Fintech Policy in the US - Things Are Heating Up

It’s August and it’s hot in Washington DC.  Yet in the nation’s capital, fintech policy may actually be hotter than the temperatures outside.  Much of the latest buzz has come from the recently released Treasury report which focuses largely on the Trump administration’s outlook for financial innovation. This document is the fourth in a series of reports in response to Executive Order 13772 that details the President’s core principles for financial regulation. The 222 page report contains more than 80 recommendations. The issues that grabbed the headlines included recommendations urging the OCC to move forward with a special purpose bank charter for fintechs (it must have worked  since the OCC made a major announcement just a few hours after the report was released), encouraging U.S. regulators to develop a system similar to a regulatory sandbox, establishing a national data security and breach notification standard and calling for the rescission of the Bureau of Consumer Financial Protection (BCFP) payday/small dollar lending rule.

Below, I highlight a few items in the report that may have gone under the radar. These emerging areas offer significant promise for both consumers and market participants alike and can be accelerated by a balanced and thoughtful policy approach.

Fintech Policy in the US: New Credit Models and the Promise of Alternative Data

The report devotes a section to the promise of new scoring models designed to leverage alternative data sources in credit decisions.  Alternative data in this context is frequently defined as information that currently resides outside of the credit bureau files.  Treasury discusses the opportunities that alternative data presents in expanding access to credit, especially for thin file and credit invisible consumers. The report also highlights FICO’s recent innovation in bringing an alternative data score to market that utilizes telecom and utility payments as well as select public records data not found widely in credit bureau files today. The score provides new credit insights for those who currently cannot be scored without this additional information. The results have been impressive and for the latest findings see a recent announcement regarding our work in this area.

Quick Take:  The report was on the mark in encouraging regulators to help facilitate the development of new solutions utilizing alternative data. Treasury is also correct to emphasize the need that any new innovations ensure data accuracy and comply with existing consumer protection laws and regulations including the Fair Credit Reporting Act, Equal Credit Opportunity Act, the Federal Trade Commission Act as well as compliance with model validation and management guidelines.

Fintech Policy in the US: Data Aggregation and Consumer Financial Account Data

In the fintech world, consumer access to financial account data has attracted great interest. The report provides a short primer on how digitization has sparked new opportunities for fintech firms involved in data aggregation. The report also discusses the challenges with screen-scraping and the importance of improving API methods to address issues such as standardizing data elements and liability concerns linked to data breaches. Yet despite some remaining challenges, Treasury remains very pro-consumer access. It recognizes the BCFP’s prior efforts to promote consumer access to financial account information and encourages the Bureau to provide further clarity to ensure that “third parties properly authorized by consumers, including data aggregators and consumer fintech application providers” are able to obtain financial account information. FICO couldn’t agree more. In fact, we are already working with our partners on the development of a new score that would facilitate the inclusion of consumer-permissioned checking, savings and money market account information to provide additional insights on credit applicants that might not otherwise be approved. Many more details will be announced in the coming months so stay tuned.

Quick Take: The report recognizes the benefits that digitization, data aggregation and increased access to financial account information can have on promoting and expanding financial inclusion.  Many of the remaining issues, including the development of appropriate consumer consent and revocation disclosures, lie with the BCFP.  In its Spring 2018 rulemaking agenda the BCFP has designated future activity related to consumer access to financial records as “long-term” (i.e., beyond a 12 month horizon). However, with the Bureau’s recent establishment of an Office of Innovation, it will be interesting to see if this issue is elevated on the priority list.

Fintech Policy in the US: Use of Digital Communications to Respond to Customer Preferences

We all abhor illegal robocalls and law enforcement as well as policy leaders must continue to work to curtail these unwanted disturbances. However, the Telephone Consumer Protection Act (TCPA) was adopted in 1991 at a time before the advent of the mobile phone. Today, consumers have consented to receive many important messages from businesses via digital communications such as text messages.  FICO knows this well since its Customer Communication Services is used to send important messages, like fraud alerts and payment reminders, to customers who have provided opt-in consent. Yet the threat of reassigned mobile numbers and conflicting interpretations of key sections of the TCPA have caused many businesses to abandon the use of modern technology that is designed to deliver customer messages through their preferred communications channel. The report recommends the need to make changes to the TCPA and for the Federal Communications Commission (FCC) to take action to develop a reassigned number database and an accompanying safe harbor as well as promulgating reasonable methods for revocation of consent.

Quick Take: The Treasury identified several of the unresolved issues related to the TCPA and encouraged the FCC to take action.  Finding ways to remove barriers to important digital communications desired by consumers appears to be high on the FCC agenda especially in light of the recent DC Circuit Court reversal of several aspects of the 2015 FCC TCPA Order.

Fintech Policy in the US: What’s Next

Treasury officials estimate that two-thirds of the report’s recommendations can be achieved through federal agency action. In fact, a number of regulatory reforms are already in process such as the FCC’s recently issued Public Notice which seeks comments on a number of TCPA issues detailed in the DC Circuit decision.  Perhaps, when the weather cools down and winter draws closer we will begin to see some positive developments on a number of the important matters identified in the report.