Episode 37: Adapting to Change: Fintech’s Public Policy Environment

Jerry Buckley: Hello, this is Jerry Buckley, and I’m here with my RegFi co-host, Sasha Leonhardt. Our guest today is Kate Flocken. Kate is a principal at FS Vector, a strategic consulting firm for financial services clients. Her focus is on government relations, both legislative and regulatory, for financial services companies in a rapidly evolving tech environment. 

Kate has had extensive legislative experience, including serving on the staff of Senator Rob Portman of Ohio. We’ve asked Kate to join us to get a feel for the current and evolving legislative environment in which financial services firms find themselves. We live in a period of considerable political uncertainty, to say the least, as well as at a time when the ways in which financial services are being delivered to consumers and businesses are also rapidly evolving. 

Kate, let’s start on a segment of the financial services industry where you and Sasha and I spend considerable time, namely the world of what has come to be known as fintech. We have all watched fintech grow from a few startups with new ideas into a business in which there are many successful players that have become household names. What is the public policy environment in which those companies, as well as new entrants to the fintech space, now find themselves today?

Kate Flocken:  Thanks, Jerry. And thank you for having me on the show. It’s great to be here talking with both of you. And I was thinking before I hopped on here that it’s a good thing we have a set time limit because I think we know that we can nerd out about this for hours if we didn’t. 

So regarding the policy environment that fintechs find themselves in, I think you hit the nail on the head with that point. We’ve watched fintech grow rapidly from being a relatively niche industry to a major part of the financial services landscape. When fintech was first beginning to come onto the scene, it didn’t have the full attention of Washington. There was a lot of talk back then about fintech filling in the gaps for the underserved, meeting the needs for those who were not being fully served by the traditional financial services system. And over the last few Congresses, we’ve seen very rapid and tremendous evolvement of how Congress approached these issues and the level of interest that Congress has shown. 

So starting out, we had some sort of select members of Congress who served on caucuses and were discussing these issues at events and things like that. Then we saw the development, particularly on the House side, of the fintech and AI task forces on the House side. And now this Congress, we have a fully fledged financial technology subcommittee that also explores AI issues. And I think that the reasons for that increased interest is really mixed. So for some members of Congress, there is a belief in and an interest in the ability of fintech to increase the quality and quantity of financial offerings—high quality, fairly priced and competitively priced offerings for both consumers as well as small businesses. But for others, there’s a lot of concern around predatory products and services, consumer safety, both around their individual consumers’ finances as well as their data. And situations where we’ve seen fintechs run into issues with regulators or run into other issues.

Those issues are typically very loudly discussed in Congress, including sometimes with congressional hearings. And there’s a tremendous amount of scrutiny.

And I think that’s led to a public policy environment that can be pretty challenging. And it’s, I think, much harder now to be a new entrant in this space than it was back then. I think that we saw a lot of really small companies coming on, and now that’s pretty tough. There’s more awareness of fintech and therefore more scrutiny and also a lot less patience for mistakes.

Jerry:  Sasha, having worked in politics and public policy at the state level, you have a feel for how important public policy can be in shaping the business environment. Your questions for Kate? Sasha Leonhardt:  Thank you, Jerry and Kate. Great to speak with you today. With a divided Congress and a clearly divided government, getting legislation enacted just seems to be hard nowadays. In this environment, more policy seems to be set by signaling at the legislative and regulatory level rather than the traditional, straightforward passage of legislation to set policy. Is that your impression? Kate:  Yes, and it’s a tremendous challenge. I’d say to put it simply, the opportunity to engage and publicly comment on legislation and regulation is becoming harder and harder. So bills are moving, and when they do move, they are packaged into much larger pieces of legislation that we think of as must-pass bills, so things like infrastructure bills or the National Defense Authorization Act. So for folks that are not constantly engaging with Washington or familiar with Washington, they wouldn’t have possibly any reason to think that legislation that would impact them would be rolled into those larger bills, since they seem to have little or nothing to do with financial services. But if they’re not paying close attention, something could pop up that directly impacts their business, and by the time it’s rolled into a package like that, it’s probably too late to do anything about it. 

On the regulatory side, it can be similarly hard to decipher policy. When agencies issue FAQs and guidance, there’s not an opportunity to comment the way there is when there’s a proposed rule or request for information. And fintechs and other companies have to focus on what’s being said in hearings, being brought up in public statements and speeches, as well as trying to stay on top of legislation that is being introduced, to try and do their best to prepare and plan for legislation and regulation that might come. I mean, it’s really, really challenging. I want to underscore that, particularly for the smallest of the companies.

Jerry:  Well, Kate, you know, regulation of the use and control of consumer and small business data in a digital environment is essential to the way financial services will be offered in the future. Traditionally, daily use rules related to financial services have been regulated under legislation enacted through the financial services committees of the House and Senate. For example, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Graham-Leach-Bliley privacy provisions. But as other congressional committees are considering privacy legislation or perhaps AI legislative initiatives, do you think the Senate Banking Committee and the House Financial Services Committee will seek to continue to play the role they have played in the past, being the primary venues to decide the rules for data use by the financial services players? Kate:  Absolutely. And I think that one aspect of this that makes it even more complicated than the issues themselves is the power in politics that goes into play in figuring out who should be the lead on what issues and which committees should have authority over what. Both of the issues described here are two of the most complicated ones that Congress is grappling with today. And part of the reason for that is they’re so far-reaching. So they don’t fall within the parameters of the existing committee structures. They’re not cleanly financial services issues, just like they’re not cleanly issues that fall into the other committee’s jurisdiction. Over the last few Congresses, we’ve seen multiple attempts to advance the ball on a federal data privacy law at the same time that we’ve seen the CFPB moving forward on Dodd-Frank Section 1033. And although committees outside the financial services space have made some major progress, the House Financial Services Committee and Senate Banking Committees are, no matter what happens, they’re going to stay very, very closely involved.

As you know, House Financial Services Committee Chair Patrick McHenry has been working on a data privacy bill for years. And has been talking publicly about how he looks forward to working with the authors of the American Privacy Rights Act that is led by Senator Cantwell and Representative McMorris Rogers, which got a lot of excited attention around it a few months back when it was brought up, because it was a bipartisan, bicameral bill that had managed to advance in several areas where there had just been total deadlock for years. And also, as you know, Senate Committee Chairman Brown has also weighed in on the data privacy conversation with his own draft bill, a few years ago, that was much broader than just a Senate banking and financial services bill, so I fully expect both committees will remain staunchly at the center of the debate. 

And the same goes for AI issues. I’d say the AI issues have followed a similar path, in that we had AI caucuses on both the Senate and House side that were exploring the impact of AI on a bunch of different issues, financial services included, but also health care, defense, cybersecurity, education, trying to understand broadly how AI was just going to impact Americans, the American economy, global security, things like that. And that’s evolved into broader working groups on the House and Senate side and really Congress-wide action with that recognition that, despite all the challenges that we face and in moving things forward, that this is an area where if America wants to remain competitive, and remain also protected on the negative sides of AI, that they need to be on top of what’s going on. 

But where this gets really complicated, as if what I’ve said isn’t complicated enough, I think progress in both of these areas is just going to have to require cross-committee collaboration and not just statements of, “This is what we intend to do…” or “We are looking forward to working together,” but actual concrete action and collaboration. We’ve already talked about the difficult environment that we’re currently in and passing legislation. And when you’ve got bills that involve multiple committees, that complicates things even further. But I think that progress on both of these issues in general is going to require silo breaking, not just within Congress, but certainly the committees are no exception. And obviously, it’s a lot easier for me to sit here and say that than it is to actually make it happen. That is the only path forward that I see here.

Jerry:  So you do see the Banking and Financial Services Committees raising their hand and insisting on having a role in the process. Kate:  I do. Jerry:  And whether it’s sequential referral and it starts in commerce or starts on another committee, they will have their say and perhaps their unique perspective on how financial services should be treated in these spaces. Kate:  I do. And for multiple reasons, in addition to the fact that they are committees that have already been active on these issues, they’re also very powerful committees. The senators and members of Congress that reach the top of the dais on those committees have a lot of power, a lot of influence, a lot of strong connections. And I just could not see a world in which they did not make sure that they were at the forefront of the debate and the forefront of progress in these areas. Sasha:  Well, to add to the complexity, Kate, you talked about how everything in the House and the Senate is quite the hill to climb. But when we look at the financial regulatory agencies, that’s another dimension. Several years ago, they were seeking to encourage innovation. They were setting up offices of innovation and holding office hours throughout the country to encourage startup dialogs and work with others trying to bring new services to the market using technology. Is that still a focus at the regulatory agencies today? Kate: That is an interesting question, and I think that the answer is still evolving. As you noted, we experienced the emergence of these offices of innovation, which were kind of interesting in that they were proactively seeking engagement. So instead of having folks come to them and request meetings, they were doing the outreach themselves. They were traveling to companies where they were setting up office hours, really making a concerted effort to have an open-door policy for fintechs to come in if they had questions, wanted to engage with their regulators, wanted to do… whatever they wanted to do. And I don’t think that that has gone away. But I do agree with those who say that it has gotten a lot less clear. 

There are also actually, I want to note too, that I think that there has been a pattern in the U.S. and even globally whereas regulatory bodies have been trying to get better at regulating technology and overseeing innovation in the various areas that they oversee. There has been more- we’re seeing more inward turning and these agencies focusing on their own technology, recognizing that they actually need to upgrade their own systems. They need to get better at understanding their own needs as well as what is out there. And so that evolvement is a lot less visible to the outside, which may make them seem less active, even though there is still, actually, really positive development occurring internally. 

I think that it is less clear now for fintechs on who to talk to and how to access them within the agencies. But there’s still definitely a strong presence within each of the agencies. It’s working hard to understand what’s happening in the market. Where is the innovation happening? What is the demand from consumers, from small businesses, from others? And also, what are they hearing from companies on what they’re looking to build in the future, even if they’re not there yet, including on how are they looking to incorporate AI, for example, into their existing products?

And I think that part of that shift could even be put down to a natural evolution that has followed a more grown-up industry. So fintech has evolved and the regulators are sort of evolving with them and their approach to how they’re overseeing the developments in the space. But as we’ve already talked about a couple of times, it definitely makes it harder for new entrants who might not have the connections and the resources that the established players have. They might just, if they’re trying to come in, especially if they have a new product that they’re not entirely sure where it falls on the regulator spectrum, that can be really, really hard for new entrants to figure out and expensive for them to figure out. And I also think it’s worth noting that there’s evolvement and restructuring in organization that occurs just with every new administration. So, some of the changes might not be so much a reflection of how fintech is seen or less interest in fintech as much as just some shifts around how this particular administration is choosing to engage or to organize themselves.

I also want to note that from the beginning, the offices of innovation, they have a particularly tough task because they’re within these regulatory- they’re regulators, right? So their number one role is safety and soundness and making sure that everything that they’re overseeing is going to be as buttoned-up and safe as possible while trying to encourage innovation. And I think that those offices did a good job of trying to walk that line. As I say, it sounds like I’m talking about it in the past tense, which I don’t mean to. But from those early days to now, to walk that line of really emphasizing, staying on top of the responsible aspect of the innovation, and making sure the companies understood their role in ensuring that what they were doing was responsible, and caring closely for consumer protection, security issues and all of that, which remains a very challenging task for regulators. And again, I just think that can make it seem like they’re less positive on innovation to outsiders than they actually are.

Sasha:  No, Kate, that’s interesting. And I want to come back to something you said about the regulatory regime facing fintechs in particular. Historically, our financial system has relied upon the core depository regulators to set the rules and to kind of set the standards, the OCC, the Fed, the FDIC, the NCUA. We’ve seen them take the lead for much of our financial history. But as we transition to fintech and with the emergence of the CFPB, when a fintech comes to market, they may interact indirectly with one of the depository regulators through a bank partnership. But just as often, the first person they will meet will be from the CFPB or from a state with respect to licensing or a state examination or enforcement action. I’m curious your thought about just the expansion of what I would call the primary financial regulators that are potentially in the market that may be the first touchpoint for these newer fintechs. Kate:  Sure. That’s a really interesting observation. And I feel like I’m painting a picture of bleakness for the new entrants, which I’m not trying to do. But it is another example, I think, of why it is harder now than it was for new entrants, because they have to stay on top of multiple state policies. That’s really difficult and expensive. And it’s a challenging outcome that’s, I think, spreading to more and more areas, given what we discussed earlier, and Congress struggling to pass some federal policies on issues like privacy. We’re just seeing states doing more and more in those areas to set policies themselves. And there’s also, though, a long history of innovation at the state level, which plays an important role here, too, as states have really competed against each other to be centers of innovation themselves. Or on the policy side, be the bar that other states set their own policies by, which is the positive side of what I’m saying.

So, we do see some challenges coming out of congressional gridlock and states having to pick things up that they might not otherwise have. But for those new entrants who have the bleak picture being painted for them, it’s worth looking into the different states and what their policies are around certain types of products. Because many of them really do want folks to come to them and to innovate within them and to grow their economies, which I think is just a fantastic tradition in the United States. 

Regarding the CFPB, I think that, to your point, like as a kind of first touchpoint, if companies haven’t been paying attention to the CFPB or they think the CFPB won’t be interested in what they’re doing or won’t notice what they’re doing because they’re busy elsewhere… Whatever it is, they need to think again and really be mindful of ensuring the financial health of the consumer is at the heart of basically — not even basically — of every decision that they make. And on the flip side of that, I also think it’s very, very helpful for companies to proactively engage with the CFPB and with other regulators, even if they don’t think they’re directly overseen, or it might not be an issue right now. Or, whatever the reason is, I think that proactive engagement is incredibly valuable, and the earlier, the better. It helps the regulators understand what’s happening in the market, which will lead to them crafting better policy, which is beneficial to everyone across the industry. And it also lessens the risk of companies being taken by surprise when regulators do suddenly pop up and take an interest in them, or want to talk to them or take a look at what they’re up to. 

If they’re growing, which is probably the goal for all these companies, they will be noticed, and probably sooner rather than later. So if the CFPB or somebody else is going to be that first touchpoint, I think that these companies should seriously consider making that first move and doing that outreach themselves and just establishing a positive and proactive relationship there. Companies don’t necessarily have to even do that through a direct connection. They can respond to requests for information and kind of engage with regulators in different ways. But I can’t emphasize enough how important I think that proactive engagement is because it signals to the regulators that they are really trying to be positive actors in the space. They’re trying to engage in a helpful way. And it shows that they want to be doing things the right way. And particularly, like we were talking about before, where there might be FAQs or guidance or something that’s not totally clear, that is a great way of starting to bring up those issues in a non-contentious format so the regulators can work to address them.

Jerry:  Okay. Our time is short, but I want to ask you one last question. We are in an election year, as we all know, and I’m not going to ask you to predict outcomes. But would you be willing to share with our listeners the potential shifts that would occur in congressional financial services committees, depending upon which party is in control in each chamber? Kate:  Sure. Yeah. And so I won’t try to predict it. I think we all know, at this point, that there is entirely a chance that we’ll see a flip in both chambers. Something I’ll note, before I go into some of the things we know will happen, is that the leadership in the committees themselves is dependent on leadership across all of the committees. So it’s a complicated process in trying to determine who can lead which committee because you can’t have one member leading them all. Democrats and Republicans have different rules within their parties, and their different rules in the House and Senate side, which for a policy nerd like me, keeps things interesting, but it can be kind of challenging to follow. 

So on the more certain side, one change that’s coming, that we know is definitely going to happen, is that the House Financial Services Committee Chairman Patrick McHenry is retiring. So no matter what, we will have a different Republican serving as the next chairman or as the next ranking member. And there are several Republicans who are in competition for that role. 

On the Democrat side at this point, we expect ranking member Maxine Waters will likely remain at the top, either as the ranking member or potentially in gaining the gavel back. Then on the Senate side, Banking Committee Chairman Sherrod Brown is up for reelection this year. So if he wins, which we expect, he will continue to lead the committee as either the chair or ranking member. But if the Senate flips or sorry, either if the Senate flips or not, he’ll remain at the top. But if he does lose his reelection, the likely next top Democrat would be Senator Elizabeth Warren.

And then something else just to keep in mind here is that since this is a presidential election year, members of Congress and senators are often tapped to fill roles in the new administration. So there could be some vacancies and other kind of shuffling and shifts due to those possible changes as well.

So it’s going to be exciting. It’s obviously a strange election year since it’s a rematch. But no matter what happens, no matter what the outcome is, I fully expect no matter who is in the White House and which parties are in control of each side of Congress, that fintech is going to remain a hot and important topic across the board.

Jerry:  Thank you. You didn’t mention Senator Tim Scott, who is being mentioned as a vice presidential candidate. But I guess…  Kate:  Too speculative. Jerry:  Too speculative. But I guess he would probably remain in the lead on the banking committee if he does not run. Kate: I think that is true. And then if there’s a Republican White House, I think there’s also a really good chance that he would be tapped to join a Republican administration. But otherwise, yes, I expect he would stay. Jerry:  And who would be next in line? Kate:  Oh, more speculation. There’s a few undercurrent shifts around there that change things around, but I’ll keep you posted. Jerry:  All right. Good, good. Well, thank you for that little venture into political speculation, not about who’s going to win, but what could happen. No matter what, there’ll be some changes we expect. 

And thank you so much, Kate, for joining us. You’ve given us a really good perspective on the policy aspects of financial regulation and the crosscurrents that are at play in this fast-moving area. So thank you again.

Kate:  Yeah, thanks for having me. It’s been really fun to talk about this and looking forward to seeing what the fall brings.  Jerry:  Great Sasha: Great to chat, Kate. Take care.