Potential of fintech needs policy support

Regulators on Capitol Hill are often keen to demonstrate their willingness to embrace innovations in financial services, but fewer words and more action are needed from politicians to protect both lenders and consumers if fintech’s potential is to be realised, panellists at the Structured Finance Industry Group (SFIG) conference said on Monday morning.

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“In the past year to two years, the speed with which fintech is generally being embraced and discussed in [Washington] DC circles is pretty phenomenal,” said Rostin Behnam, commissioner of the Commodity Futures Trading Commission (CFTC). “There is pretty solid engagement in DC and a willingness to work with market participants to figure out what the policy should be.”

Rostin was one of the panellist speaking in the Rates Wake-Up Call: Yield Curve, SOFR, and More talk at the SFIG Vegas 2019 conference. He was joined by Jeffrey Meiler, chief executive and founder of Marlette Funding. 

There are $130bn in personal loans outstanding, and the sector is one of the fastest growing parts of the market. Online lenders have been large contributors to that growth, said Meiler.

Fintech has been helpful in the creation of underwriting and cash flow models, while machine learning has allowed for the creation of more comprehensive fraud detection to protect consumers.

And alternative sources of data have allowed issuers to be more inclusive in terms of who they lend to, going beyond traditional credit scoring and taking into consideration factors such as employment and education history.

“Alternative data and underwriting can be potentially profound alternatives to credit data,” Meiler said. “[It has] potential to democratize access to the credit industry.”

Upstart, for example, has been serving people who have exited the credit system or live in “banking deserts” where they do not have access to traditional financial services. With fintech, the company has been able to use employment and educational data to lend to people who would have been otherwise turned down on the basis of their credit history.

The market has been more concerned than excited with innovations like this, even considering the wealth of opportunities they can bring, Meiler said. In order for the industry to successfully tap into alternative data, Meiler suggested that regulators explicitly grant permission and provide a clear framework and boundaries for the market.

Yet there are several policy issues that need to be straightened out first.

Policymakers have been cautious with fintech from the standpoint of cybersecurity. The issue is not only one of regulating domestic market risks, but regulating digital security, which affects the economy as a whole, said Behnam. This is primarily why regulators have been hesitant to engage with fintech more directly, even more so since lawmakers have been wrangling with privacy concerns around social media.

To deny that abuses of fintech can lead to national security risks would be “careless”, Behnam added.

When it comes to new regulations, artificial intelligence (AI) is the most difficult to grapple with because of how fast the technology is developing. AI and machine learning have been touted as cost-saving measures by financial services firms, yet the biggest challenge from a legislative standpoint has been merely keeping up with its advances, and regulators are often reacting to problems that develop rather than thinking progressively about the future of AI, said the Behnam. Trust and transparency could be the answers to solving this problem.

“In order for this to be successful, we need engagement from the market,” Behnam said.

One of the things market participants should do is “accept that there are risks” in innovation. In discussions with market participants, Behnam said he sees overly optimistic views on fintech replacing existing systems and disregarding the risk of any downside.

“Embracing that there are risks, then coming up with solutions, is a healthy environment,” Behnam said.