, Nebraska, Iowa, and Illinois, among other states) regions. 

• International Growth. Silicon VaUey is one of the 44 global Fin Tech hubs located around the world ~ 

Within the last year, the number of Fin Tech hubs has doubled globally from the 20 that were 

profiled in 2016' to 44 currently. The hubs a.re assessed based on a number of indicators including: 

government support, innovation culture, proximity to expertise, proximity to customers, foreign 

startups, and regulation. 

• Regulatory Developments. U.S. regulatory authorities and agencies have been involved in 

responding to the recent spate of innovation in the financial services system since 2008, when the 

U.S. Securities and Exchange Commission opted to regulate the peer-to-peer lending space,• which 

led to lending dub and Prosper registering their offerings as securities. In 2014, the Internal 

Revenue Service issued guidanre on the tax treatment of virtual currencies." Regulatory and agency 

actions on Fin Tech accelerated in 2015 with the U.S. Treasury Department issuance of a request for 

information on marketplace lending'" (and final report"'), the OCC's interest in special purpose 

national charters for Fin Tech firms,"' the CFPB's interest in explonns alternative data for the 

purposes of enhancing credit access"', and the Securities and Exchange Commission's recent 

guidance on initial coin offerings"'. Over the last two years, there has been an increase in the 

number of actions taken by regulators against Fin Tech firms (or firms using innovatiw methods to 

market products), induding lendUp, .. Dwolla,* and Ascenergy.a Regulators have also been 

proactive in holding a number of Fin Tech-focused forums and open meetings, and in establishing 

innovation-focused offices, working groups, and initiatives to provide firms (incumbent and startup) 

offering innovative products and services with guidanre and the opportunity to meet with agency 

representatives. 

SANTA IIONICA I 1'01.51! NG1CN I lONOOI I S NGAPORE 
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m MILKEN INSTITUTE 

CENTER FOR FINANCIALIIARKETS 

For this letter, the foaJs has been on U.S. developments as they pertain to Fin Tech. However, the 

Institute would note that competition for Fin Tech finms is increasing and countries around the world are 

making concerted efforts to attract fin Tech invel1ment and finms, as well as to develop conducive 

regulataty and policy erosystems supportive of firms offering innovative fmancial services and products 

(bllsiness to consumer and bu.siness to business). 

As the Committee continues to examine the Fin Tech landscape in subsequent hearings, the Institute 

encourages to also focus on the impact of Fin Tech on the end user. The effect these technologies have 

on the end user is often overlooked in public disoourse on FinTech.ln a 2016 study,"' Professor Thomas 

Philippon found that the unit cost of financial intermediation In the u.s. has remained around 2 percent 

over the past 130 years. In other words, 'improvements in information tech.nologies have not been 

passed through to the end users of finandal services.• Wiii ' FinTech' prove differently? 

The Milken lnstitllte appredates the opportunity to comment on the Fin Tech landscape and looks 

forward to working with the committee on FinTechofelated matters going forward. 

Sincerely, 

Jackson Mueller 

Associate Director, Fin Tech Program 

Mftken Institute Center for Financial Markets 

Washington, DC 

SANTA IIONICA I 1'01.51! NGTCN I lONOOI I S NGAPORE 
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m MILKEN INSTITUTE 

CENTER FOR FINANCIALIIARKETS 

APPfNDIX 

Reports/Testimony 

• Fin Tech: Considerations on How to Enable a 21st Centurv Financial Se<vices Ecosystem (August 

3, 2017) 

• FinRes21: Modernizing Financial Resulation for tile 21st Century (March 24, 2017) 

• leavi!J![ Transferred Money on the Table: Will Remittance.Unked Financial Products Add Value 

to Developml!ilt Financing? (March 6, 2017) 

• The U.S. Online. Non-Bank Finance landscape (June 13, 2016) 

• Millennials: Who Thev Are and Their lmoacl on the Financial Services Industry (May 13, 2016) 

• Fin Tech: Who Regulates~ and Whv It Matters. (May 11, 2016) 

California Summ~ Review: An Action Plan fpr Growth and Innovation. (March 23, 2016) 

• Access to Capital: How Small and Mid·size Businesses are Funding Their Future. (May 11, 2015) 

• FinTech:Voews from tlleMarfcet. (April28, 2015) 

Disruptive Technology and Securities Regulation. (January 12, 2015) 

• Fin Tech: Bu~d ng a 21st<enturyRegulator'sToollli. (October 21, 2014) 

• SECS Crowdfunding Prooosal: Will It Work for Small Businesses? (January 15, 2014) 

Comment ~.etters 

• Comment letter to the CfPB: Alternative Data and Modeling T echnigues in the Credit Process 

(May 19, 2017) 

• Comment Letter to the OCC: Ucensill8 Manual Draft Supplement on Evaluating Olarter 

Applications from Fin Tech Companies (April10, 2017) 

• Comment Letter to the OCC: Special Puroose National Bank Charters fpr Fin Tech Companies 

(January15, 2017) 

• Comments on the U.S. Federal Deoosit Insurance Corporation prooosed tllird-partv lender 

guidance (October 27, 2016) 

• Comments on the U.S. Office of the Comptroller of the Currl!ilcy White Paoer on Resoonsible 

Innovation (May 31, 2016) 

• Comments on the U.S. Securities and Exchange Commission ProPOSed Rule Amendments to 

Facilitate Interstate and Resional Securities Offerings: File No.: S7·22-1S (January 11, 2016) 

• Comments on the U.S. Oeoartment of the Treasury Request lOt Public Input on Exoanding Access 

to Credit Through Online Marketplace lending: Docket No.: TREAS-00·2015.0007.0001 

(September 28, 2015) 

• letter regarding RAISE Act to House Financial Services Committee. (June 12, 2015) 

• Comments on Prooosed Changes to Exchange Act Registration Requirements under Titles V and 

VI of the JOBS Act. File No. 57-12-14. (Match 2, 2015) 

• Comments on Prooosed No-Action letter (NALI Policy: Bureau of Consumer Financial Protection: 

Docket No.: CFPB-2014.0025. (December 15, 2014) 

Comments on ProPOSed Ru~ Amendments to Regulation A: Securities and Exchange 

Commission: File No. 57·11-13. (March 19, 2014) 

• Comments on Prooosed Regulation Crowdfunding: Securities and Exchange Commission; file No. 

57-0913. (February 3, 2014) 

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Op-fds 

• 'What Critics of fintedlllC Bid> Aren't Savin( American Banker {September 11, 2017) 

• Fin Tech: Can it be a real tool to bu~d meaningful ~ves? linkedln (May 2, 2017) 

• 'The big busine» of small business: Fostering a digital lending reV<Jiution' BAI Banking Strategies 

(March 29, 2017) 

• 'Enoogh with D.C.'s Mixed Messaging on Fintech' American Banker (September 16, 2016) 

• 'Can Bitcoin Technology Solve the Migrant Crisis?' The Wall Street Journal (June 8, 2016) 

• 'Why a Commission for CFPB Mav Be in Mencv's Best Interest' American Banker (No~ber 16, 

2015) 

• 'Congress Should Act to Preserve Financial Innovation' Roll Call (September 1, 2015) 

'Don~ let Outdated Laws Shadde Credit Innovation,' American Banker (July 28, 2015) 

• ' Americans Stlnd (lfl the Cusp of a Money Revolution,' Real Clear Markets (May 19, 2015) 

• 'Millennials: A New Approach to Handling Money,• Newsweek (February 19, 2015) 

• 'From Modesto to Mombasa. Tech is Revolutionizing Small Business Lending.' FO!bes (August 6, 

2014) 

• 'Stuffing money into your digital wallet is getting easier.' MarketWatch (June 19, 2014) 

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CENTER FOR FINANCIALIIARKETS 

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