[Senate Hearing 115-380] [From the U.S. Government Publishing Office] S. Hrg. 115-380 FINTECH: EXAMINING DIGITIZATION, DATA, AND TECHNOLOGY ======================================================================= HEARING BEFORE THE COMMITTEE ON BANKING,HOUSING,AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION ON EXAMINING FURTHER THE DIGITIZATION, DATA, AND TECHNOLOGY ASPECTS OF FINTECH __________ SEPTEMBER 18, 2018 __________ Printed for the use of the Committee on Banking, Housing, and Urban Affairs [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available at: http: //www.govinfo.gov / __________ U.S. GOVERNMENT PUBLISHING OFFICE 32-753 PDF WASHINGTON : 2018 ----------------------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio BOB CORKER, Tennessee JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey DEAN HELLER, Nevada JON TESTER, Montana TIM SCOTT, South Carolina MARK R. WARNER, Virginia BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada JERRY MORAN, Kansas DOUG JONES, Alabama Gregg Richard, Staff Director Mark Powden, Democratic Staff Director Joe Carapiet, Chief Counsel Kristine Johnson, Economist Laura Swanson, Democratic Deputy Staff Director Elisha Tuku, Democratic Chief Counsel Dawn Ratliff, Chief Clerk Cameron Ricker, Deputy Clerk James Guiliano, Hearing Clerk Shelvin Simmons, IT Director Jim Crowell, Editor (ii) C O N T E N T S ---------- TUESDAY, SEPTEMBER 18, 2018 Page Opening statement of Chairman Crapo.............................. 1 Prepared statement........................................... 29 Opening statements, comments, or prepared statements of: Senator Brown................................................ 2 Prepared statement....................................... 29 WITNESSES Steven Boms, President, Allon Advocacy, LLC, on behalf of Consumer Financial Data Rights................................. 4 Prepared statement........................................... 30 Responses to written questions of: Senator Brown............................................ 117 Senator Scott............................................ 117 Stuart Rubinstein, President, Fidelity Wealth Technologies, and Head of Data Aggregation....................................... 6 Prepared statement........................................... 37 Brian Knight, Director, Innovation and Governance Program, Mercatus Center at George Mason University..................... 7 Prepared statement........................................... 40 Responses to written questions of: Senator Brown............................................ 118 Senator Heller........................................... 119 Saule T. Omarova, Professor of Law, and Director, Jack Clarke Program on Law and Regulations of Financial Institutions and Markets, Cornell University.................................... 9 Prepared statement........................................... 45 Responses to written questions of: Senator Reed............................................. 119 Additional Material Supplied for the Record Letter From The American Academy of Actuaries Submitted by Chairman Mike Crapo............................................ 122 Statement From Financial Innovation Now Submitted by Chairman Mike Crapo..................................................... 182 Letter From Electronic Privacy Information Center Submitted by Senator Sherrod Brown.......................................... 184 Statement Submitted by Independent Community Bankers of America.. 187 (iii) FINTECH: EXAMINING DIGITIZATION, DATA, AND TECHNOLOGY ---------- TUESDAY, SEPTEMBER 18, 2018 U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Washington, DC. The Committee met at 10:01 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. This hearing will come to order. Today we will hear four very unique perspectives on a segment of financial technology, or ``FinTech.'' Almost exactly 1 year ago, the Committee held a hearing to explore the various sectors and applications of FinTech. In the short time period between that hearing and this one, many developments and innovations have occurred, both in the private sector and on the regulatory front. Digitization and data, in particular, are constantly evolving, challenging the way we have traditionally approached and conducted oversight of the financial services sector. As technology has developed and the ability to readily and cheaply interact with and use data has flourished, we have experienced a sort of revolution in the digital era. This digital revolution brings with it the promise of increasing consumer choice, inclusion, and economic prosperity, among other things. Less than a decade ago, the concept of mobile banking, a simple transaction, was relatively new. Now consumers have countless options by which to interact with and access their financial information and conduct transactions. As this marketplace rapidly develops, so must we constantly evaluate our regulatory and oversight framework, much of which was designed prior to the digital era. To the extent that there are improvements that can be made to better foster and not stifle innovation, we should examine those. Although these technological developments are incredibly positive, the increased digitization and ease of collecting, storing, and using data presents a new set of challenges and requires our vigilance. Many products and services in the FinTech sector revolve around big data analytics, data aggregation, and other technologies that make use of consumer data. Oftentimes these processes operate in the background, and are not always completely transparent to consumers. It is important for consumers to know when their data is being collected and how it is being used. It is equally important for the companies and the Government alike to act responsibly with this data and ensure that it is protected. As we have seen in recent years, this can be a challenging task. In order to fully embrace the immense benefits that can result from technological innovation, we must ensure that proper safeguards are in place and consumers are fully informed. Today I hope to hear from our witnesses about the ways in which FinTech is changing the financial sector and the improvements that can be made to ensure the regulatory landscape welcomes that innovation; what kind of data is being collected and used and how such data is secured and protected; and what the opportunities and challenges are going forward. Senator Brown. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator Brown. Thank you, Mr. Chairman. In the run-up to the financial crisis, Wall Street banks bragged about innovations that they claimed made the financial system less risky and credit more affordable. Some of these innovations were in consumer products, like interest-only subprime mortgages. Other innovations were happening behind the scenes, like the growth in risky collateralized debt obligations and credit default swaps. According to the banks, technological advances like increased computing power and information sharing through the Internet allowed financial institutions to calculate and mitigate the risks of these complex financial innovations. In Washington, banks told lawmakers that regulation would hold back progress--they say that often on many issues--and make credit more expensive for consumers. Rather than look at financial technology with an eye to the risks, Federal banking supervisors repealed safety and soundness protections, and they used their authority to override consumer protection laws in several States. Eventually, so-called financial innovations led to the biggest economic disaster in almost a century, costing millions of Americans their homes, their jobs, and much of their savings. Criticizing the bankers and regulators who lost sight of the enormous risks that came with these new innovations, former Fed Chair Paul Volcker declared, ``The ATM has been the only useful innovation in banking for the past 20 years.'' I am more optimistic about some new technologies benefiting consumers rather than just lining Wall Street's pockets, but I think we should look at this Treasury report with the same level of skepticism. Rather than learn from past mistakes, the Treasury report embraces the shortsightedness of precrisis regulators. It exalts the benefits of ``financial innovation,'' describes Federal and State regulation as ``cumbersome'' or as ``barriers to innovation,'' and recommends gutting important consumer protections, like the CFPB's payday lending rule. It even suggests stripping away what little control we as consumers now have over our own personal financial data, just a year after Equifax put 148 million Americans' identities at risk, 5 million in my State alone. Just like a dozen years ago, Wall Street banks and big companies are making record profits, but working families are struggling just to get by. Student loan debt is at record levels; credit card defaults are rising. Worker pay is not keeping up with inflation--comments from the Administration notwithstanding--but we have managed to cut taxes for the richest Americans while CEOs and shareholders have reaped huge windfalls through over half a trillion dollars in stock buybacks. Plenty of financial institutions are adopting new technologies without running afoul of the law. Rather than focusing on how we can weaken the rules for a handful of companies who prefer to be called ``FinTechs'' rather than ``payday lenders,'' or ``data aggregators'' rather than ``consumer reporting bureaus,'' Treasury should be focused on policies that help working families. This is not a partisan issue for me. I raised concerns about relaxing the rules for FinTech firms when Comptroller Curry, appointed by President Obama, suggested a special ``FinTech'' charter almost 2 years ago. The new leaders at the Federal Reserve, the OCC, the FDIC, and the CFPB have already made it clear that they are ready to give Wall Street whatever it asks for. And they never have enough. And the recommendations in this report call for more handouts for financial firms, FinTech or otherwise. I am interested, however, to hear from our witnesses about how new financial technologies could increase our control over our own information, better protect against cyberattacks, or make it easier for lenders to ensure they are following the law. And as traditional banks partner with technology firms, I think it is important for the Committee to consider where gaps in regulation might lead to future systemic risks. Thank you, Mr. Chairman, for holding the hearing. Chairman Crapo. Thank you, Senator Brown. And I agree with you this is not a partisan issue. We all want to get the benefits of what can be developed with this kind of increase in technological capacity. But there is significant concern about privacy and protection of data of our consumers that is agreed to on both sides of the aisle here, I believe. We welcome our witnesses here with us today. We have Mr. Steven Boms, the president of Allon Advocacy, on behalf of the Consumer Financial Data Rights association; Mr. Stuart Rubinstein, president of Fidelity Wealth Technologies; Mr. Brian Knight, director of the Innovation and Governance Program at Mercatus Center at George Mason University; and Ms. Saule Omarova, who is a professor of law and director of the Jack Clarke Program on the Law and Regulation of Financial Institutions and Markets at Cornell University. We again welcome all of you. We appreciate your being here to share your expertise with us. Your written statements will be made a part of the record. We ask you to please be very careful to pay attention to the 5-minute clock for your oral comments and as you are engaged in questioning. The Senators have a 5-minute clock, too, and sometimes they run right up to the last second for their last question, and when that happens, I ask you to be prompt in your responses to those questions. With that, Mr. Boms, you may begin. STATEMENT OF STEVEN BOMS, PRESIDENT, ALLON ADVOCACY, LLC, ON BEHALF OF CONSUMER FINANCIAL DATA RIGHTS Mr. Boms. Thank you, Mr. Chairman. Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank you for this opportunity to testify today on behalf of the Consumer Financial Data Rights, or CFDR, Group, a consortium of approximately 50 aggregators and FinTech firms united behind consumers' rights to access their financial data. My testimony this morning also represents the views of the Financial Data and Technology Association, or FDATA, of North America, which is the trade association urging the adoption of an open banking-like regime in the U.S., Canada, and Mexico. The CFDR Group and its members consulted frequently with the Treasury Department as it considered the current state of the FinTech market. Our engagement was principally focused on the crucial issue of consumer-permissioned financial data, which was an area of emphasis in the Department's report and which I would like to focus on today. A recent White House study concluded that 20 percent of adult Americans are underbanked by the traditional financial services system and almost 9 million households are entirely unbanked. For these consumers, third-party, technology-based tools can provide vital, affordable access to a financial system that has left them behind. These tools also help other Americans address the growing complexity of the financial system. Most consumers have multiple accounts across a variety of products providers. The most basic, fundamental first step toward financial health--understanding what one has and what one owes--can be needlessly difficult. Technology-powered tools can provide intuitive, accessible platforms that enable even the least financially savvy among us to manage their finances and improve their economic outcomes. The lifeblood of these tools is user-permissioned data access: the right of the consumer or the small business to affirmatively grant access to the application of their choice to connect to or see the financial data. Unlike in other jurisdictions globally, there is no legal requirement in the United States stipulating that a financial institution must make the consumer's a small business' financial data it holds available to a third party when the customer provides consent or whether restrictions on the consumer's access to that data are permissible. Consumers are dependent on the financial services providers with which they do business, with disparate outcomes for Americans who bank with different financial institutions. The lack of a cohesive framework also threatens American competitiveness and financial innovation internationally. The Treasury Department identified the key outstanding issues with regard to user-permissioned data access. I briefly highlight five Treasury recommendations for the Committee's consideration here, noting that I provide significantly more reaction in my written testimony. Number one, the Bureau of Consumer Financial Protection should affirm that third parties properly authorized by consumers fall within the definition of ``consumer'' for the purpose of obtaining access to financial account and transaction data. Though it may seem self-evident, Section 1033 of Dodd-Frank provides that the Bureau has the authority to promulgate a rule to ensure end users have electronic access to their online data. But the Bureau has thus far declined to do so. Treasury's affirmation that Dodd-Frank provides this right to consumers and small businesses, even in the absence of a Bureau rulemaking, represents a significant victory for innovation and for consumer and small business financial empowerment. Number two, all regulators should recognize the benefits of consumer access to financial account and transaction data in electronic form. One of the systemic disadvantages facing the FinTech ecosystem in the United States is the immense relative regulatory fragmentation that exists. There are at least eight Federal regulatory agencies with jurisdiction over some portion of financial data access. There are, of course, also State regulatory authorities. Treasury has called for all agencies to align behind its interpretation of Dodd-Frank Section 1033 as an important step toward a level playing field and one that could be hastened by congressional engagement. Number three, the Bureau should work with the private sector to develop best practices on disclosures and terms and conditions regarding consumers' use of products and services. The United Kingdom's Open Banking architecture includes prescriptive consent flows that ensure that a consumer's or a small business' experience granting or revoking consent to access their data to any third party is uniform. These open banking consent standards are an excellent starting point for creating best practices in the U.S. market. Number four, a solution must address resolution of liability for data access. The CFDR earlier this year released a set of principles, Secure Open Data Access, or SODA, which called for traceability, minimum cyberliability insurance standards, and other standards designed to ensure that the entity responsible for consumer financial loss as a result of a breach--be it a bank, an aggregator, or a FinTech firm--is the entity charged with making the end user whole for direct losses resulting from that breach. While CFDR members are implementing these principles, regulatory agencies and Treasury could augment and assist this work by undertaking efforts to create a more vibrant and affordable cyberliability insurance market. Number five, address the standardization of data elements as part of improving consumers' access to their data. While the CFDR Group and FDATA North America wholeheartedly agree with the Department's recommendation, I would respectfully submit an addendum. The standardization of data elements should be made available to the consumer to permit access to third parties of their choosing so that all data elements available to the end user in their native online banking environment is also available to the third party if the consumer consents. This approach would fully enable end users to leverage their own financial data to their economic benefit, and it would allow for the realization of a competitive, free marketplace in which consumers have full transparency into financial products and services offered by FinTech providers and financial services firms alike. Thank you again for this opportunity to testify. Though tens of millions of American consumers and small businesses are already utilizing third-party tools to improve their financial well-being, more can be done to harness the power of innovation safely and securely. We stand ready to work with this Committee to identify and implement Treasury's recommendations. Thank you. Chairman Crapo. Thank you, Mr. Boms. Mr. Rubinstein. STATEMENT OF STUART RUBINSTEIN, PRESIDENT, FIDELITY WEALTH TECHNOLOGIES, AND HEAD OF DATA AGGREGATION Mr. Rubinstein. Thank you, Chairman Crapo, Ranking Member Brown, and Members of the Committee. My name is Stuart Rubinstein. I am president of Fidelity Wealth Technologies and head of Data Aggregation at Fidelity Investments. Fidelity is a leading provider of investment management, retirement planning, brokerage, and other financial services to more than 30 million individuals, institutions, and intermediaries with more than $7 trillion in assets under Administration. We are strong supporters of FinTechs and are a major FinTech investor. I am appearing today to represent Fidelity with a specific focus on the topic of financial data aggregation. At Fidelity, we have a unique perspective. We are an aggregator ourselves, and we are also a source of data to aggregators who act on behalf of our customers. Fidelity is a strong believer in the benefits our customers receive when they can see a consolidated picture of their finances through aggregated data. We have offered aggregation services to our customers for well over a decade, and our customers have been able to access their Fidelity data through various third parties since the 1990s. But the cybersecurity environment has changed over time, and risks have become far more pronounced and must be addressed. First, most financial data aggregation that occurs today requires consumers to disclose their financial institution's user name and password to the third-party aggregator or FinTech. While this process may have worked in the past, it is now antiquated as there are new technologies that eliminate any such requirement. Because cybersecurity is of paramount importance, we believe that customers should not have to disclose their user name and password in order to access any third-party service. Second, aggregators using credentials may have access to an entire website or mobile app, which means they can access more data than may be necessary to provide their services. For example, a simple app that tracks your spending does not need to know your investment holdings, but it will have access to that under the current methods. Because of the advancement of cyberthreats, Fidelity and others in the industry have worked hard on developing a different approach to data aggregation that helps to protect consumers. At Fidelity, we have developed what we believe are five principles for empowering consumers to share their data safely with third parties. First, consumers should be able to access their financial account data where they want it and when they want it and through third parties if they so desire. The question becomes not if they can do it, but how. Two, access must be provided in a safe, secure, and transparent manner. Three, consumers should provide affirmative consent and directly instruct their financial institution to share data with specific third parties. Four, third parties should access only the financial data that they need to provide their product or service. This should not be a Trojan horse for the gathering, accumulating, and reselling of consumer data. And, five, consumers should be able to monitor those account access rights and direct their financial institution to revoke that if they so desire. In an effort to back up these words with actions, Fidelity announced in November of 2017 a new service based on these principles called ``Fidelity Access.'' Fidelity Access will allow Fidelity customers to provide third-party access to customer data through a secure connection without providing log-in credentials to any third party. We have also been working with policymakers and industry groups to advance these principles and are pleased that many have taken thoughtful approaches to this problem. Finally, I would be remiss if I did not mention the most difficult issue standing in the way of wider adoption of safer data-sharing technologies: the issue of responsibility. We believe companies that collect and handle financial data should be responsible for protecting that data and making customers whole if misuse, fraud, or theft occurs. As we have been discussing Fidelity Access, we have seen aggregators try to limit their liability, some to very small dollar amounts. Fidelity believes firms that obtain and handle consumer aggregated data should be held responsible to protect that data from unauthorized use just as we are. Any other standard creates moral hazard and does not incentivize aggregators to take their data stewardship responsibilities seriously. Thank you again for the opportunity to testify before you today. I look forward to answering your questions. Chairman Crapo. Thank you, Mr. Rubinstein. Mr. Knight. STATEMENT OF BRIAN KNIGHT, DIRECTOR, INNOVATION AND GOVERNANCE PROGRAM, MERCATUS CENTER AT GEORGE MASON UNIVERSITY Mr. Knight. Thank you, Chairman Crapo, Ranking Member Brown, and Members of the Committee. My name is Brian Knight, and I am the director of the Innovation and Governance Program at the Mercatus Center. Whether it is a loan to deal with an emergency, moving money to a loved one in need, or capital to build a business, access to high-quality financial services is essential. Technological innovation in financial services, or FinTech, has the potential to significantly improve this access. As the Treasury Department notes, one area where technology may dramatically change financial services is in the collection and use of data. Technology advances allow financial services firms to obtain more data from consumers and process the data in new ways, with the goal of providing more accessible, inclusive, and cost-effective options. While it is early, there are encouraging signs that innovation is, in fact, helping consumers. These include innovative products giving consumers more transparency as to their finances and allowing lenders to offer potential borrowers better-quality credit through innovative underwriting. There is also indication that technology is making credit markets less discriminatory. This is promising. But there have also been concerns raised about potential risks to consumers, including risks of privacy and discrimination. These concerns should be taken seriously, and we should react appropriately. But we should be loath to rush into regulation without being certain that new regulation is necessary. As we assess what the Government response to technological innovation should be, we should keep a few things in mind. First, we should judge an innovation compared to the status quo, not perfection. Innovative financial service products will not be perfect, but they may be better than the alternative. Imposing unduly burdensome regulation that hampers innovation and competition may ultimately be more harmful to the very consumers that regulation seeks to protect. Second, we should acknowledge that existing regulations may address new risks. For example, the requirement that a lender be able to explain why it took an adverse action could mitigate against a concern that algorithmic underwriting will be unduly opaque. There are existing regulatory incentives as well as market incentives for companies to ensure their products are fair and appropriately transparent. Third, we should be open to the possibility that in some cases the current regulatory system is, in fact, overly burdensome. There may be cases where the costs of regulation now exceed the potential benefits or where a regulatory structure that made sense in the past has been overtaken by market developments. This does not mean that new regulation may not sometimes be needed, but as technology changes what is possible with financial services, the optimal level or type of regulation may change. FinTech offers exciting possibilities for better, cheaper, and more inclusive financial services. We should be mindful of the risks posed, but we should not overreact. Instead, we should work to ensure that the legal and regulatory system facilitates innovation and competition while preserving consumer protection so that Americans can obtain the best financial services possible. I look forward to our discussion, and thank you for your time. Chairman Crapo. Thank you, Mr. Knight. Ms. Omarova. STATEMENT OF SAULE T. OMAROVA, PROFESSOR OF LAW, AND DIRECTOR, JACK CLARKE PROGRAM ON LAW AND REGULATIONS OF FINANCIAL INSTITUTIONS AND MARKETS, CORNELL UNIVERSITY Ms. Omarova. Senators, thank you for inviting me to testify here today. My written testimony lays out the details of what I have to say, so let me focus on a few big-picture points. FinTech is by far the hottest topic in today's finance. Cryptography, cloud computing, big data analytics are changing financial markets by making transacting faster and easier to automate and scale up. We have just heard arguments emphasizing the immense societal benefits of these changes as long as FinTech innovations are not stifled by outdated regulations. Let us put these arguments in context. It is quite symbolic that we are convened here today almost exactly on the tenth anniversary of Lehman Brothers' failure that triggered the global financial crisis. I do not have to tell you, Senators, what a calamity that crisis was. You lived through that crisis. And for years before the crisis, you and your colleagues probably sat through many hearings just like this one listening to many confident and articulate gentlemen with impeccable industry credentials tell you that you should not let outdated regulations stifle financial innovation. They told you and the American public that innovative products like derivatives and subprime mortgage loans were making the financial system more efficient, resilient, and democratic by enabling better risk management, expanding consumer choices, and making credit available to low-income Americans. And so risky derivatives and predatory subprime loans were allowed to grow unregulated until they crashed the financial system 10 years ago. Today the same rhetoric of financial innovation and consumer choice that brought us the crisis of 2008 returns to the center stage in the policy debate on FinTech. Of course, this time it is different. It is not about derivatives, but about crypto assets. It is not about predatory subprime lending, but about marketplace lending--once again new technologies promising to make the system more efficient, resilient, and democratic: to expand consumer choices and to give low-income Americans access to financial services. The Treasury report adopts this rhetoric and translates it into a strategy of significant deregulation in the U.S. banking sector, meant to enable banks to form large-scale business partnerships and even outright corporate affiliations with technology companies. For example, the report advocates for a significant rollback of existing regulations in order to make it easier for the banks to give unaffiliated tech companies, data aggregators, cloud service providers, and various FinTech firms much more direct access to their customers' account and transactional data. Currently banks are reluctant to allow data-mining businesses to get the direct feed of their depositors' account data because regulations make banks ultimately responsible for the handling of sensitive customer information. For the same reasons of regulatory compliance and liability, banks are currently cautious about moving all of their data to the cloud operated by a third party. The Treasury characterizes this as a bottleneck in the flow of financial information and calls for a concerted regulatory effort to push banks to share their customer data and to outsource its management to third parties much more freely. The claim here is that allowing unaffiliated tech companies to access, host, and manage bank data will make financial services faster and cheaper for all consumers and give consumers control over their financial affairs. Of course, banks will benefit from being able to reduce their operational and compliance costs and potentially increasing their revenues by charging aggregators for direct feeds of customer data. And consumers will get the convenience of living in a seamless virtual space where all FinTech apps can just magically connect to all of their bank accounts. But this will also expose consumers to tremendous risks. Imagine that your personal bank account data, transaction history, and other sensitive information previously managed by your local bank is now stored in the cloud and shared directly and in real time with multiple data-collecting companies. These companies are not regulated under a bank-like regime with dedicated supervisors making sure that the data is safe and secure, that these companies maintain strong operational controls and do not misuse sensitive consumer information. In this environment, it is easy to imagine not just one but many Equifax-style catastrophes occurring far more frequently and with far more devastating consequences. This is, in fact, a particular kind of a broader problem that our system of bank regulation has jealously guarded against since the 19th century: the potential for excessive concentration of financial and market power, if banks are allowed to engage too intimately with nonbank commercial businesses. This separation of bank and commerce remains a core principle of U.S. banking law to this day. The Treasury report, however, calls for measures that will directly undermine this longstanding and sensible regime. What it frames as low-key technical fixes to how regulators apply banking laws is, in fact, opening the door to de facto FinTech conglomeration. If allowed, this new platform trust will be able to monopolize the flow of both money and information and effectively take control of our lives not only as economic actors but also as citizens. The American Republic of George Washington and Teddy Roosevelt was never meant to become a dystopic company town of this kind. As you are deliberating on FinTech as a public policy matter, I urge you to stand on guard and not let this become even a remote possibility. Thank you. Chairman Crapo. Thank you, Ms. Omarova. I will start my questions with you, Mr. Knight. While innovations in data have brought many benefits, it has also become known that firms may be, in fact I think are, using this data to drive social policy and to restrict access to entirely legal, in fact sometimes constitutionally protected conduct and do this for reasons of trying to influence social policy unrelated to safety and soundness or other concerns that would make these targeted groups unfit to do business with. Do you think this presents a problem? Mr. Knight. Thank you, Senator. I do, and I think it presents a couple of problems. The first one, to key in on the data point, is to the extent that a financial institution is collecting data that relates to a sensitive or private matter, and particularly the more granular the data collection is, the potentially more harmful a breach would be. Information that is relatively innocuous at one level of detail can become extremely damaging at another level of detail. And, of course, depending on how much microtargeting, if you will, the bank is doing and the level of detail that the bank has stored, if that data is breached, that data is now available and people can be harmed more than had the data been recorded at a less granular level. The second and, I think, bigger issue that we are dealing with here is I think our starting point should be that a business can choose to do or not do business with anyone they want for whatever reason they want in a free market, and then we are going to narrow that for some compelling societal issues like antidiscrimination. The problem is banks are not a free market. For banks, because of public policy, there are barriers to entry; there are barriers to exit; there is significant subsidy. And so banks derive part of their market power from public power. And so when they choose to use their market power in an effort not to do what they have been charged to do, which is effectively intermediate credit or provide savings, but instead try to insist or de facto regulate the American people in a social policy setting, they are not using their market power. They are using public power. And the people who are on the receiving end of that do not have the same market protections that they would in a freer market. You know, let us take an example of YouTube, which will periodically say, ``We will not cover certain types of videos for social policy reasons.'' Well, you can stand up a YouTube competitor tomorrow. You do not need a Government-granted discretionary charter. And if you were to stand up a competitor to YouTube, YouTube does not get special access to Government Internet. It does not get insurance. It does not get loans from the Government. There is not a presumption that if YouTube is about ready to fail, the Government will bail it out, which is something that banks enjoy versus their nonbank competition, and that increases the ability of banks to throw market power around that is not derived from anything other than Government power. Chairman Crapo. Well, thank you, and I share those concerns. I want to shift a little bit here, and to you, Ms. Omarova. I appreciated your testimony on some of the positive aspects that FinTech offers consumers. But some of the concerns that you raise are also concerns that I share. There is an article in today's Wall Street Journal that highlights this intersection, and this is the title of it: ``Facebook and Financial Firms Tussled for Years Over Access to User Data''. This follows an August article in the Wall Street Journal entitled, ``Facebook to Banks: Give Us Your Data, We Will Give You Our Users''. The article suggests that data privacy is a sticking point in these conversations. Can you discuss the data privacy concerns and the need to better understand what kind of data is being collected and used and how such data is secured and protected? And I only have about a minute left in my time, so I---- Ms. Omarova. I think this article actually highlights precisely what is at stake here. This is not what the Treasury report is suggesting: it is not so much about what current data aggregators do with data today. It is about companies like Facebook, and it just shows that those big tech companies, platform companies that use information as currency in their businesses, once they get their hands on the data, on the sensitive bank customers' data, in any way for any reason, they will try to use that data to increase their revenues in a variety of spheres. And it will be extremely difficult to actually check how they use the data. They use proprietary algorithms to basically hide that from us. And who is going to oversee it? Who regulates Facebook for these kinds of issues? Nobody does. I am glad that Bank of America and Wells Fargo refused Facebook access to their bank customers' data, but I do not kid myself for a minute that they have done it out of some kind of moral respect for customer privacy. They have done it because of the regulations that apply to them today. If we remove those regulations, then all of our sensitive financial data will be open to companies like Facebook and we will not know how it will be used. Chairman Crapo. Well, thank you, and I share those concerns as well. Mr. Rubinstein and Mr. Boms, I am out of time, but I am not out of questions for you. I might have to submit them if we do not get another opportunity. Senator Brown. Senator Brown. Thank you, Mr. Chairman. Ms. Omarova, thank you for mentioning the tenth anniversary. There is, as I remind many of my colleagues here, a bit of collective amnesia on this dais and in this Senate, and thank you for always reminding me of that. I have three questions I would like to get through, and I am going to start with you, Ms. Omarova, and if you would give answers as close to yes or no as you can, I will start with her on each of the questions and move from my right to my left. The Treasury Department and much of the financial industry argue that consumers should have the right to share their financial data with any third party of their choosing. Do you think this should include the right for consumers to require that a FinTech or a data aggregator erase all information at that consumer's request? Ms. Omarova. Yes, absolutely. And, you know, we have to keep in mind, though, that this rhetoric of consumer choice and consumer's right to share the information also implies the firm's right to share their information, and that is what we need to guard against. Senator Brown. Mr. Knight. Mr. Knight. Yes, subject to reasonable considerations like law enforcement. Senator Brown. OK. Mr. Rubinstein. Mr. Rubinstein. Yes, absolutely. Consumers should understand why they are sharing their data, and share it for a specific purpose. When they no longer have that purpose, they should be able to stop sharing it and have it deleted. Senator Brown. Mr. Boms. Mr. Boms. Agreed, subject to applicable regulations and laws. Senator Brown. Thanks. Ms. Omarova, it is hard for consumer to understand all the ways that financial data might be used by a company they share it with. Should there be legal limits on how aggregators use the consumer's financial information in addition to consumer identified limits? Ms. Omarova. Yes, absolutely. Basically, data aggregators and other data platform companies like Facebook should not be allowed to engage in a form of ``insider trading'' once they get access to customer data in one context so they could use it another context. Senator Brown. Mr. Knight, legal limitations? Mr. Knight. I believe the limitations should revolve around disclosure and the fact that any consent is knowingly given and the consumer has rights to terminate that consent at any time. Senator Brown. Mr. Rubinstein. Mr. Rubinstein. Yes, I would agree with that. I think really under a disclosure with explicit consent so the consumer knows what they are getting into, really understands it, and can control it. I do not know that we need a specific legal limitation, though. Senator Brown. Mr. Boms. Mr. Boms. I would echo what the past gentleman said with the additional addendum, which is we as an industry, not just FinTech but the financial industry, can and should do a lot better on conspicuous disclosures. Senator Brown. OK. So you are saying legal limits. You are saying disclosure should be the emphasis. Last question. Companies like Google and Facebook collect enormous amounts of personal information. They also influence what information consumers are exposed to. For example, Facebook might show payday loan advertisements to servicemembers or to minorities, but not its other users. Should fair lending laws be updated to cover not just providing credit products but also their targeted advertisements on social media platforms? Ms. Omarova. Ms. Omarova. Yes, absolutely. Algorithmic opacity raises a new spectrum of discrimination concerns, and we have to guard against that. Senator Brown. Mr. Knight. Mr. Knight. Senator, that is a great question, and I do not know if I can give you an answer in the time limit you would want. If you would like to submit a QFR, I am happy to answer it. Senator Brown. I will do that. Thank you. Mr. Rubinstein. Mr. Rubinstein. Senator, I am sorry. I am not an expert in fair lending, and I probably cannot respond to that question. Senator Brown. Could I still send a letter to you and have people at Fidelity answer it? Mr. Rubinstein. You can send the letter. We can try. We are not lenders, so I do not know that we would have a good answer on that one for you. Senator Brown. OK. Mr. Boms. Mr. Boms. Senator, I would echo, I would be happy to respond in writing. It is not smuggling that we have discussed with our members. Senator Brown. OK. Fourth question. Thanks for your promptness, all of you. The biggest four banks control about 45 percent of bank assets. According to your testimony, Facebook and Google together capture between 59 and 73 percent of the online advertising revenue in the U.S. Do you think the Treasury report's recommendation, which many of you have cited, favorably would benefit the large incumbents or would increase competition? Ms. Omarova. Ms. Omarova. Well, the increase in competition is another good rhetorical choice to, you know, promote deregulation. But, in reality, both the financial sector and the tech sector are the businesses where economies of scale and economies of scope are extremely important. So in reality, what the Treasury report wants us to have is the maximum scale and maximum scope of these conglomerates. Senator Brown. So it would benefit the larger---- Ms. Omarova. It would benefit the large incumbents. Senator Brown. Mr. Knight. Mr. Knight. Senator, I believe that it would actually be potentially a mixed benefit. In some cases the largest companies would benefit; in some cases the ability of smaller financial institutions to plug into large data providers may allow them to compete with larger financial services companies. Senator Brown. Mr. Rubinstein. Mr. Rubinstein. Yes, Senator, the Treasury report refers to APIs, which is tech speak for more secure data-sharing methods. I do believe that they actually increase competition. With respect to standards, small companies only need to build to one API standard to plug into many interfaces, so, yes, I do think it helps competition. Senator Brown. It would certainly be working against trends, but, Mr. Boms. Mr. Boms. And, Senator, I would just say on behalf of many smaller financial technology firms, not the Facebooks or Googles of the world, there is a very strong view that this would promote competition. Senator Brown. So the smaller guys think it would promote competition? Mr. Boms. Yes, that is correct. Senator Brown. Thank you. Chairman Crapo. Senator Rounds. Senator Rounds. Thank you, Mr. Chairman. First of all, thank you all for being here today. One of the common threads that I have noted throughout each of your testimonies was the importance of data breach or data security in FinTech. I am really curious about the issue of the importance of or the challenges of a national data breach standard. A number of businesses and trade associations have called for Congress and the Federal Government to step in and to establish one unified data breach standard so businesses could operate across State lines; they would not be forced to comply with a patchwork of different regulations. In addition, my colleague in the House, Congressman Blaine Luetkemeyer, recently released the Consumer Information Notification Requirement Act. This legislation, which has passed the House Financial Services Committee, would require Federal regulators to establish a national unified data breach standard. On the other hand, 31 State Attorneys General have released a letter opposing a prior version of a data breach bill in the House because it would preempt State laws. I would like your thoughts, first of all, on what we are discussing right now coming out of the House. And, second of all, is a national standard necessary? And if so, how do we balance that with State interests? Who would like to begin? Ms. Omarova. Let me take this on. I think, as a general matter, just because a particular standard is unified, universally applied, and easier to understand does not necessarily make it the better standard. It depends on what the standard is, qualitatively. We have the Federal system of regulation in this country because we believe in the checks and balances. Sometimes State consumer protection laws have to step in more effectively to protect us consumers from abuse by large companies. And sometimes the Federal laws do a better job by basically, you know, creating an even playing field for everybody else. So, my response to that would be it is not necessarily a bad idea to have a unified standard, but the key to that would be that that standard creates the maximum protection for the customer's financial data from various abuses that would likely ensue if we take State authorities completely out of the game. Senator Rounds. Thank you. Other thoughts? Mr. Rubinstein. I am happy to respond, Senator. Senator Rounds. Please. Mr. Rubinstein. Thank you for the question. We do support a Federal breach notification. While a large firm like ours can stay on top of the various State laws, speed is often very necessary in a breach notification. Being able to understand one law and being able to respond quickly to that I think enhances consumer protection, and gets customers and regulators just notified faster. Senator Rounds. Other thoughts? Mr. Boms. Senator, if I may, I would just add I think certainly you would find broad support within the FinTech ecosystem for a national standard, provided that it was strong enough and provided the right consumer protections. Just to juxtapose that with the ecosystem that we have today, it is very inconsistent from a regulatory perspective. We have CFDR members who are, for example, FFIEC supervised and examined as third-party vendors to large financial institutions. We have other FinTechs who are State regulated, and so who are not subject to the prudential bank regulatory oversight. And so one standard that encapsulates best practices I think would be welcomed. Mr. Knight. Senator, I cannot speak to Representative Luetkemeyer's bill specifically, but I would also say that when assessing whether or not a Federal standard makes sense, some other things to think about are whether or not the patchwork of regulations is generating inefficiency that ends up costing consumers money; whether or not there is a disparate treatment among competitors, so some people get to leverage one standard, some people get to leverage a different standard;, and third, whether or not we are seeing citizens being de facto regulated by other States to a significant degree because, of course, you know, if you are a national player, you are going to comply with California even if someone in Wisconsin maybe would not support that standard. One of the potential advantages of a Federal standard is that there is broader political representation in setting it and everyone gets a seat at the table, even if you do not end up winning. Senator Rounds. Is there a process today where a lot of these States that have individual offices, in particular Attorneys General offices and consumer offices, to where they have--do they have an association, so to speak, where they can speak with a unified voice in terms of what should be part of a core of a national standard that you have worked with? Mr. Knight. Well, I have not worked with them on this topic, but the National Association of Attorneys General may be a place to go. They do work together both on advocacy and on enforcement through multi-State enforcement actions. Senator Rounds. Any of you worked with any one of your associations? No? OK. Thank you. Thank you, Mr. Chairman. Chairman Crapo. Thank you, Senator Rounds. Senator Reed. Senator Reed. Well, thank you, Mr. Chairman. And thank you for your excellent testimony. Mr. Rubinstein, thank you. Very thoughtful comments. We appreciate it. You point out in your written testimony that there are significant benefits, but there are also, as you say, very real cybersecurity and privacy risks. Can you project or let us know what your fears are about sort of the big problems that are out there lurking? Mr. Rubinstein. Senator, thank you for the question. Number one is the issue of credential sharing, people giving away their IDs and passwords. Today when FinTechs or aggregators show up at our front door, they log in typically with robotic activity. It is robots that impersonate the customer, basically, same as you sitting at your keyboard typing in your ID and password. That only gives access to data, and some of that data may be private which you did not intend to share. But it also can give access to transactions. If you think about that, what does that mean? It means that potentially a robot can come in and move your money to somewhere else. That is a risk from having just open access to the website, which the current methods have. It is difficult for a financial institution to know that that is a robot coming in because it looks just like a customer. It is also difficult for the customer then to come back later and say, ``I did not authorize that activity,'' when, in fact, they actually gave their ID and password to a third party. Those are real risks that we think about each and every day. Senator Reed. Thank you very much. The other aspect of this is that we are at the beginning of a huge wave. Eventually the aggregation of data will go way beyond just sharing financial information from an institution with customers of a place like Facebook. It will go to all the information they collect: what websites you are looking at, maybe what potential pharmaceuticals you are ordering, et cetera. The financial decisions that are being made may not be being made by even individual human beings, and they might not be made in the financial institutions. It will be a machine that is sharing all this data. Is that something that you are concerned about? Mr. Rubinstein. I think there are great concerns with data that flows without the customer's knowledge and affirmative consent. So I think, you know, all that comes in. However, we do firmly believe in the customer's right to share their data. It is their data. If they understand that it is being shared, understand how it is being used, frankly, if they want to participate in selling that data, let them participate. Hopefully they will get rewarded for that. But they should be able to turn it off at any time, too. Senator Reed. So in one concept there is the notion that-- and I think we have said it before--there has to be an opt-in and opt-out, not just a generic one when you sign up, but constantly as the situation changes; that if there is value in your data, then somehow the customer should be able to realize that value, or at least make the decision based upon, you know, I am giving something up or I am getting something. And then the notion of erasing data is critical. Do you agree? Mr. Rubinstein. Yes, Senator. Take Fidelity Access, as I mentioned earlier in my comments, as an example. When we use that, a customer can actually have a dashboard that they can see which third parties they have granted access to their data, so they can monitor that on an ongoing basis and with a single click be able to revoke that consent. Now, that only works--and many financial institutions are building similar things. That only works on the financial institution side. Once a consumer shares their data with a third party, we do believe that they should be able to get that erased. But that is actually between the third party and the consumer. Senator Reed. That is where we have to step in and provide some type of sensible rule so they can do that. Correct? Mr. Rubinstein. I think so, yes. Senator Reed. Ms. Omarova, in this deregulatory climate, which more and more is going to be left to the market, isn't that an argument for giving people the right to go to court if they feel aggrieved, even more so than today, giving people a private right of action if they feel aggrieved? Ms. Omarova. I suppose so. I think in general, because of the complexity of the environment with which we are dealing today and because of the complexity of understanding exactly what kind of personal data is available to whom and how it could be used and the difficulty of monitoring all of that use, I think absolutely every lever of control over the use of that data by the big tech companies, especially, should be utilized. Senator Reed. Thank you very much. Thank you, Mr. Chairman. Chairman Crapo. Senator Perdue. Senator Perdue. Thank you, Mr. Chairman. One of the unintended consequences of the Dodd-Frank law was I think it spawned probably--and it is arguable--the greatest period of bank consolidation in U.S. history. We have lost 1,700 banks in the last decade, and virtually no new banks have been started. So I have got a question. In that environment, Dr. Omarova, you mentioned earlier--I have a question for Mr. Knight first, but I want to come back to you on a second question. But Dr. Omarova talked about aggregation, the bigger the banks get, the more important this aggregation of data becomes. I am concerned that today in that environment of consolidation we have six examining agencies charged with consumer financial protection. One of those is the CFPB. We had the Acting Director before this Committee a couple months ago tell us there have been at least 240 breaches of data that they are investigating and possibly as many as 800. Any one of those could be worse than the Equifax breach. So the question I have, as we talk about--Mr. Knight, you talk about accessing this data can help banks actually improve services, particularly for people who are underserved today, and I agree with that. But this unified national data security standard, as we are talking about, breach notification that I think we all agree on, how would that apply in your mind to these Federal examining agencies that have access to this same data? Mr. Knight. I apologize. If I understand your question, is the concern that there is going to be a breach at the agency level? Senator Perdue. Yeah, we have already been told--there are 240 CFPB known breaches today, 800 they are investigating, any one of which could be worse than the Equifax breach. Mr. Knight. I absolutely share that concern, and I think that the challenge is if you allow any entity to access data, be it the bank or be it a Federal agency, there is that risk. And I think that while there are concerns and tools available to punish banks in the case of a breach or Equifax in the case of a breach--and we can debate whether or not those tools are adequate--it is harder in many respects to go after an agency due to issues like sovereign immunity. Senator Perdue. But should they be held to the same standard of data protection that commercial interests are? Mr. Knight. At least the same standard, Senator. Senator Perdue. Thank you. Dr. Omarova, I have a question about where the United States sits with our regulatory environment relative to other countries. In Kenya, for example, 93 percent of Kenyans have access to a bank account through M-PESA, a mobile phone-based money transfer and microfinancing service in China. Alibaba--I was on a visit with Alibaba and Tencent a couple months ago in China. They help facilitate $12.8 trillion in mobile payments in China. They have leapfrogged us and our technology here. No matter what we think of our FinTech, a lot of these innovations were developed here, but we are slow adopters somehow in the United States. Are we falling behind places like the U.K., Kenya, and China in terms of the adoption of this technology and FinTech? Ms. Omarova. Well, Kenya is very different, has a very different financial services market than we do here. They do not have an actual banking system. Senator Perdue. But the U.K. is very similar. Ms. Omarova. I will get to that in a second. And in Kenya, by the way, the success of their mobile banking was built on the central bank and the major telephonic provider banding together. So the State was critical to providing the service to everybody else. China, yes, China has Alibaba, which is competing with our, you know, PayPals and Facebooks and what have you. Again, in China, the State apparatus is so strong that China can control whatever those companies do, and that is a critical factor. The U.K., we always hold up the U.K., especially the industry does, as this sort of principles-based, much more market friendly, much smarter kind of regulator type environment. But, remember, before the crisis, I worked in the Treasury, and we were doing reports about how the Financial Services Authority was so much better than our regulators were in terms of allowing financial innovation to go forward. And then the crisis hit. Where is the Financial Services Authority now? I am not so sure that the Open Banking Initiative in the U.K. is actually achieving the benefits that it was promising. So I think what we should look for is not so much how, you know, industry-friendly or deregulatory a particular country's environment is. I think we should look at our market structure and the concentrations of power in the tech industry and the financial sector in our country. Senator Perdue. And that is my question. I have to gauge this against other standards and other performances, and so are we falling behind the adoption of these technologies relative to consumer protection and consumer access to banking services? And I would welcome anybody's response to that. Ms. Omarova. I do not think we are falling behind. I think we are taking a more cautious approach simply because we have probably much more to lose. Senator Perdue. Very good. Anybody else? Mr. Boms. Senator, I would just add we should not discount the vibrancy and resilience of the U.S. market, which obviously stands way above other markets. That said, the lack of consistency and clarity in the regulatory and legal framework in the U.S. with regard to data access presents a potential future competitive risk for the U.S. market. Senator Perdue. Thank you very much. Thank you, Mr. Chairman. Chairman Crapo. Thank you. Senator Warner. Senator Warner. Thank you, Mr. Chairman. I want to follow up where Senator Perdue was at, Mr. Boms, with what the Europeans are doing, with what the Brits are doing. How does this affect, again, our market's ability to stay competitive in what is obviously a global field? Mr. Boms. Sure, Senator. It is very early days. PSD2 and Open Banking in Europe and the U.K. just went live on the 13th of January this year. There was a conformance period that will last until September of next year. So we are in this transition period. But we are seeing adoption of Open Banking APIs by consumers in the U.K., for example, increase 50 percent month over month. So, clearly, there is interest in adoption of these tools. We are seeing significant investment into the FinTech market in London. It is not because the cost of living or taxes are low. It is because there is a clear regulatory framework and a legal framework for how these tools can be deployed, proscriptive consent and disclosure flows that consumers have come to expect and are aware of. So I do not think it is an imminent threat, but I do think if we do not get our house in order in the relative near term, it could become a threat. Senator Warner. One of the things I--and related to this, while not the direct topic today, you know, there is a group of us, bipartisan, that have been working for now 3\1/2\, 4 years to try to at least standardize data breach legislation. The fact that we have got 49 or 47 different data breach legislative laws--this is different than data portability, but I would hope you would think that some level of Federal leadership on data breach would be important as well. Mr. Boms. Absolutely, Senator, so long as the floor that it establishes provides sufficient consumer protection. Senator Warner. Right, and that is, I think, what we have done. Frankly, it has been some of--I was from the telecom business before. It is my old industry that has been some-- everybody is for data breach legislation, but then they all want a carveout for their specific industry, and that is not going to end up being, I think, the way we get there. Unfortunately, those efforts have lagged a little bit in the last 8 or 9 months, and I think as we think about this, we have got to think holistically. And, Ms. Omarova, that is where I want to go to my question with you. I am a big advocate around data portability, and I think Senator Brown may have indirectly raised this question already. In my efforts on the Intelligence Committee, where we are looking at the social media firms who have these platforms, who have enormous, enormous power and growing power, if we deal with data portability in the FinTech space alone but do not deal with data portability in terms of our individual personal data, if we are not able to move from Facebook to another enterprise and make it easy and allow our cat videos to move easily as well, we are really not going to be able to have the type of competitive market, I think, in that field. I would just like you to comment on the need to not only get this right in the FinTech, in the financial arena, but more broadly based. Ms. Omarova. You are absolutely correct. Information is the currency in the digital economy, and, you know, it takes many forms and it flows through many, many markets for many, many goods and services, not just financial markets but markets for other types of data. And it is a structural problem. I understand the concerns with competitiveness, and I am completely in favor of allowing consumers to move freely between different apps and utilize various information in ways that serve their interests. But the problem here is that you have to understand that, structurally speaking, financial institutions are sitting on the type of information that presents, you know, a much heightened danger of misuse, and this is where we should be particularly careful with respect to FinTech and how the financial information is moving structurally in these markets and probably deal with the broader issues of data protection outside the financial sector and perhaps antitrust issues as well, because those are serious structural issues that exist everywhere in the big tech sector separately. Senator Warner. My concern is that what--and this Committee has looked in terms of Russia sanctions, what happened in 2016, where Russia intervened, but what I see as the next iteration is that someone will come in and break into nonprotected personal financial data, as they did with Equifax, and Senator Warren and I have a bill, and it is, I think, a travesty that we are a year later and there still has been no penalty paid by that company. But they will break in, get personal information, contact any of us as an individual, and then what will pop up with be what is called a ``fake video,'' and it will be somebody that looks like Senator Brown, but it is not actually Senator Brown live stream video. And the combination to wreak havoc there not only on the political side but on the market side is really huge, so we have to solve this issue not just for financial data portability but across the board. Ms. Omarova. Oh, that is absolutely correct. That is absolutely correct. Senator Warner. Thank you. Chairman Crapo. Thank you. Senator Cortez Masto. Senator Cortez Masto. Thank you, and thank you, Mr. Chair and Ranking Member. Obviously, this is an important discussion, and thank you all for being here today. It is a great conversation. I echo my colleague Senator Warner. I think we have to look at this in a holistic approach. I think what I have heard today, we all agree we have got to address the data privacy, security, and consumer protection piece of this, but this is emerging technology. It is not going away, and we are going to have to figure out at a Federal level how we address this, but also, I believe, incorporating State laws in the States as well. They have to be a part of this discussion. So let me ask you this, because we received a letter from the National Association of federally Insured Credit Unions, the Committee did. One statement the association makes is that, ``As new companies emerge and compete in this area, it is important that they compete on a level playing field of regulation, from data security to consumer protection.'' Would each of you agree with that statement? Mr. Boms. Senator, yes. Mr. Rubinstein. Yes, absolutely. Whoever holds consumer data should be held to the same standards. Mr. Knight. Yes. Senator Cortez Masto. Thank you. Ms. Omarova. Well, yes, it is generally a good principle. Senator Cortez Masto. And that level playing field of regulation does not mean that we roll back regulation, does it? Mr. Boms. Senator, from my perspective, no, it does not. It means that we make the regulation consistent across the various regulators who have some stake in this. Senator Cortez Masto. Thank you. Mr. Rubinstein. Yes, I would agree. Senator Cortez Masto. Right. And I think you would all agree. Mr. Knight. Senator, I would say that when we talk about level playing field, we should be thinking about what is the risk that is generated that we are trying to regulate against, and so if that risk exists, comparable regulation should exist. If a new player comes along and offers a comparable service but does not generate a certain risk, then they should not be regulated in the same way vis-a-vis that risk. For example, a lender that does not fund their loans from federally insured deposits should not be regulated as a depository because they are just not generating the risks that go along with the deposit holding. They should be regulated vis-a-vis consumer protection in lending, for example. Senator Cortez Masto. OK. Ms. Omarova. Well, sometimes it is very difficult to figure out exactly what types of risks a particular lender or a particularly institution really poses. Sometimes we do not see how exactly they fund their loans and their services. We have learned that from this last crisis. And I think that in that sense, it is important that, if we are looking for leveling the playing field, we have to make sure that that common level is not the minimum regulatory level of oversight but the maximum one. And when we are looking at the maximum level of regulatory oversight in the interest of the American public, we should keep in mind the biggest players in those markets, not the smallest ones. Senator Cortez Masto. Thank you. And can I ask you, each one of you, when we are talking about banks and credit unions that allow data aggregators access to bank customers' accounts, if there is a violation of those customers' privacy information and that privacy information for those customers, who should be legally liable? Should the banks and credit unions be legally liable if they are working with those third-party aggregators and there is a breach? Mr. Boms. Senator, you have identified, I think, perhaps the largest, most significant obstacle in this ecosystem, which Mr. Rubinstein referenced in his opening statement. The members that I represent would say that he who breaches the data should be responsible for making the consumer whole. The catch to that and the issue with that is we have decades of regulation and consumer expectations that say that it is the financial institution that either should or must make the consumer whole. So on some level, even though our members have taken it upon themselves, are adopting this notion of he who breaches must make the consumer responsible, at some point we need to holistically take a look at the regulations that we have on the books and modernize them for the 21st century economy. Senator Cortez Masto. OK. Anyone else? Mr. Rubinstein. Senator, as Mr. Boms said, it is a very difficult topic, and we firmly believe that whoever causes harm to the consumer should make the consumer whole. Unfortunately, this is a chain. Consumer data starts at the financial institution. It moves to a financial data aggregator. Then it moves to a FinTech. It may continue to move beyond that. The financial institution only has a direct relationship in that first step of the chain with the financial aggregator. They need to look to that financial aggregator to make the financial institution whole if the financial institution has reimbursed the consumer and then they can deal with their own customer. Similar to getting into a car accident, right? You have auto insurance. You turn to your insurance company, and then your insurance company goes and subrogates with the others down the chain. It has been very difficult. The industry is not adopting that yet, and we can use a nudge in that direction. Senator Cortez Masto. Thank you. Please, whoever would like to go next. Ms. Omarova. I think that everybody in that chain should bear a responsibility and be exposed to the liability for data breaches of bank customer data. And what concerns me about the Treasury report in particular is that it never really addresses that issue directly, and it talks about, yes, we need to kind of have an appropriate liability regime, but it is not clear to me what that regime will be like. What I know, though, is as a practical matter, in order to incentivize banks to share their information, their bank customer information, with various technology companies, you are going to have to relax the actual liability constraints existing today on them, because, otherwise, they simply would not share it. So that is what concerns me a lot. Senator Cortez Masto. Thank you. And I know I am out of time, Mr. Chair. I do not know, Mr. Knight, if you wanted to say a few words--I do not want to take up any more time. Chairman Crapo. Briefly. Senator Cortez Masto. Thank you. Mr. Knight. So in addition to all that has been said, I would say that one threshold question we need to talk about is that Treasury takes the position in the report that Dodd-Frank Section 1033 compels the bank to make the information available to the consumer's chosen aggregator. I do not know if that is the position the Bureau will take, and if we are compelling the bank, then the normative argument for holding the bank liable if some accident happens down the chain with an aggregator they did not choose to partner with but were compelled to partner with weakens; whereas, if it is a matter of choice all the way down, then the principles discussed make more sense. Chairman Crapo. Senator Scott. Senator Scott. Thank you, Mr. Chairman. Thank you to the panel for investing the time to be here this morning. Things get complicated when a company is headquartered in Tennessee, does business in South Carolina, and is breached in Arkansas. Those States all have different laws on the books governing when and how companies must notify the public of a data breach. The reality is that a patchwork quilt of 50 different breach notification standards creates a race to the bottom in which breached parties will often comply with the lowest possible standard. Consumers are ultimately the ones that pay the price. They are the ones that lose out. I know that Senator Rounds touched on this question earlier, but let me ask you, Mr. Boms, is a State-by-State framework for breach notification effective? Who stands to benefit from a more uniformed approach? Mr. Boms. Senator, we think that there is certainly room for improvement. A Federal approach that lifts up what the ceiling is across the board would benefit consumers, it would benefit the industry. We think it would be a win-win for everybody involved. It is not simply an issue of regulatory complexity at the State level. Several of the FinTech firms that I work with have Federal supervision through third-party vendor risk management, and so there is a piece of prudential bank regulatory authority here as well on this score. This is another area where consistency among regulation, not deregulation, would be immensely helpful. Senator Scott. Thank you, sir. The Gramm-Leach-Bliley Act from 1999, we did business very differently then. I think we were all still using paper for most of our transactions. We probably had dial-up for our Internet connection, and we certainly did not have cell phones that could do anything other than call, and that was a pretty expensive venture as well. The bottom line is that the world has changed so significantly since GLBA was enforced, became law, but it is still the foundation of how we govern data aggregators for financial institutions. I am encouraged by the fact that we are moving to APIs from screen scraping, but it is happening fairly slowly. Mr. Boms, you mentioned Europe, Mexico, and Japan in your testimony. How are U.S. policymakers falling behind in crafting laws that foster FinTech innovation and protecting consumer data? Mr. Boms. Senator, I would answer in two parts. I think the first thing I would say is APIs in and of themselves are not a panacea. They will not solve everything. The API, in addition to being secure, as we have heard, also must be robust. So the API must include data fields like fees, for example, so that a consumer who is using a third-party tool that compares fees at one, for example, financial institution can compare what its fees would be for the same products or services at another financial institution. So making sure that the APIs with the direct feeds are robust is the first step. The second is there are no standards in the U.S. market. The Treasury report talks about data standardization, which we think is a very important area that other markets have addressed. In the U.K. open banking environment, the data elements are standardized. The Mexican central bank and securities regulator are currently working on an API that would standardize the data sets. This would be, we think, one place to start, but there are quite a few that regulators here could begin with. Senator Scott. Thank you. Almost 30 percent of Americans living in economically distressed communities are credit-invisible, meaning they have no credit score. An additional 15 percent are unscorable due to having an insufficient or old credit history. In South Carolina, that combined number is about 23 percent, or one out of every four adults. Senator Cortez Masto and I have worked diligently to find ways to bring that credit-invisible person to a place where their consistent habits of paying their bills, whether it is their electric bill or their cell phone or the rent from a place that they are renting, if they are paying those on time, they should get some credit for that. Mr. Knight, you testified that innovative underwriting can provide consumers with benefits such as lower interest rates. Can you speak to the benefits of using rent and utility payments in credit scoring and to other developments in underwriting that will benefit consumers? Mr. Knight. Thank you, Senator. Yes, I think that expanding access to the types of data that bear on the creditworthiness of a borrower, even if they have not traditionally been captured in traditional underwriting like a FICO score, has the potential to be valuable in allowing lenders to make an accurate assessment of the risk that they would take on by lending to a borrower. In some cases, that will make someone who is credit-invisible visible and, therefore, the lender has enough data they feel like they could make an offer. In other cases, it will indicate that people who are, in fact, good credit risks or better credit risks than they otherwise get credit for, because you are looking at data that has not otherwise been picked up. So I think that there is potential value there. Senator Scott. Thank you. I have another question on my legislation, the MOBILE Act, that I will submit for the record. Thank you, Mr. Chairman. Chairman Crapo. Thank you. Senator Warren. Senator Warren. Thank you, Mr. Chairman. So FinTech holds out a lot of promise for consumers and also raises a number of concerns. I think it is critical that the Government move methodically on a regulatory approach to FinTech, so we encourage productive innovation but we do not expose consumers to a lot of unnecessary risks. So the Treasury Department issued a report on FinTech earlier this year, and in almost every instance, it advocates for deregulation in an effort to stimulate the FinTech industry. And I am concerned about a lot of those recommendations. One set of recommendations is about rolling back the rules that govern how banks can share personal financial information with third-party data aggregators. So, Professor Omarova, I know you addressed this issue in your written testimony, and I just would like you, if you could very briefly, to explain what your concerns are with the Treasury Department's recommendations on this front. Ms. Omarova. So my main concern is that the Treasury's approach will essentially open the floodgate for the banks that are currently regulated to open up this treasure trove of sensitive financial data on the customers that they have for much broader types of uses by various tech companies. So my concern is about Facebook, it is about Google, it is about Amazon. And we do not know what they do with the data they touch, so they could use it, they could get access to that data in one capacity, let us say as a cloud service provider and the code writer, but then misuse it in order to sell something to the customer, and that is what I worry about. And the customer consent here could be obtained by the bank at the point when the customer is actually opening a deposit account with the bank, and that is what concerns me. This notion of consent and choice could be actually diminished. Senator Warren. All right. That is very important. Thank you. You know, given what just happened with the Equifax breach, I think a lot of my constituents and constituents for pretty much everybody here would be uncomfortable with the idea of even more companies getting access to our financial data without our effective consent and without strict rules on how they have to protect that data. Another set of Treasury recommendations would further weaken the wall between banking and commerce. They would allow our biggest banks and our huge technology platforms to join their corporate empires--you were just talking about this--and giant technology companies like Facebook and Google to buildup equity stakes in multiple smaller banks across the country. Again, could you go back to this, Professor, and describe some of the potential harms in allowing this kind of consolidation across different industries? Ms. Omarova. Right. So the Treasury basically seeks to weaken how control is defined in the Bank Holding Company Act. The Bank Holding Company Act currently subjects any company that controls a U.S. bank or is affiliated with a U.S. bank to various regulations and supervision, and it is essentially an antitrust law that seeks to prevent banks from abusing their control of immense power over public money and credit. And what the Treasury says is essentially we should make it much easier for the banks to acquire equity stakes in tech companies and vice versa. And I worry about the fact that it will not create greater competition; it will actually lead to extreme concentrations of power over money and information across the sectors. And it will take the ``too big to fail'' problem to an unprecedented level because in the next crisis we may have to save Facebook and Amazon because they would be so intertwined in the financial sector. Senator Warren. So, actually, this is powerfully important, and I appreciate your comments on this. You know, a lot of discussion in FinTech centers on the consumer to corporate part of this, but there is also the part about the effect it would have on wholesale banking. Can you just say a word more about that? You have talked about blowing up ``too big to fail.'' Just a bit more. Ms. Omarova. So remember with subprime mortgages, for example, it was also--the rhetoric was all about the right of the consumer to choose to take a very expensive loan, for example, but in reality, those mortgages were the fuel for the wholesale market speculation. And so I worry that allowing digitization of data and all of this sort of new FinTech innovation without proper controls will actually increase the potential for wholesale market speculation in the secondary markets that would make the system more volatile and more unstable, and we have to be aware of that danger. Senator Warren. Good. Thank you very much. You know, I know there is a lot that improving technology can do to reduce costs and improve service for customers. But I am concerned that this Treasury report consistently ignores real concerns that could arise both for consumers and for the industry and change the-- have an impact on protecting data, on reducing consumer choices, on maintaining safety in the financial system. So thank you very much, Mr. Chairman, for holding this hearing. I hope we will continue to dig into this issue. Thank you. Chairman Crapo. We definitely will. And I think there is lot of bipartisan agreement on a lot of these issues. I need to wrap up the hearing. However, Senator Brown has asked for one more round of 5 minutes. Senator Brown. I have a couple questions. Thanks. Chairman Crapo. Senator Brown, I will grant that to you, and I am sorry, then I am going to have to wrap the hearing up. Senator Brown. Mr. Chairman, thank you. We have had sort of private discussions about overlap and the common interests we see in some of this on privacy, and I am hopeful that we can come together on some things. I have a couple questions left. Professor Omarova and Mr. Knight, if I could direct the first one to you, starting with you, Professor Omarova. Should a nonfinancial company be allowed access to consumers' detailed financial data such as transactions or account balances? Or should the traditional separation of banking and commerce extend to data sharing as well? Ms. Omarova. I absolutely think that the traditional separation of banking and commerce should extend to everything that relates to data. I do not think that pure disclosure really cures the problem because the problem is structural. The problem is about the market power crossing over different sectors and essentially hurting all of us and the long-term competitiveness of our economy. Senator Brown. Thank you. Mr. Knight, any comments on that? Mr. Knight. So I am somewhat more optimistic. I think that there may be circumstances where allowing that sort of exchange can actually be beneficial to the consumer. I do think that meaningful disclosure, meaningful acceptance is critical to this, because we are talking about very sensitive information, and if the consumer is allowing that information to be shared, it should be used only for the purposes that the consumer has granted access to, and that consent should be periodically reacquired. It should not be something that you click ``yes'' on a splash screen when you first sign up and then never hear about it again. But I do think that there may be scenarios where that exchange actually is worth it. Senator Brown. Thank you. And the last question to Mr. Boms, and thank you, Mr. Chairman. What would be the impact of a successful hack of one of your members? Mr. Boms. Senator, it would depend on which of the members we are talking about. So if I could, I will separate them from the aggregator members and the end FinTech clients. For the aggregator members, there is a wide variety. They are mostly read-only platforms. You cannot execute transactions across them. While many do hold credentials as a way to get into the ecosystem, they employ best in class security systems, hardware encryption, elements of data security that I am not qualified to get into. That is not to say that more cannot be done, but, of course, they are not encumbered by---- Senator Brown. And there have been successful hacks in the past, of course. Mr. Boms. Well, I would argue, respectfully, that the vast majority of the hacks that we see in the financial ecosystem are at the incumbent financial institutions, not the FinTech players, or at least the ones that I represent. That is not to say that one will not happen the second this hearing ends. For the end user--and I should also add, for the aggregators, many have adopted policies where they do not collect PII. So they are the pipeline; they connect one entity to the data that they acquire for the use case, but do not themselves retain the identifying information that the end user provides to their third party. But I think underlying the question, Senator, is there need to be standards for data security in this ecosystem, and that is why my members at least have come out and said, whether it is regulatorily prescribed or whether it is private sector driven, we are ready to have that conversation. And we have already started to deploy some of those standards across the 50 companies that I work with. Senator Brown. Thank you. Chairman Crapo. All right. Thank you, Senator Brown, and I again want to thank the witnesses. I have a lot more questions I want to ask, and I do not know if I will pummel you with all of those, but over time we are going to dig much more deeply into this as a Committee. It is an incredibly important issue. And it is complex. It needs to be understood, and we appreciate your helping us to get a deeper understanding today. That concludes the Committee questioning. For Senators wishing to submit questions for the record, those questions will be due in 1 week, on Tuesday, September 25. Witnesses, we ask you, when you receive questions, if you would promptly respond to them. And, again, we thank you for your willingness to come and share your expertise with us today. With that, this hearing is adjourned. [Whereupon, at 11:21 a.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and additional material supplied for the record follow:] PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO Today, we will hear four very unique perspectives on a segment of financial technology, or ``FinTech.'' Almost exactly one year ago, the Committee held a hearing to explore the various sectors and applications of FinTech. In the short time period between that hearing and this one, many developments and innovations have occurred, both in the private sector and on the regulatory front. Digitization and data, in particular, are constantly evolving, challenging the way we have traditionally approached and conducted oversight of the financial services sector. As technology has developed and the ability to readily and cheaply interact with and use data has flourished, we have experienced a sort of revolution into the digital era. This digital revolution brings with it the promise of increasing consumer choice, inclusion and economic prosperity, among other things. Less than a decade ago, the concept of mobile banking, a simple transaction, was relatively new. Now, consumers have countless options by which to interact with and access their financial information and conduct transactions. As this marketplace rapidly develops, so must we constantly evaluate our regulatory and oversight framework, much of which was designed prior to the digital era. To the extent that there are improvements that can be made to better foster and not stifle innovation, we should examine those. Although these technological developments are incredibly positive, the increased digitization and ease of collecting, storing and using data presents a new set of challenges and requires our vigilance. Many products and services in the FinTech sector revolve around big data analytics, data aggregation and other technologies that make use of consumer data. Oftentimes these processes operate in the background, and are not always completely transparent to consumers. It is important for consumers to know when their data is being collected and how it is being used. It is equally important for the companies and the Government alike to act responsibly with this data and ensure it is protected. As we have seen in recent years, this can be a challenging task. In order to fully embrace the immense benefits that can result from technological innovation, we must ensure that proper safeguards are in place and consumers are fully informed. Today, I hope to hear from our witnesses about: the ways in which FinTech is changing the financial sector and the improvements that can be made to ensure the regulatory landscape welcomes that innovation; what kind of data is being collected and used, and how such data is secured and protected; and what are the opportunities and challenges going forward? ______ PREPARED STATEMENT OF SENATOR SHERROD BROWN In the run-up to the financial crisis, Wall Street banks bragged about innovations that they claimed made the financial system less risky and credit more affordable. Some of these innovations were in consumer products--like interest-only subprime mortgages. Other innovations were happening behind the scenes, like the growth in risky collateralized debt obligations and credit default swaps. According to the banks, technological advances like increased computing power and information sharing through the internet allowed financial institutions to calculate and mitigate the risks of these complex financial innovations. Here in Washington, banks told lawmakers that regulation would hold back progress and make credit more expensive for consumers. Rather than look at financial technology with an eye to the risks, Federal banking supervisors repealed safety and soundness protections and used their authority to override consumer protection laws in several States. Eventually, so-called financial innovations led to the biggest economic disaster in almost a century, costing millions of Americans their homes and their jobs. Criticizing the bankers and regulators who lost sight of the enormous risks that came with these new innovations, former Fed Chair Paul Volcker declared that ``the ATM has been the only useful innovation in banking for the past 20 years.'' I am more optimistic about some new technologies benefiting consumers rather than just lining Wall Street's pockets, but I think we should look at this Treasury report with the same level of skepticism. Rather than learn from past mistakes, the Treasury report embraces the shortsightedness of precrisis regulators. It exalts the benefits of ``financial innovation,'' describes Federal and State regulation as ``cumbersome'' or as ``barriers to innovation,'' and recommends gutting important consumer protections, like the CFPB's payday lending rule. It even suggests stripping away what little control we have over our personal financial data, just a year after Equifax put 148 million Americans' identities at risk. Just like a dozen years ago, Wall Street banks and big companies are making record profits, but working families are struggling just to get by. Student loan debt is at record levels, and credit card defaults are rising. Worker pay isn't keeping up with inflation, but we've managed to cut taxes for the richest Americans while CEOs and shareholders have reaped huge windfalls through over half a trillion dollars in stock buybacks. Plenty of financial institutions are adopting new technologies without running afoul of the law. Rather than focusing on how we can weaken the rules for a handful of companies who prefer to be called ``FinTechs'' rather than ``payday lenders'', or ``data aggregators'' rather than ``consumer reporting bureaus'', Treasury should be focused on policies that help working families. This isn't a partisan issue for me. I raised concerns about relaxing the rules for FinTech firms when Comptroller Curry, appointed by President Obama, suggested a special ``FinTech'' charter almost two years ago. The new leaders at the Federal Reserve, the OCC, the FDIC, and the CFPB have already made it clear that they're ready to give Wall Street whatever it asks for. And the recommendations in this report call for more handouts for financial firms, FinTech or otherwise. I am, however, interested to hear from our witnesses about how new financial technologies could increase our control over our own information, better protect against cyberattacks, or make it easier for lenders to ensure they're following the law. And as traditional banks partner with technology firms, I think it's important for the Committee to consider where gaps in regulation might lead to future systemic risks. Thank you to the Chairman for holding this hearing, and to the witnesses for their testimony today. ______ PREPARED STATEMENT OF STEVEN BOMS President, Allon Advocacy, LLC, on behalf of Consumer Financial Data Rights September 18, 2018 Introduction Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank you for the opportunity to testify today on behalf of the Consumer Financial Data Rights, or CFDR, Group. The CFDR Group is a consortium of nearly 50 financial technology (FinTech) companies, including financial data aggregation companies and end user-facing technology tools, on whose services more than 100 million consumers and small businesses collectively depend for access to vital financial services and wellness applications that serve them at every stage of their financial lifecycles. CFDR Group member-companies provide, for example, automated savings services, no-fee credit cards, investment advisory services, retirement savings advice and critical small business capital. In the complex and often opaque financial services ecosystem, the CFDR Group strives to be the voice of consumers and small businesses before policymakers and market stakeholders alike. My testimony today also provides the perspective of the Financial Data and Technology Association (FDATA) of North America, a trade association for which I serve as Executive Director. FDATA North America is comprised of several financial services providers, some newer entrant FinTech firms and some incumbent, traditional providers, united behind the notion that standardization of consumer data access is both a fundamental consumer right and a market-driven imperative. FDATA North America is a regional chapter of FDATA Global, which was the driving force for Open Banking in the United Kingdom and which continues to provide technical expertise to regulators and policymakers in London, to the European Commission, and to regulatory bodies internationally contemplating many of the same issues identified in the Department of the Treasury's (``the Department'' or ``Treasury'') report released on July 31, A Financial System That Creates Opportunities: Nonbank Financials, FinTech, and Innovation. The CFDR Group and its members consulted frequently with the Department as it considered the current state of the FinTech market, the consumer and small business benefits it provides to Americans today, and how best to harness innovation in the FinTech ecosystem moving forward while ensuring that consumers, small businesses and the financial system itself are well protected. The CFDR Group's engagement with Treasury was principally focused on the crucial issue of consumer- permissioned financial data, which ultimately was an area of emphasis in the Department's report. Ultimately, any provider of a technology-based financial tool, whether that provider is a FinTech firm or a longstanding market incumbent, depends on the ability to access and utilize, with the consumer's or small business' express permission, elements of that customer's financial data to offer its products or services. Financial data, including, for example, balances, fees, transactions, and interest charges, are essential to facilitating the technology tools on which millions of Americans depend. These data elements are typically held at the financial institution with which that customer holds a checking, savings, and/or lending account. Before providing an overview of how this data exchange works today in the United States, I would first like to underscore the immense need that the technology-based tools offered by CFDR Group and FDATA North America member firms are fulfilling. The State of U.S. Consumer Finances Although the U.S. economy is performing well from a macroeconomic standpoint, there are unquestionably significant numbers of Americans who are being left behind and are financially invisible. The level of credit card debt in the United States is historically high and, earlier this year, exceeded $1 trillion for the first time ever, with the average American household holding approximately $8,200 in credit card debt. \1\ About half of American consumers have no retirement savings at all, and of those that do, the average retirement account balance is about $60,000. \2\ Approximately one-third of American adults have sufficient savings to last comfortably for more than a few months during their golden years. \3\ --------------------------------------------------------------------------- \1\ Comoreanu, A. (2018, June 11). ``Credit Card Debt Study: Trends and Insights''. Retrieved from https://wallethub.com/edu/credit- card-debt-study/24400/. \2\ Morrissey, M. (2016, March 3). ``The State of American Retirement: How 401(k)s Have Failed Most American Workers''. Retrieved from https://www.epi.org/publication/retirement-in-america/. \3\ ``1 in 3 Americans Have Less Than $5,000 in Retirement Savings''. (2018, May 8). Retrieved from https:// news.northwesternmutual.com/2018-05-08-1-In-3-Americans-Have-Less-Than- 5-000-In-Retirement-Savings. --------------------------------------------------------------------------- The crisis, of course, is not limited only to an accumulation of debt or a lack of retirement savings. The Federal Reserve Board of Governors determined earlier this year that 40 percent of American consumers could not afford a surprise $400 expense without either selling an asset or taking on additional debt. \4\ And, unsurprisingly, many of us do encounter these surprise expenses. According to a recent study by CIT Bank, while half of Americans experience a financial emergency, such as a major health event or an unforeseen home repair, every year, more than one in four do not save for these unexpected events. \5\ --------------------------------------------------------------------------- \4\ ``Report on the Economic Well-Being of U.S. Households in 2017''. (2018, May 22). Retrieved from https://www.federalreserve.gov/ publications/files/2017-report-economic-well-being-us-households- 201805.pdf. \5\ ``Summer Survey: Trends on Saving for Life's Planned and Unplanned Events''. (2018, August 1). Retrieved from https:// bankoncit.com/blog/2018-summer-savings-survey/. --------------------------------------------------------------------------- It is no wonder, then, that 85 percent of Americans report feeling anxious about their financial state, with more than two-thirds believing that their financial anxiety is negatively impacting their overall health. \6\ --------------------------------------------------------------------------- \6\ ``Planning and Progress Study 2016''. (2016, June 8). Retrieved from https://news.northwesternmutual.com/planning-and- progress-study-2016. --------------------------------------------------------------------------- Compounding this economic predicament is the growing complexity of most consumers' and small business' relationships with the American financial system. The vast majority of Americans have multiple different accounts across a variety of products providers. The most basic, fundamental first step towards financial health--simply understanding what one has and what one owes--is often intimidating and logistically difficult for all but the most financially savvy. The technology-powered tools on which millions of Americans have come to depend, provide intuitive, accessible platforms that enable even the least financially savvy among us to manage their finances and improve their economic outcomes. In addition to allowing Americans to see the totality of their financial accounts in one place, these applications empower consumers and small businesses to find lower loan rates or better loan terms, to avoid predatory products and services, to compare fees across different product offerings, to receive personalized investment and wealth management advice, to find and secure capital that otherwise may not be extended, or to take advantage of budgeting and savings tips to secure their financial future. This of course presumes that one has access to the system in the first place. Twenty percent of adult Americans are underbanked by the traditional financial services system and almost nine million American households are entirely unbanked. \7\ For these consumers, third-party, technology-based tools can provide vital, affordable access to a financial system that has left them behind. --------------------------------------------------------------------------- \7\ ``Financial Inclusion in the United States''. (2016, June 10). Retrieved from https://obamawhitehouse.archives.gov/blog/2016/06/10/ financial-inclusion-united-states. --------------------------------------------------------------------------- Regardless of the use case a consumer or a small business wishes to leverage, and irrespective of whether that technology-powered tool is offered by a FinTech firm or a traditional financial services provider, the lifeblood of these tools is user-permissioned data access: the right of the consumer or small business to affirmatively grant access to the third party of their choice to connect to or see the financial data required to provide them the product or service for which they have provided their consent. The State of Consumer-Permissioned Financial Data Usage of third-party, FinTech tools in the U.S. is widespread: by 2017, 87 percent of consumers preferred to adopt a FinTech application rather than use a product or service offered by a traditional financial services provider. \8\ To gain access, with the consumer's or small business' consent, to their customer's financial data in order to provide their products or services, the vast majority of technology- based tools retain contractual relationships with financial data aggregators, such as Envestnet Yodlee, Quovo, or Morningstar ByAllAccounts, all of which are members of the CFDR Group. These aggregators, which have built data connectivity to thousands of U.S. financial institutions over many years, function as technology service providers for the consumer or small business-facing applications. Once the consumer or small business has affirmatively provided their consent to the application that they wish to utilize, that consent is transmitted to their financial institution and they are authenticated. Upon authentication, the aggregator utilizes one or more methods of data consumption to capture the financial data permissioned by the end user that is required to deliver the use case requested and delivers it to the application provider. The application provider then uses this data to provide its service or product to the consumer or small business. --------------------------------------------------------------------------- \8\ ``EY FinTech Adoption Index 2017''. (2017, June 28). Retrieved from https://www.ey.com/Publication/vwLUAssets/ey-fintech-adoption- index-2017/$FILE/ey-fintech-adoption-index-2017.pdf. --------------------------------------------------------------------------- Because there are no overarching statutory, regulatory or market standards in the United States with regard to consumer or small business authentication, or with regard to the data consumption protocol used by aggregators to transmit the end user's data, with their permission, to their application of choice, there are several different methods used in the ecosystem today. To authenticate, end users typically provide their online banking credentials, either to the third-party application provider delivering them the service or product they have selected, or, through redirection, to their financial institution, which in turn issues an access token to the third party and the aggregator with which it partners. Once the consumer or small business is authenticated, the aggregator may use any of several data consumption methods to retrieve the financial data required for the use case. Some financial institutions have created direct feeds, such as Application Programming Interfaces (APIs), specifically for aggregators and third parties to utilize for the purpose of providing products or services to their customers; however, the vast majority of U.S. financial institutions have not. The significant capital investment required to build and maintain these feeds typically results in only the largest U.S. financial institutions deploying them. In the case where no direct data feed is available, aggregators employ proprietary software to retrieve the data required for the use case from the end user's native online banking environment. This data consumption method is colloquially referred to as ``screen scraping.'' I note here a critical issue that underlies the entire FinTech ecosystem's ability to continue to deliver the products and services on which many consumers and small businesses now rely: There is no legal requirement in the United States stipulating that a financial institution must make the consumer's or small business' financial data it holds available to a third party in the event their customer provides affirmative consent for the institution to do so. Accordingly, a consumer's or small business' ability to take advantage of the benefits offered by third-party, technology-based tools rests almost entirely with the inclination of their financial institutions to allow them to do so. Not all financial institutions are disposed to allow third-party tools, some of which compete directly with their own products and services, complete access to their customers' data. The Treasury's report notes, for example, that ``access [to financial data] through APIs was frequently and unilaterally restricted, interrupted, or terminated by financial services companies.'' \9\ In many cases, these APIs also may not provide the full suite of data required by technology-powered tools to deliver their products or services. The market is therefore fundamentally dislocated; the ability of U.S. consumers and small businesses to utilize third-party technology tools is dependent on the financial services provider(s) with which they do business, with disparate outcomes for Americans who bank with different financial institutions. The unevenness of this playing field could materially worsen as many large U.S. financial institutions seek to impose on consumers and small businesses their view of how the ecosystem should function in the form of bilateral agreements with aggregation firms. --------------------------------------------------------------------------- \9\ ``A Financial System That Creates Economic Opportunities: Nonbank Financials, FinTech, and Innovation''. (2018, July 31). Retrieved from https://home.treasury.gov/sites/default/files/2018-08/A- Financial-System-that-Creates-Economic-Opportunities---Nonbank- Financials-Fintech-and-Innovation_0.pdf. --------------------------------------------------------------------------- The Bureau of Consumer Financial Protection (``BCFP'' or ``the Bureau'') engaged in a year-long process to address this issue, which ultimately culminated in the release in October 2017 of nonbinding principles for consumer-authorized financial data sharing and aggregation. \10\ Though the BCFP's engagement was earnest and well- intentioned, the principles it ultimately released did not meaningfully shape or change market behavior, both because they were not legally binding and because the Bureau declined to forcefully stake out a position regarding consumer-permissioned data access. The BCFP asserted, for example, that consumers ``generally'' should be able to use ``trusted'' third parties to obtain information from account providers \11\ but provided no further detail regarding these qualifiers. As a result of this ambiguity, and despite the BCFP's much- needed engagement in the market, the state of consumer-permissioned financial data access in the United States is not meaningfully different today than it was when the Bureau's nonbinding principles were released almost 1 year ago. --------------------------------------------------------------------------- \10\ ``Consumer Protection Principles: Consumer-Authorized Financial Data Sharing and Aggregation''. (2017, October 18). Retrieved from https://files.consumerfinance.gov/f/documents/cfpb_consumer- protection-principles_data-aggregation.pdf. \11\ Ibid. --------------------------------------------------------------------------- While policymakers in the United States have not issued any regulation specific to consumer-permissioned financial data access, regulators and legislators abroad have sought to harness innovation. As these other jurisdictions implement frameworks that harness innovation, the U.S. market is at risk of losing pace internationally with the development and delivery of new, innovative financial tools for consumers. There is, accordingly, ``a huge risk the U.S. will fall behind, and with that a risk that jobs will go elsewhere.'' \12\ --------------------------------------------------------------------------- \12\ Phillips, C. (2018, September 12). Remarks to the Exchequer Club of Washington. Speech, Washington, DC. --------------------------------------------------------------------------- The United Kingdom's Open Banking regime, under which consumers can utilize authorized third-party tools without restriction, began its implementation phase earlier this year, as did Europe's Second Payments Services Directive, or PSD2. In Mexico, following a recently passed new FinTech law, the Bank of Mexico and the National Banking and Securities Commission (CNBV) are in the midst of developing API standards that national financial institutions will be required to adopt in order to facilitate the use of third-party FinTech tools. The Australian Government has made public its intention to begin its implementation of an Open Banking regime in July 2019, and New Zealand, Canada, and Mexico are not far behind. In the preamble to its report, Treasury rightly notes that policymakers' engagement with the FinTech ecosystem--and the decisions that are made by the financial regulatory agencies in response to the Department's recommendations, particularly with regard to consumer- permissioned data access--will have implications for U.S. global competitiveness. \13\ Developments such as the announcement earlier this month of a pact between the Monetary Authority of Singapore and the Dubai Financial Services Authority to work collaboratively on digital payments and blockchain projects are becoming increasingly common. While the U.S. market continues to consider the most fundamental policy issues regarding innovation in financial services, policymakers in other jurisdictions are assertively creating well- regulated, innovative regulatory frameworks designed to attract and encourage large-scale innovation. The stakes are high: Globally, the FinTech market attracted more than $31 billion in 2017, with the United States attracting more than half the investment in the market. \14\ --------------------------------------------------------------------------- \13\ ``A Financial System That Creates Economic Opportunities: Nonbank Financials, FinTech, and Innovation''. (2018, July 31). Retrieved from https://home.treasury.gov/sites/default/files/2018-08/A- Financial-System-that-Creates-Economic-Opportunities---Nonbank- Financials-Fintech-and-Innovation_0.pdf. \14\ ``The Pulse of FinTech--Q4 2017''. (2018, February 13). Retrieved from https://home.kpmg.com/xx/en/home/insights/2018/02/pulse- of-fintech-q4-2017.html. --------------------------------------------------------------------------- Treasury Report Recommendations Both the CFDR Group and FDATA North America strongly believe that the Department in its July report identified the key outstanding issues with regard to consumer and small business financial data access. I would respectfully highlight five of the Treasury recommendations for the Committee's consideration, as formalizing standards around these areas would significantly bolster the ability of Americans to utilize third-party technology tools to improve their financial well-being: 1. The Bureau should affirm that for purposes of Section 1033 [of the Dodd-Frank Wall Street Reform and Consumer Protection Act], third parties properly authorized by consumers . . . fall within the definition of ``consumer'' under Section 1002(4) of Dodd-Frank for the purpose of obtaining access to financial account and transaction data. Treasury's assertion that the Dodd-Frank Act's inclusion of language in Section 1033 mandating that financial institutions provide their customers with electronic access to their data should be interpreted to ``cover circumstances in which consumers affirmatively authorize, with adequate disclosure, third parties such as data aggregators and consumer FinTech application providers to access their financial account and transaction data from financial services companies'' \15\ marks a significant step forward for consumers' and small businesses' financial rights. Though it may seem self-evident, because Section 1033 of Dodd-Frank provides that the BCFP has the authority to promulgate a rule to ensure end users have electronic access to their online data, and the Bureau has thus far declined to do so, Treasury's affirmation that the Dodd-Frank Act provides this right to consumers and small businesses, even in the absence of a Bureau rulemaking, represents a significant victory for innovation and for consumer and small business financial empowerment. The CFDR and FDATA North America both respectfully echo the Department's call for further action on this score by the BCFP. --------------------------------------------------------------------------- \15\ ``A Financial System That Creates Economic Opportunities: Nonbank Financials, FinTech, and Innovation''. (2018, July 31). Retrieved from https://home.treasury.gov/sites/default/files/2018-08/A- Financial-System-that-Creates-Economic-Opportunities---Nonbank- Financials-Fintech-and-Innovation_0.pdf. 2. All regulators . . . should recognize the benefits of consumer access to financial account and transaction data in electronic form and consider what measures, if any, may be needed to --------------------------------------------------------------------------- facilitate such access for entities under their jurisdiction. One of the systemic disadvantages facing the FinTech ecosystem in the United States as compared with many other countries that have imposed standards with regard to consumer-permissioned data access is the immense relative regulatory fragmentation that exists in the U.S. financial system. In the United Kingdom, for example, two agencies, the Financial Conduct Authority and the Competition and Markets Authority, represent the totality of regulatory authorities that were required to implement an entirely new, innovative approach to harnessing FinTech under Open Banking. Mexico's CNBV and the Bank of Mexico are themselves responsible for developing and imposing financial API standards. The Australian Treasury and the Competition and Consumer Commission alone will deliver Open Banking in 2019. There are at least eight Federal regulatory agencies with jurisdiction over at least some portion of financial data access in the United States: the BCFP, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Federal Reserve Board of Governors, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Federal Trade Commission. (Other Federal agencies, including the Financial Crimes and Enforcement Network and the Financial Industry Regulatory Authority, have also been involved in the issue of consumer- permissioned data recently permissioned data recently. \16\) One commonly discussed regulatory constraint to the open transmission of permissioned consumer and small business financial data has been the prudential bank regulatory agencies' third-party vendor risk management guidance. \17\ --------------------------------------------------------------------------- \16\ ``Know Before You Share: Be Mindful of Data Aggregation Risks''. (2018, March 29). Retrieved from http://www.finra.org/ investors/alerts/know-you-share-be-mindful-data-aggregation-risks. \17\ ``Third-Party Relationships''. (2017, June 7). Retrieved from https://www.occ.gov/news-issuances/bulletins/2017/bulletin-2017- 21.html. --------------------------------------------------------------------------- There are also, of course, regulatory authorities in each State that have jurisdiction over entities that play a role in the FinTech market, financial services providers and FinTech firms alike. While Treasury cannot address the intrinsic, structural disadvantages in the United States' regulatory regime as compared with other countries', its call for all of the agencies in this space to align behind the Department's interpretation of Section 1033 of the Dodd-Frank Act is an important step towards a level playing field, and one that could be hastened by Congressional engagement. While, interestingly, some U.S. regulatory agencies have begun to collaborate with their peers internationally, \18\ greater domestic coordination that provides harmonization, rather than divergence, would spur innovation and improved consumer and small business financial outcomes. --------------------------------------------------------------------------- \18\ ``BCFPB Collaborates With Regulators Around the World To Create Global Financial Innovation Network''. (2018, August 7). Retrieved from https://www.consumerfinance.gov/about-us/newsroom/bcfp- collaborates-regulators-around-world-create-global-financial- innovation-network. 3. The Bureau [should] work with the private sector to develop best practices on disclosures and terms and conditions regarding consumers' use of products and services powered by consumer financial account and transaction data provided by data --------------------------------------------------------------------------- aggregators and financial services companies. The CFDR Group and FDATA North America strongly believe that consumers and small businesses should be empowered to use their financial data for their own financial benefit. To fully realize this empowerment, however, end users must be able to clearly and easily understand to what data elements they are granting third parties access to and for what purpose, as well as how they can revoke their consent to access and use the data. Though several industry groups have previously sought to establish guidelines in this space--and others continue to seek to formulate best practices--given the vast scope of the financial services market, very little standardization has taken place. Fortunately, to the extent that the private sector, the BCFP and other regulatory agencies come together to develop best practices that could be adopted broadly across the industry, a market-tested framework already exists. The United Kingdom's Open Banking architecture includes prescriptive consent flows that ensure that a consumer's or small business' experience granting or revoking consent to access their data to any third party in the Open Banking environment is uniform. Accordingly, consumers in the Open Banking ecosystem experience the same consent-granting process across every third-party application they use, regardless of the financial institution with which they have their primary banking relationship. Offboarding is similarly uniform. The evidence suggests that end users of the Open Banking ecosystem are quickly becoming comfortable and familiar with these standards; three million Open Banking API calls were made this July, a month-over-month increase of 50 percent. \19\ Public and private sector participants would do well to use these Open Banking consent standards as a starting point for creating best practices in the U.S. market. --------------------------------------------------------------------------- \19\ ``Open Banking Progress Update 13 July-31 August''. (2018, September 3). Retrieved from https://www.openbanking.org.uk/about-us/ news/open-banking-progress-update-july-august-2018/. 4. Any potential solution [to move to more secure and efficient methods of data access should] address resolution of liability for data access. If necessary, Congress and financial regulators should evaluate whether Federal standards are --------------------------------------------------------------------------- appropriate to address these issues. The CFDR and FDATA North America believe that the issue of liability is the fundamental obstacle preventing the U.S. market from offering a more even, consumer-centric delivery of third-party tools powered by permissioned data connectivity. Decades-old regulations, such as Regulation E, create either the regulatory expectation or the consumer perception that financial institutions will largely make their customers whole in the event of any financial loss, including as a result of a data breach at a third party. \20\ Further, prudential bank regulators have told the FinTech community that the potential liability exposure to customers that nationally regulated banks face in the event of a data breach for which customers experience a financial loss represents a safety and soundness concern. --------------------------------------------------------------------------- \20\ 12 CFR 205. --------------------------------------------------------------------------- Largely as a result, some of the financial institutions seeking bilateral agreements with data aggregators are seeking to place the aggregator in the position of holding full, unlimited liability for the FinTech ecosystem. These financial institutions hold that, because the aggregator is the only party with which they will have a bilateral agreement, the aggregator is the only entity from which they can recoup customer losses; however, this position is both impractical and untenable. Aggregators typically have no direct relationship with consumers or small businesses. Practically, they do not have the scale necessary to be in a position to provide their financial institution counterparties with boundless liability protection for the entire FinTech market, nor would that fairly apportion responsibility throughout the ecosystem. As responsible stewards of consumer data, however, aggregators are prepared to be liable for any direct consumer harm that arises as a result of a breach for which they are at fault. More broadly, the question of liability must also address the responsibility of the third party with which the consumer or small business has a relationship, whether it is a FinTech application or a technology tool delivered by a traditional financial institution. The CFDR earlier this year released a set of principles, Secure Open Data Access (SODA), which called for the implementation of traceability, minimum cyberliability insurance standards and other standards designed to ensure that the entity responsible for consumer financial loss as a result of a data breach--be it a bank, an aggregator, or a FinTech firm--is the entity charged with making the end user whole. While CFDR members are starting to implement the SODA principles with regard to liability, the financial regulatory agencies and Treasury could augment and assist this work by undertaking efforts to create a more vibrant and affordable cyberliability insurance market, similar to the steps taken by Her Majesty's Treasury in the United Kingdom last year. 5. Any potential solution [to move to more secure and efficient methods of data access should] also address the standardization of data elements as part of improving consumers' access to their data. Treasury notes in its report that ``a standardized set of data elements and formats would help to foster innovation in services and products that use financial account and transaction data . . . '' \21\ While the CFDR Group and FDATA North America wholeheartedly agree with the Department's recommendation, I would respectfully submit an addendum to this recommendation. Standardization of data elements will only be impactful to American consumers and small businesses if they are able to grant access to all of the data required to power the use case they have selected. A standardized data set that, for example, does not allow end users to grant access to any data fields related to the fees or interest rates a financial institution assesses inherently restricts the ability of that customer to utilize fee comparison tools or to use a third-party tool to select an alternative, lower-cost provider. --------------------------------------------------------------------------- \21\ ``A Financial System That Creates Economic Opportunities: Nonbank Financials, FinTech, and Innovation''. (2018, July 31). Retrieved from https://home.treasury.gov/sites/default/files/2018-08/A- Financial-System-that-Creates-Economic-Opportunities---Nonbank- Financials-Fintech-and-Innovation_0.pdf. --------------------------------------------------------------------------- Therefore, with the appropriate consent, authentication, and liability safeguards in place, the standardized data elements made available to the consumer or small business to permit access to third parties of their choosing should include all of the data elements available to the end user in their native online banking environment. This approach would fully enable end users to leverage their own financial data to their economic benefit and it would allow for the realization of a competitive, free marketplace in which consumers have full transparency into financial products and services offered by FinTech providers and financial services firms alike. Conclusion Though tens of millions of American consumers and small businesses are already utilizing third-party tools to improve their financial well-being, more can and should be done to harness the power of innovation and to give Americans full control of their own financial data and future. The Treasury's report provides an insightful overview of the outstanding issues facing the U.S. market that should be collaboratively addressed in order to better serve consumers and to ensure that the United States remains globally competitive as multiple countries implement comprehensive, consumer-centric financial data access frameworks. The CFDR Group and FDATA North America stand ready to work with the Department, the regulatory agencies, market stakeholders, and, of course, Congress, to implement the Treasury's recommendations. ______ PREPARED STATEMENT OF STUART RUBINSTEIN President, Fidelity Wealth Technologies, and Head of Data Aggregation September 18, 2018 Chairman Crapo, Ranking Member Brown, and Members of the Committee: thank you for holding this important hearing. Fidelity is very interested in FinTech and data policy and has a unique perspective to share on financial data account access and aggregation used by many FinTech firms. My name is Stuart Rubinstein and I am President of Fidelity Wealth Technologies and Head of Data Aggregation. In this role, I oversee the team focused on helping Fidelity and other institutions enable consumers to securely share account data and documents with third parties. Fidelity is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services to more than 30 million individuals, institutions, and financial intermediaries with more than $7 trillion in assets under Administration. Our goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. I will focus my testimony for this hearing on an issue I first worked on over 20 years ago: financial data aggregation services and ways we can make data sharing safer and more secure. Fidelity's Perspective on Data Aggregation Fidelity has a unique perspective on financial data aggregation practices and necessary protections for customers. We are on all sides of this issue: we are an aggregator of data for third parties, \1\ we are a significant source of data for aggregators acting on behalf of our mutual customers, and we offer a data aggregation service for our retail customers and retirement plan participants. \2\ This perspective gives us a thorough understanding of the benefits of financial data aggregation, but also of the very real cybersecurity and privacy risks that current data aggregation industry practices create. --------------------------------------------------------------------------- \1\ Financial advisors can use eMoney Advisor, a Fidelity-owned business that provides account aggregation services along with software that helps them provide financial advice to their clients. \2\ Fidelity offers its FullView' services to retail customers through Fidelity.com and to retirement plan participants through NetBenefits.com, and developed its first account aggregation service over 15 years ago. Fidelity FullView provides a snapshot of customers' net worth in a simple format with an ability to do budgeting and financial planning. --------------------------------------------------------------------------- Financial data aggregation in this context refers to services that, with customers' consent, collect financial information from their various bank, brokerage, and retirement accounts, along with other sources, to be displayed and processed in an aggregated view. An example of this kind of service might be a budgeting and planning smartphone app. Consumers use third party applications that leverage data aggregation because they value tools to help manage financial planning, budgeting, tax preparation, and other services. As part of our focus on helping our customers, Fidelity works to make it possible for customers to access the services they want to use--including third party aggregation-based services. To that end, customers have been able to use their Fidelity data in third party applications for many years. However, the cybersecurity environment has significantly changed over that time and we have a responsibility to protect the very sensitive personal financial data and assets of our more than 30 million customers from misuse, theft, and fraud. Current data aggregation practices make this challenging, because they rely on consumers providing their financial institution log-in credentials (i.e., username and password) to third parties. Those third parties, typically data aggregators, then almost always employ a practice known as ``screen scraping.'' At its most basic, screen scraping involves the use of computerized ``bots'' to log-in to financial institution websites, mobile apps, or other applications as if they were the consumer. Once the bots have access to the site or app, they ``scrape'' customer data from the various screens to be presented on a consolidated basis, along with information scraped and collected from other sources. There are two consumer data security problems with this practice. First, as a matter of basic security consumers should not be asked or required to share their private log-in credentials in order to access a third party service. Doing so creates cybersecurity, identity theft, and data security risks for the consumer and financial institutions. Unfortunately, we know that due to years of this practice, financial institution log-in credentials are now held by a myriad of companies. Some are likely very secure, while others may not be secure at all. Given this, allowing third parties to log-in using these credentials as if they are the customer creates significant risk of cyberfraud. Because consumers go directly to data aggregators or their commercial clients and not their financial institution, the financial institutions never really know if the activity has in fact been authorized by the customers or if the customer credential has been compromised and a criminal is using the data aggregation service to test the credential's validity and illicitly gather data. Second, screen scraping may result in access to data fields far beyond the scope of the service a third party offers the consumer-- including personally identifiable information (PII) about consumers and in some cases their dependents. This means third parties have access to fields of information often used by financial institution call centers to identify customers. For example, if a consumer provides his or her log-in credentials to a budgeting app, that app potentially has access to sensitive personal information like customer dates of birth and dependent names and dates of birth, all of which might be data financial institutions use to verify customer identities online or over the phone. Collection of information beyond what is needed for the service the consumer has elected creates unnecessary risk. And all of this adds up to an array of risks financial institutions must navigate to protect the integrity of their systems and the assets of their customers. In considering the challenges described above, Fidelity developed the following five principles that we believe should guide industry in creating better data sharing solutions: 1. We strongly support consumers' right to access their own financial data and provide that data to third parties. As a provider of aggregation services ourselves, we know that customers value these products, and the demand for aggregation is likely to increase. We also believe that the concept of access is broad enough to encompass security, transparency, and cybersecurity protections for consumers. 2. Data access and sharing must be done in a safe, secure, and transparent manner. We firmly believe credential sharing makes the system less safe for consumers, aggregators, and financial institutions alike. While we strongly support customer access, the security of customer data, customer assets, and financial institution systems must be our primary concern. 3. Consumers should provide affirmative consent and instruction to financial institutions to share their data with third parties. Rather than trust that third parties who use customer log-in credentials to access a financial institution's website are authorized, customers should tell financial institutions which third parties have permission to access their financial data. This eliminates the potential that unauthorized access using credentials is mistaken for authorized access. 4. Third parties should access the minimum amount of financial data they need to provide the service for which the customer provided access. There should be a tight nexus between the service provided and the information collected by third party aggregators. For example, if a customer signs up for a tax planning service that leverages aggregation, that service should only access the information needed for tax planning. 5. Consumers should be able to monitor who has access to their data, and access should be easily revocable by the consumer. We believe data sharing and permissioning should be an iterative process, with customers engaged continuously. Moreover, many customers believe revoking access is as easy as deleting an app from their phone--this is not the case. Customers should be able to easily instruct their financial institution to revoke access when they no longer want or need the aggregation-based service. We believe that embracing these principles will better protect consumers, aggregators, and financial institutions, and facilitate more efficient data sharing practices. How Do We Solve This for Consumers? Fortunately, although the risks and challenges of the current system are serious, there are steps financial institutions and aggregators can take together to improve the data sharing ecosystem. The financial services industry is employing technological solutions for the secure exchange and access of financial information. These technologies involve the implementation and use of application programming interfaces (APIs), which are provided by the financial institution to aggregators and other third parties. An API works in conjunction with an authentication process that is handled by the financial institution. There are authentication processes, for example ``open authorization'' (OAuth), that do not involve sharing of account access credentials with third parties. Consumers who want their data aggregated sign into their accounts at the financial institution's website and provide authorization for third party aggregators to access their financial data. The financial institution and the data aggregator then manage that connection through secure, encrypted tokens that are provisioned for the specific connection. There are several compelling consumer and data security benefits for moving to APIs. First, it keeps log-in credentials private and secure by eliminating the need for consumers to share log-in credentials with third parties. This reduces the cyber, identity, and personal data security risks that exist when a consumer shares private log-in details with a third-party. Second, it puts the consumer in the driver's seat by giving consumers greater transparency and control of their data by allowing consumers to provide unequivocal consent and instruction to share their data with third parties. Third, it allows financial institutions and aggregators to agree on what data should be shared and avoid over-scraping. Fourth, it eliminates the need to reconfigure aggregators' systems every time a consumer changes his or her username or password or the financial institution updates its webpage. Fifth, it removes the traffic-intensive screen scraping activity from financial institutions' web sites and other digital properties, returning that capacity to the individual consumers for whom those sites were created. Finally, it enables the consumer to monitor the ongoing access and instruct their financial institution to revoke the consent if desired. Fidelity Access In November 2017, Fidelity announced its own API solution for data sharing called Fidelity Access. Fidelity Access will allow Fidelity customers to provide third parties access to customer data through a secure connection without providing log-in credentials. Fidelity Access will include a control center, where customers can grant, monitor, and revoke account access at any time. We have been working closely with aggregators and other third parties on adoption of this solution. Of particular note, eMoney Advisor, Fidelity's affiliate that offers its own aggregation service, is committed to working with other financial institutions that offer APIs. By championing the exclusive use of APIs to facilitate customers providing third parties access to their financial data, we hope to show leadership by taking action to better secure our customers' data. Industry Standards and Policymaker Guidance In addition to our own efforts to address the problems with data aggregation, we have been working with a wide array of industry and public sector stakeholders. We support many of the data sharing and aggregation principles that have been put forth:In October 2017, after a year-long inquiry into the topic, the Bureau of Consumer Financial Protection (BCFP) released nonbinding financial data sharing and aggregation principles, which helpfully emphasized the importance of access, security, transparency, and consent. \3\ --------------------------------------------------------------------------- \3\ Available at https://files.consumerfinance.gov/f/documents/ cfpb--consumer-protection-principles--data-aggregation.pdf. Fidelity commented on the Request for Information that culminated in these principles (https://www.regulations.gov/document?D=CFPB-2016-0048- 0053). In February 2018, the Financial Services Information Sharing and Analysis Center (FS-ISAC), a cybersecurity information sharing group focused on the financial services industry, published a standard durable data API free of charge to help facilitate safer transfer of financial data. \4\ The --------------------------------------------------------------------------- Fidelity Access API is based on this standard. \4\ See https://www.fsisac.com/article/fs-isac-enables-safer- financial-data-sharing-api. Fidelity is a member of FS-ISAC and contributed to the development of the durable data API. --------------------------------------------------------------------------- In March 2018, the Financial Industry Regulatory Authority (FINRA) published an investor alert that explained the risks associated with aggregation-based services and noted that many firms are moving toward APIs. \5\ --------------------------------------------------------------------------- \5\ Available at http://www.finra.org/investors/alerts/know-you- share-be-mindful-data-aggregation-risks. In April 2018, the Securities Industry and Financial Markets Association (SIFMA) released data aggregation principles that focused on similar themes. \6\ --------------------------------------------------------------------------- \6\ Available at https://www.sifma.org/resources/general/data- aggregation-principles/. Fidelity is a member of SIFMA and worked closely with other member firms in developing these principles. In July 2018, the U.S. Department of the Treasury released a report on Nonbank Financials, FinTech, and Innovation that includes a lengthy discussion of financial data aggregation and helpful recommendations, including simplified disclosures, moving away from screen scraping, and eliminating log-in credential sharing. \7\ --------------------------------------------------------------------------- \7\ Available at https://home.treasury.gov/sites/default/files/ 2018-08/A-Financial-System-that-Creates-Economic-Opportunities--- Nonbank-Financials-Fintech-and-Innovation_0.pdf. These efforts to provide guidance have brought many of the challenges and risks associated with data aggregation to the fore and encouraged healthy debate on how to solve them. Continuing Challenges Despite the general consensus that the status quo is untenable and the industry should move to safer data sharing technologies, there are roadblocks that prevent wider adoption of APIs and other solutions. Here are what we see as the most challenging: Inertia: One force working against adoption of safer data sharing technologies is simple inertia. Existing practices have been the norm for close to two decades. Getting firms to adopt new technologies can be challenging no matter what the benefits. However, given the stakes, with headlines replete with examples of cybersecurity events and data breaches, this is not an adequate reason to resist better data sharing technology. Cost: Another countervailing force is cost. One of the unfortunate truths about screen scraping is that it is cheap and effective. While safer technologies like APIs have become less costly as technology advances, building one does incur costs. We believe the incremental increase in cost is well worth the substantial security and transparency improvements for consumers. Still, financial institutions should be sensitive to this reality, which is why we are providing Fidelity Access to third parties free of charge. Liability: Liability is the most stubborn blocker to wider adoption of safer data sharing technologies. Third party aggregators want to limit their potential liability in the event that financial data is illicitly obtained. We have seen firms try to limit their liability to low dollar amounts. These kinds of limits are untenable for financial firms like Fidelity that have a duty to protect client assets. Fidelity believes firms that obtain and handle consumer data should be held responsible to protect that data from unauthorized use, just as we are. Any other standard creates moral hazard and does not incentivize aggregators to take their data stewardship responsibilities seriously. Until all industry participants--aggregators, FinTech firms, and financial institutions--are prepared to overcome these challenges in a responsible manner, we will not move as swiftly as we otherwise could to adopt safer data sharing technologies. Thank you again for the opportunity to testify and I look forward to answering your questions. ______ PREPARED STATEMENT OF BRIAN KNIGHT Director, Innovation and Governance Program, Mercatus Center at George Mason University September 18, 2018 Good morning, Chairman Crapo, Ranking Member Brown, and Members of the Committee. I thank you for inviting me to testify. My name is Brian Knight, and I am the director of the Innovation and Governance Program and a senior research fellow at the Mercatus Center at George Mason University. My research focuses primarily on the role technological innovation plays in financial services. Any statements I make reflect only my opinion and do not necessarily reflect the opinions of the Mercatus Center or my colleagues. I would like to begin by thanking Chairman Crapo and Ranking Member Brown for their leadership in holding this hearing. The role of financial technology (or FinTech) in changing the market for financial services is continuing to grow, with innovations permeating all financial markets. The importance of these technological changes is reflected by the fact that the Treasury Department chose to devote almost an entire report to the topic in its series of reports on core principles in financial regulation. \1\ I also appreciate your collecting speakers from a broad array of experiences and viewpoints for what I expect will be a productive discussion. I am honored to be part of it. --------------------------------------------------------------------------- \1\ Steven T. Mnuchin and Craig S. Phillips, U.S. Dep't of the Treasury, ``A Financial System That Creates Economic Opportunities: Nonbank Financials, FinTech, and Innovation'' (2018) [hereinafter Treasury Report]. --------------------------------------------------------------------------- Given the limited amount of time, I have focused my testimony on a handful of areas centered on the collection, aggregation, and use of data. I am happy, however, to answer any other questions you may have to the best of my ability. I want to leave you with three main points: 1. FinTech innovation has significant potential to improve the quality of, and access to, financial services. 2. While there are potential risks, these risks should be judged against the status quo, not an unobtainable perfection. 3. Existing law can mitigate risk to some degree, and changes to the law should be considered only if existing law is proven to be inadequate and the benefits of changing the law will outweigh the costs. The Potential for a Better Financial Services Market Changes in technology have the potential to improve the financial services markets. Specifically, the collection, use, and aggregation of consumer data may allow consumers to enjoy more choice, more competition, and higher-quality services. Likewise, the use of artificial intelligence, machine learning, and other advanced algorithmic techniques to process data present the possibility of more accurate, fair, and inclusive underwriting and risk management. While there are reasons to be excited, there are also potential risks. More granular data collection and broader access might increase the risk and harm of data breaches to consumers. There are concerns that the enhanced use of algorithms may lead to more discrimination, a lack of transparency, or diminished access to essential services like credit. \2\ There are also fears that the existing legal and regulatory environment is unable to address the risks introduced by technology. --------------------------------------------------------------------------- \2\ See, e.g., U.S. Fed. Trade Comm'n, ``Big Data: A Tool for Inclusion or Exclusion'' 8-11 (2016) (summarizing findings of public workshop on big data regarding potential risks). --------------------------------------------------------------------------- While these concerns merit consideration and the risks they describe should be monitored, it is premature to panic. First, the early data are promising, in many cases finding that financial technology and the competition and innovation it fosters are improving financial services. Second, existing law and regulation might mitigate some of the major risks already. Although this area is often presented as a lawless Wild West, it is incorrect to think that these areas are unregulated. As discussed below, existing regulations apply, and in general, we should see how well the existing laws and regulations work with new technology before we impose new restrictions. Indeed, we should consider the possibility that, in fact, we already have too much regulation that affects these new technologies. Otherwise we risk forestalling innovations that can lead to more competitive, efficient, and inclusive financial markets--to the detriment of the American consumer. Data Collection As the Treasury Report notes, the ability of financial service providers to collect and utilize a broader and more diverse selection of consumer data has the potential to improve the provision of financial services, especially to consumers who are poorly served by the status quo. \3\ Not only could cost-effective access to more data help established firms improve their offerings, it could also encourage competition and innovation from new entrants. --------------------------------------------------------------------------- \3\ Treasury Report, supra note 1, at 17. --------------------------------------------------------------------------- While the ability to access and utilize more data has a significant upside, it also presents risks. For example, it is possible that the more granular a dataset a financial institution collects on a consumer, the more harm a security breach could cause. Data that might be relatively harmless at one level of detail could become highly sensitive at another. What could be labeled ``professional or medical services'' at one level of detail could be labeled ``marriage counseling'' at another. While obtaining more information could allow financial services providers to offer better products, we should also be alert to the risks that could develop. Additionally, as the Treasury Department notes, there are divergent regulations at the State level regarding data security and breach notification. \4\ These different requirements can increase compliance costs for firms and result in citizens being regulated by sets of rules put in place without consultation with them, the consumers. \5\ Given the predominantly interstate nature of cybersecurity, there is little question that Congress could constitutionally preempt State law to create consistent national standards, and given the costs of the status quo, it may want to consider doing so. --------------------------------------------------------------------------- \4\ Treasury Report, supra note 1, at 39-41. \5\ For further discussion of the potential costs of State-by- State regulation on FinTech, including the costs of inefficiency and political inequity among citizens of different States, please see Brian Knight, ``Federalism and Federalization on the FinTech Frontier'', 20 Vand. J. Ent. and Tech. L. 129, 185-99 (2017). --------------------------------------------------------------------------- Data Aggregation Third-party aggregators, acting on a consumer's behalf, can now allow consumers to see all of their accounts from different financial services providers at a glance. This convenient display of information can help consumers more effectively assess and manage their finances. Third-party aggregation can also be used by applications, again acting at the request of the consumer, to collect the consumer's financial data in order to allow the consumer to use the application's service. Such applications are gaining in popularity; a recent survey conducted by the Clearing House found that about a third of banking customers use financial technology applications. \6\ --------------------------------------------------------------------------- \6\ The Clearing House, ``FinTech Apps and Data Privacy: New Insights From Consumer Research'' 4 (2018). --------------------------------------------------------------------------- While there are real potential benefits to data aggregation, the practice is not without controversy. Banks and other financial institutions have expressed concern that data aggregators, particularly those using ``screen scraping,'' \7\ place consumers' data at risk and potentially expose consumers to fraud and the bank to liability. \8\ As the Treasury Department's FinTech report notes, the banks' fears are not outlandish, as there is an open question as to the scope of the banks' liability under existing law, even if the customer willingly granted access to a third party that was responsible for the data breach. \9\ --------------------------------------------------------------------------- \7\ Screen scraping generally refers to an aggregator using a customer's login credentials to log into a financial institution's webpage on behalf of the customer and extracting data from the webpage. \8\ See, e.g., The Clearing House, ``Ensuring Consistent Consumer Protection for Data Security: Major Banks vs. Alternative Payment Providers'' (2015). \9\ Treasury Report, supra note 1, at 35-36. --------------------------------------------------------------------------- This concern is part of why section 1033 of the Dodd-Frank Act is so controversial. As the Treasury Department report notes, there is a plausible reading of the act (one that the Treasury endorses) that requires financial institutions covered by Dodd-Frank to, subject to rules promulgated by the Bureau of Consumer Financial Protection (Bureau), make account records available in an electronic form not only to consumers themselves but also to a consumer's agent, including a FinTech application. \10\ Paired with potential legal liability, this provides banks with few options to protect themselves. --------------------------------------------------------------------------- \10\ Treasury Report, supra note 1, at 31. --------------------------------------------------------------------------- Understandably, this presents some significant issues that the Bureau, and potentially Congress, should consider. Among them are the following: The extent of the burden placed on covered financial institutions. Must a covered financial institution make data available to all comers, or may it place limits on the basis of safety or data security? The standards for data transmission. As mentioned in the Treasury Report, there has been a shift from screen scraping to the use of application programming interfaces (APIs) that may provide a more secure method of communicating data. However, there is not a mandatory standard that would allow interoperability. While there are ongoing industry efforts to bring standardization, \11\ questions remain as to whether covered financial institutions must accommodate all requests and who will set standards for data transmission methods. --------------------------------------------------------------------------- \11\ See, e.g., ``NACHA, API Standardization--Shaping the Financial Services Industry'' (2018) (discussing efforts by NACHA to develop standards for financial services APIs to allow interoperability). The scope of data transmission. One of the major concerns expressed by covered financial institutions is that data aggregators can obtain data in excess of what is needed to perform the service the consumer has authorized them to do. Conversely, data aggregators express frustration that financial service providers prevent them from accessing needed data via financial-service-provider-approved APIs. \12\ While the availability of more data may allow applications to offer better services, it could also increase consumer harm if there were a breach. The scope of data that aggregators will be able to obtain from financial institutions, and what factors control that scope, will need to be determined. --------------------------------------------------------------------------- \12\ Treasury Report, supra note 1, at 34. Consumer control of data transmission. The amount of control consumers will have over the amount of data that is obtained by aggregators, and how that control must be exercised, will need to be determined. According to the same survey by the Clearing House, a majority of consumers would like to be required to provide explicit consent to any third party seeking data. \13\ However, what that might look like in practice (e.g., when that consent must be provided or how granular the consent must be), and whether that standard is even practical, remain to be determined. --------------------------------------------------------------------------- \13\ The Clearing House, supra note 8, at 7. --------------------------------------------------------------------------- Liability for data breaches. As the Treasury Report discusses, there is a question regarding the scope of liability for a financial institution in the event consumer data is lost owing to a failure on the part of a data aggregator or a downstream application. Financial institutions feel at risk that they will ultimately be forced to compensate customers, even if the financial institution was not at fault, because the aggregator or application lacks sufficient resources to make aggrieved customers whole. This concern is heightened if financial institutions are forced to make data available to aggregators, rather than choosing to enter into contracts that allow the financial institutions to perform due diligence and make demands of the aggregator. If the Bureau adopts the Treasury Department's view regarding section 1033, it will need to craft a rule that provides meaningful access while addressing the legitimate concerns of covered financial institutions. However, the Bureau should also leave as many of the details as possible to market participants so as to not impede innovation or risk enshrining requirements that will become outdated or suboptimal far faster than the regulatory process can adapt. Congress should monitor these developments to determine whether any subsequent adjustment is necessary. Innovative Underwriting As the Treasury Department notes, credit underwriting is one area where data, in conjunction with artificial intelligence, are being used to potentially great effect. There is optimism that algorithmic underwriting may increase inclusion and improve the quality of underwriting, making it more accurate and efficient. However, there are also concerns that it could exacerbate discrimination and exclusion, because the algorithms may exacerbate existing discrimination or be so opaque that humans lose the ability to discern what is driving the algorithm's results, preventing humans from excluding improper variables. \14\ These concerns are particularly acute with regard to unintentional discrimination through the use of facially neutral variables that nonetheless have a ``disparate impact'' on protected classes of persons. --------------------------------------------------------------------------- \14\ Treasury Report, supra note 1, at 57-8. --------------------------------------------------------------------------- While these concerns should be taken seriously, there are also reasons to believe they are at least somewhat overstated. First, it must be remembered that the appropriate standard to judge innovative underwriting is not perfection. Rather, we should judge whether it is an improvement over the status quo. In this regard, there is evidence that innovative underwriting may prove to be less discriminatory than current practices. Second, there are reasons to believe that the current legal and regulatory environment for financial services may be well situated to mitigate these risks. As Professor Anupam Chander points out, there are several reasons why algorithms may prove to be less prone to discrimination than human decision making. To the extent that discrimination is driven by subconscious or unconscious bias, those biases are less likely to survive the process of being written down in an intentional underwriting algorithm compared to a ``gut decision'' by a lending officer. \15\ Additionally, to the extent there is concern that algorithms may present a ``black box'' that cannot be audited, they nonetheless present less of a black box than the human mind. \16\ Further, to the extent human decision making incorporates inaccurate stereotypes when making decisions, algorithms, with access to more and better data, and without the baggage of inaccurate stereotypes, may be able to do a better job. \17\ --------------------------------------------------------------------------- \15\ Anumpam Chander, ``The Racist Algorithm?'', 115 Mich. L. Rev. 1023, 1028 (2017). \16\ Id. at 1030. \17\ Id. --------------------------------------------------------------------------- Early evidence of the use of innovative underwriting is promising. For example, researchers at the Federal Reserve Banks of Chicago and Philadelphia looked at a leading marketplace lender's use of innovative underwriting and found that the lender was able to offer many borrowers better rates than they would have received from a traditional lender. These loans also seemed to age reasonably well, indicating that the underwriting did not present an undue risk of default. \18\ Likewise, scholars at the University of California, Berkley, found evidence indicating that FinTech lenders using innovative underwriting for mortgages were significantly less likely to discriminate on the basis of race than traditional lenders. \19\ While we are still in the early days and more research is necessary, there are good indications that innovative underwriting, as applied, may have significant benefits. --------------------------------------------------------------------------- \18\ See Julapa Jagtiani and Catharine Lemieux, ``FinTech Lending: Financial Inclusion, Risk Pricing, and Alternative Information'' (Fed. Res. Bank of Phila., Working Paper No. 17-17, 2017); Julapa Jagtiani and Catharine Lemieux, ``The Roles of Alternative Data and Machine Learning in FinTech Lending: Evidence From the Lending Club Consumer Platform'' (Fed. Res. Bank of Phila., Working Paper No. 18-15, 2018). \19\ See Robert P. Bartlett, Adair Morse, Richard Stanton, and Nancy Wallace, ``Consumer Lending Discrimination in the FinTech Era'' (2018). --------------------------------------------------------------------------- Additionally, certain existing regulatory requirements may encourage firms developing innovative underwriting tools to avoid some of the concerns expressed by pessimists. For example, while there are concerns about the opacity of algorithms, the Equal Credit Opportunity Act and Fair Credit Reporting Act require lenders to be able to provide prospective borrowers with adverse action notifications explaining why the borrower was denied or charged a higher rate and detail the information the lender used to make that determination. \20\ Complying with this requirement will be difficult if the lender's algorithm is truly opaque, giving lenders an incentive to maintain auditability and explainability. \21\ --------------------------------------------------------------------------- \20\ Matthew Bruckner, ``The Promise and Perils of Algorithmic Lenders' Use of Big Data'', 93 Chicago-Kent L. R. 1, 38-39, 51 (2018). \21\ Id. at 40. --------------------------------------------------------------------------- Further, while lenders have an economic incentive to ensure that their algorithms are accurate and not irrational, there are also existing regulatory reasons to do so. To the extent that underwriting algorithms generate lending decisions that create the ``artificial, arbitrary, and unnecessary barriers'' that disparate impact theory is meant to address, \22\ the lender may, depending on the unique circumstances and the relevant applicable statutes, also find itself subject to liability for lending decisions that, while relying on facially neutral criteria, have a disparate impact on protected classes of borrowers, unless those decisions are driven by a legitimate business purpose and cannot be accomplished with less discriminatory means. While lenders have a strong profit motive to make certain their underwriting is as accurate as possible, potential liability should also encourage lenders to actively monitor and improve their algorithms. --------------------------------------------------------------------------- \22\ Tex. Dep't of Hous. and Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507, 2522 (2015). --------------------------------------------------------------------------- Conclusion The advance of technology has shown significant promise for improving the market for financial services. Specifically, the collection, aggregation, and use of consumer data has significant potential to allow consumers to enjoy the benefits of a more competitive and innovative market. Of course, there is no such thing as a free lunch, and increased risks may accompany the benefits. However, at present there is no reason to panic, and rash regulatory intervention may frustrate proconsumer innovation, leaving consumers worse off. Congress should carefully monitor and evaluate developments in the FinTech arena and intervene only when existing law and regulation-- including market regulation--prove inadequate to address a problem and where the costs of intervening would not be worse than the problem the intervention seeks to solve. When Congress does intervene, it should do so in a technologically agnostic manner and refrain from imposing specific technical requirements on market participants because such solutions are likely to become obsolete in short order. A specific area Congress may want to monitor is whether concerns about potential liability are chilling innovations in underwriting that might otherwise benefit society. Congress should consider tools such as ``regulatory sandboxes,'' which can allow firms to experiment in a way that encourages innovation while maintaining appropriate consumer protection. While some regulators have announced their intention to undertake such activities under their existing authority, given the fragmented nature of financial regulation, it may require Congress to provide sufficient authority to allow for meaningful experiments. Another area Congress should consider is the question of whether the current allocation of regulatory authority regarding data security and breach notification is appropriate. As mentioned earlier, the laws governing data security and data breach notification, especially those at the State level, may be unduly burdening market participants and forcing consumers to pay for rules they had no say in. Therefore, Congress should consider whether establishing consistent, preemptive Federal standards would be appropriate. Technology presents the opportunity for market actors to more effectively gather, aggregate, and use data to provide customers with better, cheaper, and more effective financial services. While there are potential risks that should be monitored, there is also the potential for significant benefits. Intelligent regulatory choices, including the possibility of exercising forbearance, can help create an environment where consumers are able to enjoy the maximum benefits of innovation and competition while enjoying adequate protection. Thank you again for the invitation to testify. I look forward to your questions. ______ PREPARED STATEMENT OF SAULE T. OMAROVA Professor of Law, and Director, Jack Clarke Program on Law and Regulations of Financial Institutions and Markets, Cornell University September 18, 2018 Dear Chairman Crapo, Ranking Member Brown, Members of the Committee: Thank you for inviting me to testify at this hearing. My name is Saule Omarova. I am Professor of Law at Cornell University, where I teach subjects related to U.S. and international banking law and financial sector regulation. Since entering the legal academy in 2007, I have written numerous articles examining various aspects of U.S. financial sector regulation, with a special focus on systemic risk containment and structural aspects of U.S. bank regulation. Prior to becoming a law professor, I practiced law in the Financial Institutions Group of Davis Polk and Wardwell. I also served in the George W. Bush administration as a Special Advisor on Regulatory Policy to the U.S. Treasury's Under Secretary for Domestic Finance. I am here today solely in my academic capacity and am not testifying on behalf of any entity. I have not received any Federal grants or any compensation in connection with my testimony, and the views expressed here are entirely my own. FinTech--an umbrella term that refers to a variety of digital technologies applied to the provision of financial services--is by far the hottest topic in finance today. Recent advances in computing power, data analytics, cryptography, and machine learning are visibly changing the way financial transactions are conducted and financial products are used. New financial technologies promise to make transacting in financial markets infinitely faster, cheaper, easier to use, and more widely accessible. Reaching across generational and political lines, technology is bringing tech-savvy millennials, utopian anarchists, and computer scientists into the mainstream debate on the future of finance, infusing it with a new sense of excitement about the game- changing potential of the unfolding FinTech ``revolution.'' As usual, financial markets translate these expectations into massive and rapidly growing flows of capital into FinTech-related ventures. This is, of course, not the first time in modern history that these market dynamics are being played out. \1\ As history keeps teaching us, in such periods of rising investor optimism, it is especially critical that policymakers and regulators remain cautious, cool-headed and even- handed in their assessment of FinTech. On the one hand, there is no doubt that technological progress creates previously unimaginable opportunities for improving the functioning of financial markets and, more broadly, the quality of our financial lives. On the other hand, there is no guarantee that any of these expected benefits will, in fact, materialize--or whether they will generate any real long-term benefits for the Nation's economy and society as a whole. --------------------------------------------------------------------------- \1\ See Charles P. Kindleberger and Robert Aliber, ``Manias, Panics, and Crashes: A History of Financial Crises'' (2005). --------------------------------------------------------------------------- In this context, it is especially commendable that the Committee is taking a closer look at the current state of FinTech and the current Administration's strategic priorities in this area laid out in the U.S. Treasury Department's recent report to President Trump, ``A Financial System That Creates Economic Opportunities: Nonbank Financials, FinTech, and Innovation'' (hereinafter, the ``Treasury Report'' or ``Report''). \2\ --------------------------------------------------------------------------- \2\ U.S. Department of the Treasury, ``Report to President Trump: A Financial System That Creates Economic Opportunities: Nonbank Financials, FinTech, and Innovation'' (July 2018), [hereinafter, Treasury Report] available at https://home.treasury.gov/sites/default/ files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities--- Nonbank-Financi....pdf. --------------------------------------------------------------------------- At this early stage in the development and adoption of many FinTech applications, it is difficult to come up with an exhaustive list of specific policy concerns associated with each specific technology use. It is also difficult to identify the full spectrum of changes in the existing legal and regulatory regimes needed to accommodate specific uses of new technologies in financial transactions. It is both possible and necessary, however, to start taking a broader systemic view of FinTech and identifying key public policy issues arising in connection with the continuing growth of FinTech. A comprehensive analysis of the macrolevel, systemic implications of FinTech is provided in my new working paper, ``New Tech v. New Deal: FinTech as a Systemic Phenomenon'', attached separately as an Appendix hereto. In this testimony, I will take a broader look at a few overarching themes that arise directly out of the Treasury Report and, in my view, deserve the Committee's special attention. The key point here is that the Treasury Report understates or even ignores a number of critically important public policy issues and concerns raised by the unfolding digital ``revolution'' in finance. My testimony identifies a few such high-level public policy concerns that both (1) merit full consideration by the Committee, and (2) are not adequately discussed or acknowledged in the Treasury Report. It is not intended as a detailed critique of the Treasury's conclusions and recommendations, nor does it claim to analyze the full risks and benefits of any particular FinTech application discussed in the Report. The purpose of my testimony is to widen the lens beyond the seemingly value-neutral and narrowly technocratic ``solutions''--and to introduce the necessary note of caution with respect to potentially crucial systemic implications of the Treasury's approach to FinTech innovation. The Treasury Report: The FinTech Strategy Outlined The Treasury Report addresses a wide range of important trends in today's FinTech sector and discusses a long list of legal and regulatory challenges such trends present. The Treasury's numerous conclusions and recommendations span across multiple issues and vary greatly in the level of specificity. The Report's primary public policy significance, however, is that it outlines the current Administration's strategic approach to FinTech--and, more generally, financial sector-- regulation. Thus, understanding the Report's programmatic content is the key first step in the process of examining FinTech as a public policy challenge. Underlying Narrative: FinTech as a Technical Phenomenon From the outset, the Treasury clearly states its view of data digitization and the corresponding growth in the use of digital technologies in financial and commercial transactions as the fundamental drivers of innovation and economic growth in the modern economy. \3\ The Report asserts that recent advances in core computing and data storage capacity dramatically reduced the cost of transmitting, keeping, and managing financial information--thus greatly increasing operational efficiencies and reducing the overall cost of delivering financial services. \4\ It claims further that digitization allows financial institutions to satisfy consumers' and companies' demand for increased convenience and speed of transacting and to scale up their services to reach a greater number of customers. \5\ --------------------------------------------------------------------------- \3\ Treasury Report, at 6-8. \4\ Id. at 7. \5\ Id. --------------------------------------------------------------------------- On the basis of this optimistic narrative, the Treasury concludes that ``[t]he availability of capital, the large scale of the financial services market, and continued advancements in technology make accelerating innovation nearly inevitable.'' \6\ Accordingly, the Report defines the Administration's overarching strategic policy priority in terms of actively facilitating the ``inevitable'' march of FinTech innovation. --------------------------------------------------------------------------- \6\ Id. at 8. --------------------------------------------------------------------------- To the extent this approach conveys a basic recognition of the need to accept and facilitate socially beneficial technological change, the Report's contribution is both timely and important. Technological progress and financial innovation, however, are not ``natural'' and value-neutral ``win-win'' phenomena: they have significant long-term distributional and systemic stability-related--and thus political-- consequences. Technology is a tool that can be used in socially harmful ways that advance the interests of the few rather than those of the many. This basic fact makes it especially important to keep in mind that the Treasury's conclusions and recommendations directly reflect, and are shaped by, certain fundamentally normative preferences and assumptions. These underlying normative choices are often hidden behind the technical idiom and deliberately technocratic discussions filling the Report's 223 pages. An unbiased evaluation of the Treasury's proposed FinTech strategy, therefore, requires a clear understanding of what that strategy actually calls for--and whose economic and political interests it prioritizes. Normative Baseline: Regulatory Accommodation of Private Sector Innovation Two principal themes run through the long list of Treasury's recommendations: (1) an explicit and strong commitment to promoting private sector-led financial innovation; and (2) an implicit but equally strong commitment to minimizing regulatory interference with private firms' efforts to scale up FinTech operations. These fundamentally normative choices form the basis of the Treasury's overall FinTech strategy. The Treasury Report envisions financial innovation as both (1) presumptively socially beneficial; and (2) a fundamentally and inherently private sector-led initiative. The Report consistently emphasizes private firms' leading role in digitization of financial data and services. Even where the Report advocates establishing ``public-private partnerships'' (PPP), its envisioned PPP model clearly places control over the nature and pace of technological change in private firms' hands. Throughout the Report, the principal role of the Federal and State lawmakers and regulators is effectively confined to providing the necessary logistical and infrastructural support for private firms' FinTech activities, while otherwise ``staying out'' of their way. Accordingly, the Treasury's strategic emphasis is on ``modernizing'' the existing legal and regulatory regimes in order to accommodate, rather than control, the process of privately led financial innovation. In that sense, the Treasury's normative stance is fundamentally deregulatory. Rhetorical Focus: ``All About Consumers'' As a rhetorical matter, the Report justifies this inherently reactive and accommodating regulatory posture by stressing that new FinTech products are (1) created in response to consumer demand for better financial services, and (2) offer important benefits to consumers. \7\ --------------------------------------------------------------------------- \7\ See, e.g., Id. at 17-19. --------------------------------------------------------------------------- These consumer benefits include greater speed and convenience of transacting; easier access to financial markets and services; and greater freedom of consumer choice with respect to financial products and service providers. \8\ By offering these benefits, the Treasury's argument goes, FinTech serves equally the interests of all segments of America's population, from digitally savvy millennials to the under- served poor, from pragmatic bargain-hunters to ideological libertarians. Put simply, the Treasury's argument is that all of us, ordinary consumers of retail financial services, are the principal beneficiaries of the proposed regulatory unshackling and unfettered FinTech innovation. --------------------------------------------------------------------------- \8\ Id. at 17. --------------------------------------------------------------------------- This is, of course, a well-known mode of arguing consistently employed by the proponents of deregulation in the financial sector. The financial industry and its representatives have a long historical record of justifying their demands for regulatory easing by reference to consumer benefits. As discussed below, in the years before the 2008 crisis, the same rhetoric was widely used to avoid legislative or regulatory ``interference'' with predatory subprime lending practices that were at the core of the unsustainable speculative asset boom and the resulting economic devastation. It is therefore important to contextualize the Treasury's claims. Practical Focus: Relaxing Bank Regulation To Enable Certain Structural Changes To operationalize its programmatic goals--promoting private sector- led financial innovation and minimizing regulatory ``interference'' with that process--the Treasury adopts what may be viewed as a structural approach. Many of the Treasury's various recommendations target, directly or indirectly, the organizational and operational ``walls'' that currently prevent or slow down FinTech companies' full- scale entry into the banking sector. Thus, the Treasury Report strongly calls for financial regulators to ``modernize''--or, more precisely, to relax or remove--some of the key rules and regulations governing banking institutions' relationships with unaffiliated technology companies. The unstated goal of the Treasury's ``modernization'' strategy is to enable regulated banks to form large-scale de facto partnerships with technology companies, without subjecting the latter to bank-like oversight. Three examples of this deregulatory approach are particularly noteworthy. Thus, the Treasury Report lists a variety of specific recommendations that seek to: 1. enable banking institutions to enter into open-ended, large-scale data-sharing and information-management partnerships with technology companies; 2. enable mutual equity investments and direct affiliations between banks and nonbank technology companies; and 3. facilitate ``rent-a-charter'' arrangements allowing online marketplace lenders to take advantage of national banks' exemptions from State usury laws. These recommendations raise a number of potentially significant public policy concerns that do not receive attention in the Report. In broad terms, these policy concerns arise in three interconnected but conceptually separate areas: 1. consumer financial data privacy and safety; 2. market structure and potential concentration of economic power; and 3. systemic financial stability and economic growth Below, I will examine each of these high-level public policy issues--or systemic concerns--in the context of the three groups of Treasury recommendations outlined above. Systemic Concern Number One: Consumer Protection The Treasury Report advocates for a significant relaxation, if not elimination, of the existing rules governing banking institutions' relationships with third-party vendors, in order to make it easier for regulated banks to form large-scale data-sharing and data-management partnerships with data aggregators and cloud service providers. \9\ --------------------------------------------------------------------------- \9\ Id. at 73-77. --------------------------------------------------------------------------- Data aggregators--or data miners--are technology companies that collect and ``share'' (i.e., sell to interested businesses) vast amounts of online business and personal user data. So far, banking institutions have been reluctant to share their customers' financial information--including personal bank account types and balances, history of late fees and charges, detailed transaction records, and so forth--with unaffiliated data aggregators. Bound by their legal and regulatory obligations to safeguard customer information handled by third-party vendors, banks typically insist on controlling their bilateral relationships with individual data aggregators and often impose unilateral restrictions on their access to banks' customer data. The Treasury Report views this situation as an example of undesirable regulatory obstacles to financial innovation and, accordingly, calls for a concerted regulatory effort to allow data aggregators a greater direct access to banking customers' financial data. The Report maintains that it is critical to ease legal and regulatory requirements that currently ``hold back'' financial institutions from entering in unrestricted data-sharing agreements with data aggregators. In particular, the Report calls for a universal adoption of Application Programming Interfaces (APIs) that would give data aggregators direct access to customer account and transaction data in possession of either any particular bank or all participating financial institutions. \10\ Relieving banks from legal liability for third-party service providers' handling of customer data is key to this industrywide shift to APIs that is, in turn, critical to scaling up the flow of financial information from banks to data aggregators. \11\ --------------------------------------------------------------------------- \10\ Id. at 26-27. \11\ Id. at 73-77. --------------------------------------------------------------------------- The Treasury Report adopts the same approach to promoting large- scale partnering between banks and cloud computing service providers, The Treasury recommends that Federal financial regulators ``modernize their requirements and guidance (e.g., vendor oversight)'' to reduce regulatory barriers to large-scale migration of banks' data and information management activities to the cloud managed by third parties. \12\ As the Report emphasizes, facilitating a massive shift to cloud computing would ``increase the speed of innovation'' in the financial sector. \13\ Enabling banks and other regulated financial institutions to outsource their integrated data management and information technology functions to large cloud service providers, without exposing themselves to potentially extensive liability, is critical to this industrywide shift. \14\ --------------------------------------------------------------------------- \12\ Id. at 52. \13\ Id. at 49. \14\ Id. at 49-50. --------------------------------------------------------------------------- To justify shielding banks from liability--among other things, by relaxing existing bank service provider regulations--the Treasury points to banks' efficiency gains and their customers' greater convenience and freedom of choice. The basic claim is that allowing unaffiliated tech companies to access, host, and manage bank data will (1) render financial services faster and cheaper for all consumers; and (2) give consumers unfettered control over their own financial data and their own financial affairs. There is no doubt that wholesale outsourcing of banks' customer and enterprise data storage and management to specialized technology companies would greatly reduce banks' operating costs and regulatory compliance headaches--and even enhance banks' revenues by enabling them to charge data aggregators for direct feeds of their customers' account data. It would also potentially enable individuals to access their bank accounts and other financial records via the same device they use for downloading music and rating restaurants. As the Report emphasizes, data-sharing through APIs would create a seamlessly integrated virtual data management space for individuals seeking this kind of click- through convenience. However, the Treasury Report ignores potentially significant public harms of allowing an industrywide wholesale migration of core bank activities and highly sensitive financial data to the cloud and/or data aggregation platforms run by third parties. What is breezily portrayed as ``financial data freedom'' for consumers, in practice, may lead to potentially irreversible erosion of consumer rights and meaningful freedom of choice in the financial marketplace. While it is difficult to present a comprehensive list of potential harms to consumers likely to result from the proposed data-sharing expansion, two basic issues deserve the Committee's consideration. Privacy and Safety of Bank Customers' Financial Data One reason for concern is that, despite the attractive rhetoric of ``financial data freedom,'' an easy and direct access to banking institutions' data creates both the opportunity and the incentive for tech platform companies to engage in unauthorized commercial uses of bank customers' personal data. Giving consumers ``unfettered'' access to their personal financial data, in the way advocated in the Treasury Report, would simultaneously give technology platform operators an equally unfettered access to the same data. These platform operators, however, are not regulated or supervised in the interest of consumer financial privacy as banks currently are. \15\ Unlike banks, these companies are not required to maintain any particular levels of liquid assets or equity capital to ensure their safety and soundness. They don't have any explicit legal obligations to make customers whole in case of unauthorized withdrawals of money from customers' accounts. They don't have a corps of dedicated Federal and State agency staff--such as bank examiners--monitoring closely their daily operations for compliance with the applicable consumer protection and business conduct standards. In other words, these companies are regular private entities seeking to maximize their own private profits in a free capitalist market, governed by the basic principle of ``caveat emptor'' (``buyer, beware''). In this sense, they are not fundamentally different from used car salesmen. --------------------------------------------------------------------------- \15\ See Karen Petrou, ``The Crisis Next Time: The Risk of New-Age FinTech and Last-Crisis Financial Regulation'' (Sept. 6, 2018), available at http://www.fedfin.com/images/stories/client--reports/ FedFin%20Policy%20Paper%20on%20The%20Risk%20of%20New- Age%20Fintech%20and%20Last-Crisis%20Financial%20Regulation.pdf. --------------------------------------------------------------------------- Unlike used car salesmen, however, these tech platform companies will now be able to get direct access to your bank account and transaction data--and thus invisibly monitor your earnings and your expenses, your daily Starbucks coffee purchases and your annual political campaign contributions. That will give these professional information merchants an extraordinary advantage over you, the consumer. They will be able to ``harvest'' a valuable asset--your personal financial information--without paying you for it. They can then use it to make you buy the products they want to sell you. They can also sell your financial information to other salesmen who can, in turn, use it to make you buy what they want to sell you. And all of this ``free commerce'' can happen without your knowledge or informed consent. In fact, the only action required on the part of an individual to become a captive participant in this spiral of ``free commerce'' may be as simple as opening a deposit account at a local bank--and perhaps signing a boilerplate ``consent'' form. \16\ --------------------------------------------------------------------------- \16\ Treasury Report, at 26. --------------------------------------------------------------------------- If this is a plausible hypothetical, the Treasury's proposed method of ``embracing digitization'' by relaxing existing regulatory constraints on banks' data-sharing has to be subjected to the strictest scrutiny. Instead of giving consumers meaningful ``financial data freedom,'' it would give a massive gift of ``free financial data'' to data aggregators, cloud providers, various FinTech companies, and other businesses set up to capitalize on it. This is a deeply troubling prospect. As a recent study found, ``the FinTech ecosystem is predicated on little to no privacy protections for consumer data housed outside regulated financial institutions.'' \17\ But it is also intuitively easy to understand the obvious dangers of allowing large tech platform companies such an easy access to bank customers' personal financial data. A strong public reaction to the recent news of Facebook--one of the world's largest and most notorious data aggregators--requesting access to large banks' customer data shows that consumers care deeply about keeping their financial information private, safe, and secure from all manner of unauthorized use. \18\ --------------------------------------------------------------------------- \17\ Petrou, supra note 15, at 3. \18\ See Emily Glazer et al., ``Facebook to Banks: Give Us Your Data; We'll Give You Our Users'', Wall St. J. (Aug. 6, 2018). --------------------------------------------------------------------------- The Treasury Report does not address the heightened risk of unauthorized commercial uses of consumer data by tech platforms allowed to access it. Instead, it confines the discussion to issues of data security, or unauthorized access to data. While acknowledging the importance of data protection in general terms, the Report generally seems content leaving the necessary adjustments to the private sector. Thus, it refers to the fact that the Federal Trade Commission (FTC) imposes certain information security requirements on data aggregators that are ``significantly engaged in financial services,'' and are therefore subject to its so-called Safeguards Rule. \19\ In the Treasury's view, that rule ``appropriately addresses'' all concerns about the security of customers' financial information managed by data aggregators and other FinTech firms. \20\ Accordingly, the conclusion is that no further legislative or regulatory action is needed in order to bolster consumer data protection. It is not clear, however, to what extent the FTC's Safeguards Rule is sufficiently effective in practice. The Rule may not even apply to giant platform conglomerates whose financial activities do not technically constitute a ``significant'' portion of their overall operations. \21\ Moreover, a recent massive data security breach at Equifax, which affected over 143 million people, is a vivid example of what can happen even on the FTC's watch. \22\ --------------------------------------------------------------------------- \19\ Treasury Report, at 38. \20\ Id. at 39. \21\ See Petrou, supra note 15, at 5. \22\ See https://www.ftc.gov/equifax-data-breach. --------------------------------------------------------------------------- Of course, any meaningful discussion of data security has to address the critical issue of apportioning liability for security breaches. While the Treasury acknowledges the importance of this issue, it does not provide a clear answer to the fundamental question: Who will be liable to the consumer whose bank account is hacked? It seems clear that, as a practical matter, the only way banks would be willing to share their customer data with tech platforms is if they are not held liable for the platform operators' failures to protect the data. But, if banks are not liable, then who is going to make the account holder whole? Unless this question has a clear--and satisfactory-- answer, the notion of ``facilitating innovation'' through unrestricted data-sharing is inimical to the objective of protecting consumers' interests. Predatory and Discriminatory Pricing of Financial Services The Report's rhetoric of consumer choice and financial data freedom implies the existence of a perfectly competitive and transparent market in which individual consumers have the power to choose the best FinTech service provider. Reality, however, is far more complicated and a lot less benign. In particular, the market for cloud computing and data analytics is both highly concentrated and inherently opaque. Only four megatech companies currently dominate the worldwide market for cloud services: Amazon, Microsoft, Alibaba, and Google. \23\ These four ``hyperscale'' service providers hold approximately 73 percent of the global cloud infrastructure services. \24\ Apple, Amazon, Google, Microsoft, and Facebook--five of the largest publicly traded U.S. companies by market capitalizations--are the pioneers of megascale data aggregation and ``integral drivers of the digital economy'' as a whole. \25\ Even though the Treasury Report refers to data aggregators and cloud service providers in generic terms, it is these megacompanies that define the dynamics in the tech sector. --------------------------------------------------------------------------- \23\ ``Gartner Says Worldwide IaaS Public Cloud Services Market Grew 29.5 Percent in 2017'', Press Release (Aug. 1, 2008), available at https://www.gartner.com/en/newsroom/press-releases/2018-08-01-gartner- says-worldwide-iaas-public-cloud-services-market-grew-30-percent-in- 2017. \24\ Id. \25\ Treasury Report, at 23. --------------------------------------------------------------------------- It is no coincidence that today's giant technology conglomerates are aggressively growing, diversifying, and continuously expanding their market shares. As recent studies show, this constant quest for size and market power is the built-in economic imperative in this business so intimately dependent on network effects. \26\ These companies' critical reliance on complex proprietary analytical tools renders their business models, and the markets in which they operate, fundamentally nontransparent. Put simply, nobody really knows what exactly these companies can see or what they can do with the data they touch. --------------------------------------------------------------------------- \26\ See, e.g., John M. Newman, ``Digital Antitrust'' (June 22, 2018), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3201004; Lina Khan, ``Amazon's Antitrust Paradox'', 126 Yale L. J. 710 (2017); Frank Pasquale, ``Paradoxes of Digital Antitrust'' (2013), available at https://jolt.law.harvard.edu/ assets/misc/Pasquale.pdf. --------------------------------------------------------------------------- In this context, the Treasury's proposed strategy of enabling megatech companies to ``get inside'' banks' customer data raises a number of significant consumer protection concerns. If that happens, the dominant players in the financial data and services market will be perfectly positioned to abuse their enormous market power, among other things, by engaging in predatory or unfair pricing of financial products and consumer discrimination. The basic blueprint for such abuses is already there. For example, Amazon's unprecedented market power in online commerce and command of digitized consumer data enable it to adjust its prices almost instantaneously, in response to fluctuations in current demand for specific goods. \27\ For example, if more people are buying a particular brand of baby food in the morning, Amazon can raise its price by noon. \28\ This type of ``dynamic pricing'' is difficult for any outsider to detect, as only Amazon has control of its algorithms and data. This algorithmic opacity makes consumers extremely vulnerable to predatory or unfair pricing, and not only by Amazon but also by other companies widely emulating its practices. \29\ --------------------------------------------------------------------------- \27\ Alberto Cavallo, ``More Amazon Effects: Online Competition and Pricing Behaviors'', Harvard Business School and NBER (Aug. 10, 2018), available at https://kansascityfed.org//media/files/publicat/ sympos/2018/papersandhandouts/825180810cavallopaper.pdf?la=en. \28\ David Dayen, ``Does Amazon Have More Power Than the Federal Reserve?'' New Republic (Aug. 28, 2018), available at https:// newrepublic.com/article/150938/amazon-power-federal-reserve. \29\ Id.; Rana Foroohar, ``Amazon's Pricing Tactic Is a Trap for Buyers and Sellers Alike'', FT.Com (Sept. 2, 2018). --------------------------------------------------------------------------- In the context of financial services, this technical capacity for nontransparent ``dynamic pricing'' can easily translate into the highly questionable practice of ``micro-targeting'' consumers. Amazon, Google, and other FinTech companies will be able to use the vast amounts of data gained from monitoring consumers' behavioral patterns and commercial transactions--and now the detailed real-time bank account data--to ``up-price'' financial products and services offered to individual consumers. \30\ In essence, they will be able to charge individual borrowers not the fair market price but the maximum price each of them is able to pay. --------------------------------------------------------------------------- \30\ See Petrou, supra note 15, at 4. --------------------------------------------------------------------------- This microtargeting may be presented to the public under the benign guise of ``product customization.'' In practice, however, it will effectively destroy consumers' ability to make informed decisions and to gauge whether they are being overcharged, underserved, or even entirely excluded from certain product markets. The opacity of the pricing process, the service provider's control of the customer's data, and the practical difficulty of switching providers will fundamentally skew the balance of power in favor of the service provider. \31\ --------------------------------------------------------------------------- \31\ See Foroohar, supra note 29. --------------------------------------------------------------------------- Importantly, the same factors will also make it difficult, if not impossible, for any regulatory agencies to detect and punish abusive behavior in financial markets. The growing deficit of regulatory capacity is likely to leave consumers to fend for themselves--precisely at a time when they acutely need Government protection. This is particularly poignant, given the current efforts to weaken the Bureau of Consumer Financial Protection and to limit its enforcement capabilities. \32\ --------------------------------------------------------------------------- \32\ See Renae Merle, ``Trump Administration Strips Consumer Watchdog Office of Enforcement Powers in Lending Discrimination Cases'', Wash. Post (Feb. 1, 2018), available at https:// www.washingtonpost.com/news/business/wp/2018/02/01/trump- administration-strips-consumer-watchdog-office-of-enforcement-powers- against-financial-firms-in-lending-discrimination-cases/ ?utm_term=.4c83cde19b28. --------------------------------------------------------------------------- In sum, simply relaxing existing bank regulations in order to allow wholesale migration of the highly sensitive and valuable financial information currently controlled by banks to data aggregators, cloud providers, and other FinTech companies would expose consumers to potentially massive data privacy and safety risks. Rather than gaining meaningful control over their personal financial data, American consumers will be an easy target for unscrupulous salesmen of the digital era. A prudent public policy approach to safe and secure financial data-sharing in the digital age requires a deeper and more balanced analysis of these risks, as well as the means of preempting them. Systemic Concern Number Two: Structural Shifts in the Economy Under the headings of ``aligning'' and ``modernizing'' the regulatory framework, the Treasury Report makes a number of specific recommendations intended to remove or relax the existing restrictions on permissible business activities and organizational affiliations of banking organizations. While framed as a narrowly technical issue, this effort goes directly to the long-standing U.S. policy of separation of banking from commerce. It also raises a broader spectrum of concerns related to potentially far-reaching structural shifts in the U.S. economy. The principle of separation of banking and commerce is one of the core principles underlying and shaping the elaborate regulatory regime applicable to all U.S. banking organizations. \33\ Under the National Bank Act of 1863, U.S. commercial banks generally are not permitted to conduct any activities that fall outside the statutory concept of ``the business of banking.'' \34\ Moreover, under the Bank Holding Company Act of 1956 (the BHC Act), bank holding companies (BHCs)--companies that own or ``control'' U.S. banks--are generally restricted in their ability to engage in any business activities other than banking, managing banks, or certain activities ``closely related'' to banking. \35\ --------------------------------------------------------------------------- \33\ See Bernard Shull, ``Banking and Commerce in the United States'', 18 J. Banking and Fin. 255 (1994); Bernard Shull, ``The Separation of Banking and Commerce in the United States: an Examination of the Principal Issues'', 8 Fin. Markets, Inst. and Instr. 1 (Aug. 1999). \34\ 12 U.S.C. 24 (Seventh). \35\ 12 U.S.C. 1841-43. --------------------------------------------------------------------------- Since the 1980s, the scope of banks' and BHCs' permissible activities has been steadily and gradually expanding. \36\ The Office of the Comptroller of the Currency (OCC) has been especially aggressive in its interpretations of the statutory term ``business of banking'' to allow banks to engage, among other things, in data storage and certain software-related activities. \37\ In 1999, Congress passed the Gramm- Leach-Bliley Act (the GLB Act), which partially repealed the Glass- Steagall Act and authorized certain qualifying BHCs to become ``financial holding companies'' (FHCs) and to conduct a wide range of financial and even some commercial activities. \38\ --------------------------------------------------------------------------- \36\ See Saule T. Omarova, ``The Quiet Metamorphosis: How Derivatives Changed the `Business of Banking' '' 63 U. Miami L. Rev. 1041 (2009); Saule T. Omarova, ``The Merchants of Wall Street: Banking, Commerce, and Commodities'', 98 Minn. L. Rev. 265 (2013). \37\ Id. \38\ 12 U.S.C. 1843(k). --------------------------------------------------------------------------- These developments notwithstanding, however, U.S. banks' and BHCs' activities, investments, and organizational affiliations remain subject to significant limitations. Citing with approval the OCC's aggressively expansive approach, the Treasury Report recommends that all banking regulators interpret banking organizations' scope of activities ``in a harmonized manner as permitted by law wherever possible and in a manner that recognizes the positive impact that changes in technology and data can have in the delivery of financial services.'' \39\ --------------------------------------------------------------------------- \39\ Treasury Report, at 80. --------------------------------------------------------------------------- The Treasury also recommends that the Federal Reserve ``consider how to reassess'' the definition of ``control'' in the BHC Act, in order to make it easier for banking institutions and FinTech companies invest in each other's equity. \40\ The BHC Act defines ``control'' in deliberately broad terms: in addition to specifying a quantitative threshold (direct or indirect ownership of 25 percent or more of any class of voting securities), it grants the Federal Reserve discretion to make the requisite findings of ``controlling influence'' in a wide range of circumstances. \41\ The Treasury Report criticizes the Federal Reserve's accumulated interpretations of ``control'' as ``not sufficiently transparent'' and thus discouraging--instead of facilitating--the formation of extensive business partnerships and close organizational relationships between BHCs and FinTech companies. The practical worry here is that unregulated technology companies may be deemed either to ``control'' a U.S. bank or to be ``controlled'' by a BHC--and thus subject to the BHC Act's activity restrictions and supervisory oversight. \42\ --------------------------------------------------------------------------- \40\ Id. \41\ 12 U.S.C. 1841(a). \42\ Treasury Report, at 80. --------------------------------------------------------------------------- Although the Treasury does not explicitly direct the Federal Reserve to adopt any specific definition of ``control,'' the main thrust of its recommendation is clear: a properly ``modernized'' definition should be significantly narrowed and uniformly applied. In contrast to the Treasury's usual calls for ``tailored'' FinTech regulation, the Federal Reserve's tailoring of ``control'' determinations to the circumstances of each individual case is deemed undesirable as hindering bank partnerships with and acquisitions of (and by) nonbank technology companies. Separation of Banking and Commerce Adopting a systematic policy of aggressively pushing the legal and statutory boundaries of bank-permissible business activities and affiliations, as advocated by the Treasury, will significantly undercut--if not completely incapacitate--the operation of the foundational U.S. principle of separation of banking and commerce. In this sense, it will weaken the overall integrity and efficacy of the U.S. bank regulation and supervision. It is important to remember why the entire system of U.S. bank and BHC regulation is designed to keep institutions engaged in deposit- taking and commercial lending activities from conducting, directly or through some business combination, any significant nonfinancial activities, or from holding significant interests in any general commercial enterprise. There are three main public policy reasons for maintaining this legal wall between the ``business of banking'' and purely commercial businesses: (1) preserving the safety and soundness of federally insured depository institutions; (2) eliminating potential conflicts of interest and ensuring a fair and efficient flow of credit to productive economic enterprise; and (3) preventing excessive concentration of financial and economic power in the financial sector. \43\ --------------------------------------------------------------------------- \43\ See Omarova, ``The Merchants of Wall Street'', supra note 36, at 274-278. --------------------------------------------------------------------------- Of course, each of these traditional concerns may be more or less pronounced in the context of a particular commercial activity. It is also clear that banks' involvement in certain nonfinancial activities may--and often does--produce financial benefits to their clients and, indirectly, to society as a whole. Yet, after decades of unquestioning acceptance of private firms' self-interested depiction of such benefits, it is critical that policymakers fully address and appreciate potential social costs of mixing banking and commerce--especially, digital commerce. The key point here is simple: allowing banks and BHCs to form wide- ranging business partnerships with technology firms--either through global contractual arrangements or through outright combinations--would critically undermine all of the public policy goals at the heart of the U.S. bank regulation. For example, it would expose banking institutions to a wide variety of nontypical and potentially excessive economic, operational, and legal risks associated with tech companies' rapidly evolving commercial activities. Banks are ``special'' business actors in that they perform critical public functions, enjoy direct public support, and are inherently vulnerable to runs that can trigger systemic financial crises. For these reasons, banks' safety and soundness remains the cornerstone of bank regulation and supervision. \44\ Expanding banking entities' economic activities to encompass global e-commerce, ``big data'' management, and AI development will diversify and magnify not only their potential revenues but also their potential losses and vulnerabilities. It will also render banking organizations' internal governance and regulatory oversight far more challenging, if not outright impossible, propositions. --------------------------------------------------------------------------- \44\ See E. Gerald Corrigan, ``Are Banks Special?'' 1982 Fed. Res. Bank of Minn. Ann. Rep., available at http://www.minneapolisfed.org/ pubs/ar/ar1982a.cfm. For a systematic exposition of banks' special function as sovereign public's ``franchisees,'' see Robert C. Hockett and Saule T. Omarova, ``The Finance Franchise'', 102 Cornell L. Rev. 1143 (2017). --------------------------------------------------------------------------- Furthermore, it would give rise to new patterns of conflicts of interest, potentially systematic misallocation of credit, and other cross-sectoral abuses of market power. Some of these abuses of market power are discussed above, in the context of consumer protection. However, this type of bank-tech conglomeration would also pose an immediate and tangible threat to all other businesses, especially those competing with banks' technology affiliates or partners. These types of structurally determined distortion in the economywide credit flows would critically impede economic growth and cause a host of socio- economic and political problems. Market Structure, Antitrust, and ``Too Big To Fail'' Concerns Perhaps the most far-reaching potential consequence of opening the door for direct cross-sectoral acquisitions and affiliations between banking institutions and tech firms is the dangerous increase in the overall concentration of the economic and political power likely to result from it. The U.S. financial services industry is already heavily concentrated. The passage of the GLB Act, which officially removed the long-standing prohibition on affiliations between commercial and investment banks, has elevated the pace of industry consolidation to a qualitatively new level. \45\ The level of industry concentration increased further in the wake of the global financial crisis of 2008, so that the top five banks in the U.S. now control approximately half of all assets in the sector. \46\ Large BHCs control over 80 percent of all banking assets. \47\ --------------------------------------------------------------------------- \45\ See Arthur E. Wilmarth, Jr., ``The Transformation of the U.S. Financial Services Industry, 1975-2000: Competition, Consolidation, and Increased Risks'', 2002 U. Ill. L. Rev. 215 (2002). \46\ https://fred.stlouisfed.org/series/DDOI06USA156NWDB \47\ See NAFCU, ``Modernizing Financial Services: The Glass- Steagall Act Revisited'' (2018), at 14, available at http:// stilltoobigtofail.org/wp-content/uploads/2018/09/Glass-Steagall-Act- White-Paper_R4.pdf. --------------------------------------------------------------------------- The same trend is strongly evident in the tech sector. Despite the great number and diversity of what we call ``technology'' companies, a few giants at the core of the tech industry undoubtedly dominate it. Thus, only two companies, Apple and Google, currently provide the software for 99 percent of all smartphones, the indispensable devices for mobile payments. \48\ Facebook and Google capture between 59 and 73 cents of every dollar spent on online advertising in the U.S. \49\ Amazon takes 49 cents of every e-commerce dollar in the U.S. \50\ This dominance is clearly reflected in the stock markets. Earlier this year, both Apple and Amazon exceeded $1 trillion in market capitalization. And the largest tech companies--including Apple, Amazon, Facebook, and Google--lead the longest stock market rally in decades. \51\ --------------------------------------------------------------------------- \48\ See Matt Phillips, ``Apple's $1 Trillion Milestone Reflects Rise of Powerful Megacompanies'', N.Y. Times (Aug. 2, 2018). \49\ See id.; Lina M. Khan, ``Sources of Tech Platform Power'', 2 Geo. L. Tech. Rev. 325, 326 (2018). \50\ See David Streitfeld, ``Amazon Hits $1,000,000,000,000 in Value, Following Apple'', N.Y. Times (Sept.4, 2018). \51\ See Phillips, supra note 48. --------------------------------------------------------------------------- It is against this background that the Treasury Report's seemingly low-key, technocratic recommendation to ``correct'' or ``clarify'' a specific regulatory interpretation of the statutory definition of ``control'' in the BHC Act should be evaluated. The existing body of the Federal Reserve's interpretations of what constitutes ``control'' for purposes of the BHC Act is fundamentally fact-driven and thus inevitably complex. While that may complicate private firms' efforts to structure their investments so as to avoid being subject to the BHC Act, it preserves the necessary flexibility enabling the Federal Reserve to safeguard the principles underlying the Act. This is especially critical in light of the fact that the BHC Act was originally designed to operate as an antitrust, antimonopoly law. \52\ --------------------------------------------------------------------------- \52\ See Omarova, ``The Merchants of Wall Street'', supra note 36, at 276-277. --------------------------------------------------------------------------- By contrast, what the Treasury calls ``a simpler and more transparent standard to facilitate innovation-related investments'' would effectively enable large U.S. financial holding companies to take significant equity stakes in various FinTech ventures, alongside large tech companies. It would also enable the tech giants to acquire significant equity stakes in U.S. banks and BHCs of varying sizes, without becoming subject to BHC regulation. The Treasury Report carefully frames its recommendations to create an impression that such a regulatory pullback would make financial markets more efficient and competitive by enabling a myriad of small investments by a myriad of banks in a myriad of competing tech companies--and vice versa. What remains unsaid, however, is that the dominant players in both markets-- including JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, Facebook, Amazon, Google, Apple, Microsoft, and IBM--will also be able to take advantage of such explicitly permissive regulatory standards. Given the importance of scale and network effects for both tech platforms and financial institutions, they will be remiss not to. Thus, in practice, ``simplifying'' the Federal Reserve's interpretation of the BHC Act's ``control'' requirements for purposes of ``facilitating FinTech innovation'' is likely to trigger a wave of unprecedented cross-sectoral consolidation. Because of the 25 percent threshold built into the BHC Act's definition of ``control,'' this new- generation consolidation wave will likely take new transactional forms, potentially resulting in a Byzantine system of corporate ownership and de facto management interlocks. In this web of formal and informal corporate control linkages, detecting and punishing collusive behavior and other abuses of market power will be even more difficult than it is today. One additional point bears emphasis here. In both sectors, companies' size and market share are key to profitability and success. In the financial sector, the quest for scale and scope is also driven by the presence of the bank public subsidy. The well-known phenomenon of ``too big to fail''--a de facto suspension of market discipline with respect to systemically important entities--presents one of the greatest public policy challenges in the financial sector. \53\ Drastically curtailing the regime of separation of banking from commerce would facilitate a potentially massive transfer of banks' public subsidy to the tech sector. In that sense, it is virtually guaranteed to take the ``too big to fail'' problem to an entirely different--perhaps even unimaginable--level. In the next crisis, the sheer scale of the Government bailouts required to keep the hypersized FinTech conglomerates from failing might make the taxpayer cost of saving Wall Street in the last one look like small change. --------------------------------------------------------------------------- \53\ See Matt Egan, ``Too-Big-To-Fail Banks Keep Getting Better'', CNN Money (Nov. 21, 2017), available at https://money.cnn.com/2017/11/ 21/investing/banks-too-big-to-fail-jpmorgan-bank-of-america/index.html. --------------------------------------------------------------------------- Of course, money is not the only thing that matters to the American public in this scenario. The increasing concentration of economic power in a small club of corporate giants is a direct threat to American democracy. \54\ It perpetuates and exacerbates deep socio-economic inequality, which inevitably undermines political order premised on ideals of equal participation and voice. Big corporations' ability to ``buy'' political influence fundamentally corrupts political process and corrodes public confidence in the democratic system as a whole. \55\ This is an unacceptably high societal price for the personal convenience of accessing one's bank accounts and digital wallets via a single iPhone click. --------------------------------------------------------------------------- \54\ See Omarova, ``The Merchants of Wall Street'', supra note 36, at 349-351; Julie Cohen, ``Technology, Political Economy, and The Role(s) of Law'' (June 8, 2018), available at https://lpeblog.org/2018/ 06/08/technology-political-economy-and-the-roles-of-law/. \55\ See generally Rana Foroohar, ``A Light Shines on the Concentration of Power in Silicon Valley'', FT.Com (July 22, 2018); Buttonwood, ``Political Power Follows Economic Power'', Economist.com (Feb. 3, 2016), available at https://www.economist.com/buttonwoods- notebook/2016/02/03/political-power-follows-economic-power. --------------------------------------------------------------------------- In sum, it is critical to keep in mind that, without proactive and appropriately applied public oversight, data digitization, cloud computing, and other seemingly value-neutral and science-driven FinTech innovations may operate as hidden channels for the formation of economywide FinTech platform conglomerates. Systemic Concern Number Three: Financial Stability and Economic Growth The Treasury Report uses a direct reference to the ``bank partnership model'' in its discussion of marketplace lending. Among other things, the Treasury makes a very specific recommendation for Federal legislation overruling the Second Circuit's decision in Madden v. Midland Landing LLC, which held that the National Bank Act did not preempt State usury rules with respect to the interest charged by a third-party nonbank purchaser of loans from a national bank. \56\ --------------------------------------------------------------------------- \56\ Madden v. Midland Funding, LLC, 786 F. 3d 246 (2d Cir. 2015). --------------------------------------------------------------------------- The Madden decision directly affects marketplace lenders operating under the so-called rent-a-charter model, in which the online lender markets the loans and runs its proprietary algorithms but the actual loan is initially extended and funded by a chartered bank. The bank typically holds the loan for a few days and then sells it back to the online lender. \57\ In effect, the online lender buys the originating bank's ability to ``export'' its home-State's favorable (or nonexistent) usury rate nationwide. In this sense, the bank is ``renting out'' its bank charter--or, more accurately, selling a special legal privilege the Government grants exclusively to chartered banks--to an entity that does not qualify for a bank charter and is not entitled to any privileges that come with it. \58\ --------------------------------------------------------------------------- \57\ See Michael S. Barr, et al., ``Financial Regulation: Law and Policy'' 185 (2nd ed., 2018). \58\ For a discussion of why bank charters are special and different from regular corporate charters, see Robert C. Hockett and Saule T. Omarova, `` `Special', Vestigial, or Visionary? What Bank Regulation Tells Us About the Corporation--and Vice Versa'', 39 Seattle U. L. Rev. 453 (2016). --------------------------------------------------------------------------- The ``rent-a-charter'' model is not a recent invention; it was widely used by predatory payday lenders and subprime mortgage companies in the run-up to 2008. \59\ At the time, Federal bank regulators did not interfere with this unseemly charter-arbitrage practice in the name of promoting ``financial innovation,'' ``freedom of consumer choice,'' and ``access to credit'' for high-risk/low-income borrowers. The OCC's aggressive Federal preemption strategy, the Federal Reserve's laxity, and the absence of a dedicated Federal financial consumer protection agency contributed to the rampant growth of subprime debt that ultimately triggered a major financial crisis. \60\ --------------------------------------------------------------------------- \59\ See Consumer Federation of America and U.S. Public Interest Research Group, ``Rent-A-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protections'' (Nov. 2001), available at https://consumerfed.org/pdfs/paydayreport.pdf. \60\ See, e.g., Kathleen C. Engel and Patricia A. Mccoy, ``The Subprime Virus: Reckless Credit, Regulatory Failure and Next Steps'' (2011). --------------------------------------------------------------------------- In this context, the Treasury's insistence that Congress legislatively overrule Madden brings into bold relief the broader concerns about systemic financial stability and the threat of recurring financial crises. All too often, the familiar rhetoric of ``facilitating consumer access to cheap credit'' obscures the underlying systemwide dynamics that drive the emergence and growth of specific ``innovations.'' The Treasury Report's normatively inflected rhetoric also diverts attention from the significant potential impact of proposed deregulatory measures on the financial markets as a whole. To avoid repeating the costly mistakes of the pre-2008 period, therefore, policymakers must look behind the Report's technocratic gloss and examine FinTech developments from a systemic, public interest-driven perspective. Financial Asset Speculation in the Digitized Marketplace Contrary to the Treasury Report's baseline narrative, FinTech is not simply a matter of applying computer and information science to financial transactions and finding ``win-win'' technical solutions to various market ``frictions.'' It is trivially true that new technological tools are designed to make financial transactions faster, cheaper, and easier to use and adjust to transacting parties' individual needs and preferences. But that is only part of the story. The rise of FinTech is an integral part, and a logical stage in the development, of the broader financial system. Therefore, FinTech's overall normative significance cannot be simply postulated on the basis of its intended microtransactional efficiencies. It has to be assessed in the context of the financial system's stability and ability to perform its core social function: effectively and reliably channeling capital flows to their most productive uses in the real, i.e., nonfinancial, economy. \61\ --------------------------------------------------------------------------- \61\ For an in-depth analysis of the systemic significance of FinTech, see Saule T. Omarova, ``New Tech v. New Deal: FinTech As a Systemic Phenomenon'', 36 Yale J. Reg. (forthcoming 2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3224393. --------------------------------------------------------------------------- From this systemic perspective, the rapid digitization of data and financial services presents a far more complex public policy challenge than the Treasury Report is willing to acknowledge. FinTech innovations are driven not only--and perhaps not even mainly--by the financial institutions' and tech companies' desire to improve retail financial services. Despite the consumer-centric rhetoric surrounding FinTech, digital technologies are likely to have their greatest systemic impact in the highly volatile and speculative secondary financial markets dominated by professional traders, dealers, and institutional investors. Fixing the focus of policy discussions on the expected benefits of FinTech to retail consumers, however, diverts attention from potentially crucial developments in wholesale financial markets. It accordingly creates a dangerous blind spot for policymakers and regulators. The pre-2008 subprime mortgage and securitization boom provides a vivid illustration of just how dangerous it can be. It is well-known that the rapid growth of risky subprime mortgage lending in the early 2000s--a predominantly retail market phenomenon--was fundamentally driven by the insatiable demand on the part of yield-hungry institutional investors for tradable asset-backed securities. Subprime mortgage loans served as the perfect raw material for the creation of high-yielding yet highly (and wrongly) rated mortgage-backed securities (MBS), collateralized debt obligations (CDOs), and other complex structured products. \62\ As speculative demand for these products grew, mortgage lenders used increasingly deceptive and discriminatory tactics to generate greater volumes of such raw material, among other things, by targeting the most vulnerable borrower populations. \63\ --------------------------------------------------------------------------- \62\ See generally Engel and McCoy, supra note 60; ``Fin. Crisis Inquiry Comm'n, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of Financial and Economic Crisis in the United States'' (2011), https://www.gpo.gov/fdsys/pkg/GPO- FCIC.pdf; S. Permanent Subcomm. on Investigations, 112th Cong., ``Wall Street and the Financial Crisis: Anatomy of a Financial Collapse'' (2011), http://hsgac.senate.gov/public/_files/Financial_Crisis/ FinancialCrisisReport.pdf. \63\ Id. --------------------------------------------------------------------------- Ironically, in the public arena, these predatory subprime loans were often touted as a great benefit for low-income borrowers. This is how a senior executive of now infamous Countrywide Financial described his company's subprime lending activities to Congress in early 2004, a year in which some of the worst subprime mortgages were originated: ``[ . . . ] Countrywide entered the nonprime lending market in 1996 as part of our effort to make homeownership possible for the largest number of American families and individuals. We believed then, as we believe now, that nonprime lending is a natural extension of our commitment to bring Americans who have traditionally been outside mainstream mortgage markets into their first homes. Our nonprime lending programs also have helped these families and individuals build equity and use this equity to send their children to colleges, start their own businesses, and gain control over their financial destiny.'' \64\ --------------------------------------------------------------------------- \64\ Testimony of Sandy Samuels, Senior Managing Director and Chief Legal Officer of Countrywide Financial Corporation and the Housing Policy Council of the Financial Services Roundtable before the Subcommittees on Financial Institutions and Housing, U.S. House of Representatives (March 30, 2004), available at https://www.gpo.gov/ fdsys/pkg/CHRG-108hhrg94689/pdf/CHRG-108hhrg94689.pdf. ``Nonprime products give borrowers more choices and make credit more readily available, because we and other lenders can price according to the level of risk.'' \65\ --------------------------------------------------------------------------- \65\ Id. Millions of Americans who either lost their homes in the crisis or are forced to carry the heavy burden of underwater mortgage debt would strongly disagree. \66\ --------------------------------------------------------------------------- \66\ See Robert C. Hockett, ``Accidental Suicide Pacts and Creditor Collective Action Problems'', 98 Cornell L. Rev. 55 (2013). --------------------------------------------------------------------------- In reality, of course, Countrywide flooded the market with risky loans not because it cared for its poor borrowers' economic rights, but because it was reaping huge profits in the wholesale securitization markets. Its executive's remarkably self-serving statements illustrate how the financial industry used--indeed abused--consumers not only as the unwitting captive source of fuel for its high-stakes speculation game, but also as the ``sympathetic beneficiary'' legitimizing and shielding that game from public scrutiny. Today, similar consumer-centric rhetoric is being deployed to justify various deregulatory moves, among other things, in the context of FinTech innovation. It is, of course, too early to draw definitive conclusions as to what exactly this rhetoric may be obscuring from policymakers' and the broader public's view. The recent history tells us, however, that whenever a powerful private industry demands deregulation in the name of consumers' ``freedom of choice'' or ``access to credit,'' something a lot bigger and much less altruistic is driving these demands. It is, therefore, both timely and necessary to start identifying some of the ways in which FinTech is likely to impact the ``big-picture'' issues related to systemic financial stability. The basic point here is simple: In the current environment of global investment capital glut, the rapid digitization of financial data and transactions is bound to amplify the underlying structural incentives for excessive speculation in secondary markets for financial instruments. By making financial transactions infinitely faster, cheaper, and easier to use and to customize, FinTech innovations potentially empower wholesale market participants to engage in financial asset speculation on an unprecedented level. Armed with new digital tools, financial and FinTech firms will be able to synthesize potentially endless chains of virtual assets, tradable in potentially infinitely scalable virtual markets. This FinTech-driven qualitative growth in the volume and velocity of speculative trading, in turn, potentially amplifies the financial system's vulnerability to sudden shocks and cascading loss effects. In short, a fully digitized and frictionless financial marketplace is bound to grow not only much bigger and faster but also more complex, opaque, and volatile. \67\ --------------------------------------------------------------------------- \67\ For a detailed discussion, see Omarova, supra note 61. --------------------------------------------------------------------------- It is worth emphasizing that advances in technology are increasingly enabling private market participants to create tradable cryptoassets effectively out of thin air. These cryptoassets--digital tokens or bits of data representing some value--can have such an attenuated connection to productive activity in the real economy as to be practically untethered from it. By potentially rendering the financial system entirely self-referential, this type of unchecked private sector ``innovation'' can fundamentally undermine--rather than promote--the long-term growth on the part of the American economy. On a macrolevel, therefore, the key risk posed by FinTech lies in its--still not fully known--potential to exacerbate the financial system's dysfunctional tendency toward unsustainably self-referential growth. \68\ (For a detailed discussion of these and related issues, see Appendix to this testimony.) --------------------------------------------------------------------------- \68\ Id. --------------------------------------------------------------------------- Regulatory and Supervisory Capacity Understanding some of the potentially destabilizing systemic effects of unchecked FinTech innovation brings into a sharp relief the crucial importance of strengthening the capacity of the relevant regulatory agencies to effectively oversee this process. FinTech's ability to bring about massive increases in the volume and velocity of speculative trading in financial assets inevitably magnifies the systemic role of--and amplifies the pressure on--central banks and other public instrumentalities charged with ensuring financial and macroconomic stability. Hyperfast, hyperexpansive financial markets require a hyperfast and hypercapacious public actor of ``last resort''--one of the central bank's core functions. Similarly, substantial new risks to consumers, posed by the digitization of personal financial data and the rise of the digital platform economy, dramatically elevate the role of Government agencies in protecting consumers' data privacy and safety. And, of course, the growing concern with potentially excessive concentrations of economic and political power in the hands of hypersized FinTech conglomerates underscores the need for a far more proactive approach to Government enforcement of antitrust principles. This, however, runs contrary to the Treasury Report's overall deregulatory strategy and the emphasis on an inherently passive and accommodative regulatory posture. As a general matter, the Report supports, and even insists on, proactive--or ``agile''--regulatory action only where such action is necessary to ``expedite regulatory relief'' under existing laws in order to facilitate private experimentation with new digital technology. The Treasury's recommendation to form a State and Federal ``regulatory sandbox'' should be read in this normative context. \69\ Several foreign jurisdictions, including Singapore and the United Kingdom, have already established such regulatory sandboxes, which essentially refer to the practice of allowing certain FinTech companies to operate for a period of time without having to comply with various otherwise applicable laws and regulations. The purpose of this arrangement is to conduct a controlled test of FinTech products, which should then help the regulators decide how beneficial and safe these products are for the rest of the market. --------------------------------------------------------------------------- \69\ Treasury Report, at 168. --------------------------------------------------------------------------- The idea of a regulatory sandbox as a way to generate usable empirical data for better regulatory decision making is not necessarily a bad one. In each particular case, however, the efficacy of this effort depends fundamentally on the specific design features of the ``sandbox.'' Thus, if the specific assessment criteria for FinTech products in the ``sandbox'' are insufficiently capturing potentially problematic effects of these products on consumer interests or systemic financial stability, the resulting data will not be a reliable indicator of how that product will fare outside the ``sandbox.'' Furthermore, some of the most significant systemic implications of a particular product may be inherently impossible or difficult to test in a controlled ``sandbox'' environment. \70\ --------------------------------------------------------------------------- \70\ See, e.g., Hilary Allen, ``A U.S. Regulatory Sandbox?'' (Feb. 2018), available at file:///C:/Users/sto24/Downloads/SSRN- id3056993.pdf. --------------------------------------------------------------------------- In any event, a ``regulatory sandbox'' is not a substitute for a well-coordinated and well-resourced regulatory apparatus, capable of devising and dynamically implementing a comprehensive and balanced approach to overseeing FinTech activities. In this moment of great change in financial markets, the American public needs such an apparatus: it needs capable regulators and supervisors who show their true ``agility'' by staying in front of, rather than behind or away from, the market. For all of the foregoing reasons, I urge the Committee to apply the healthy dose of skepticism to the Treasury Report's and the interested industry actors' consumer-centric rhetoric and deregulatory demands. The systemic significance of FinTech innovations must be assessed in the broader public policy context, with a special focus on the need to protect American consumers from abusive market practices on the part of megasized corporate conglomerates, to safeguard the structural integrity of the U.S. financial market, and to ensure long-term systemic stability and sustainable growth of the Nation's economy. Technology is not an end in and of itself, it is merely a tool: it can be used to improve our collective future or to destroy it. The Committee's task is to ensure that the latter does not happen, while everybody is looking the other way. [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM STEVEN BOMS Q.1. Given that companies like Google and Facebook collect enormous amounts of information, and are also in a position to influence what information consumers are exposed to. For example, Facebook might show payday loan or private student loan advertisements to servicemembers or to minorities but not its other users. Should fair lending laws be updated to cover not just the provision of credit, but also targeted advertisement of such products on social media platforms? A.1. CFDR members believe that fair lending laws represent important public policy. The content of those laws, however, is determined solely by Congress and, when authority is delegated, to regulatory agencies. Each company in the CFDR membership-- which does not include Google, Facebook, or any similar ``big tech'' company that operates a social media platform--strives to abide by all applicable fair lending laws, at both the State and Federal levels, and will continue to abide by fair lending laws if they should change in response to your concerns addressed in the predicate to this question. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM STEVEN BOMS Q.1. My ``Making Online Banking Initiation Legal and Easy''--or MOBILE--Act allowed banks and credit unions to use a scan of a driver's license through a mobile device to verify a customer's identity when opening an account. Approximately 16 million adults live in households without a checking or savings account and an additional 51 million adults live in households that rely on nonbank lenders with sky-high interest rates. Yet about 90 percent of unbanked and underbanked adults own a mobile phone, of which 75 percent are smartphones. Please answer the following with specificity: What impact does linking personal finance with mobile and data technologies have on the financial well-being of consumers? A.1. The ability to link personal finance with mobile and data technologies could significantly decrease the number of unbanked or underbanked households in the United States. The first step in analyzing the impact of a more seamless flow of data transfer through mobile technology would be to asses why these householders are unbanked or underbanked. For some, including those who live in rural communities, it may be that the nearest branch bank has closed and that the next closest bank is tens of miles away. For others, it may be a distrust of the traditional banking system, informed perhaps by prior bad experiences or lack of knowledge about the services and solutions offered. Either way, having access to--and actually availing oneself of--financial services products is critical to consumer financial wellness as it helps families manage budgets, establish credit, pay bills, and save for the future. The mobility of technology driven by the near ubiquity of modern mobile telephones and digital networking holds great promise to reach underserved areas of the country with tailored financial services solutions. The MOBILE Act is a great example of a forward-thinking legislative approach that embraces new ways of using and transmitting data. CFDR supports Congress's building on this success to further erode barriers to the free flow of consumer-permissioned data across interfaces so that all consumers, whether presently underserved or not, can make the best use of a 21st century, mobile, data-driven financial services marketplace. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM BRIAN KNIGHT Q.1. Given that companies like Google and Facebook collect enormous amounts of information, and are also in a position to influence what information consumers are exposed to. For example, Facebook might show payday loan or private student loan advertisements to servicemembers or to minorities but not its other users. Should fair lending laws be updated to cover not just the provision of credit, but also targeted advertisement of such products on social media platforms? A.1. It is reasonable and appropriate to prohibit social media platforms from enabling lenders to use prohibited characteristics to target or withhold credit offers, and regulators should have the ability to enforce this prohibition. An illustrative example in a related area is found in the Assistant Secretary for Fair Housing and Equal Opportunity filing's of a housing discrimination complaint against Facebook for violations of the Fair Housing Act. \1\ In its complaint, the assistant secretary alleges that Facebook allowed advertisers of housing and housing-related services to directly target or withhold ads on the basis of protected classes such as race, religion, age, and gender. Such conduct should be prohibited. \2\ --------------------------------------------------------------------------- \1\ Anna Maria Farias, ``Housing Discrimination Complaint: Assistant Secretary for Fair Housing and Equal Opportunity v. Facebook, Inc.'', August 13, 2018, https://www.hud.gov/sites/dfiles/PIH/ documents/HUD_01-18-0323_Complaint.pdf. \2\ Facebook has not been found liable for any such acts, and to my knowledge it has not admitted to the allegations in the Assistant Secretary's complaint. --------------------------------------------------------------------------- The question of whether social media sites should be prohibited from using neutral data that may correlate with protected classes is more complex. Concerns about disparate impact must be balanced with the fact that accurate algorithms based on neutral data may also be the most effective way to communicate useful information to potential customers. Additionally, seeking to prohibit the use of algorithms using neutral data for conveying ads to customers could face potential constitutional issues. \3\ Beyond identifying these potential issues, I have not done sufficient study to come to a conclusion on the issue. --------------------------------------------------------------------------- \3\ Some courts have found that algorithms like those used by Google are speech protected by the First Amendment. See Langdon v. Google, Inc., 474 F. Supp. 2d 622, 629-30, (D. Del. 2007). Additionally, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., acknowledged that disparate impact liability must be limited to avoid ``serious constitutional questions.'' See Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., 135 S. Ct. 2507, 2512 (2015). --------------------------------------------------------------------------- ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER FROM BRIAN KNIGHT Q.1. In Nevada, Industrial Loan Companies (ILCs) play an important role in our economy. There is a growing demand for ILCs which have proven to meet consumer needs throughout the country. The current FDIC Chair has said that she welcomes ILC applications. Do you believe that a FinTech company that meets FDIC requirements should be allowed to be chartered as an ILC? A.1. Expanding competition and innovation in banking services will benefit consumers. Therefore, we should have a presumption that a FinTech firm that meets the statutory and regulatory requirements for an ILC charter should be granted a charter. Risks created by granting a charter could likely be addressed through existing regulation and competition protection mechanisms. To the extent that additional protections or limitations are needed to handle unique circumstances, Congress should pass legislation to create those protections or limitations. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM SAULE T. OMAROVA Q.1. In your testimony, you state that ``Technology is not an end in and of itself, it is merely a tool: it can be used to improve our collective future or to destroy it. The Committee's task is to ensure that the latter does not happen, while everybody is looking the other way.'' You also mention elsewhere in your testimony that FinTech could lead to ``potentially systematic misallocation of credit, and other cross-sectoral abuses of market power.'' Could you please provide us with a couple of concrete examples of precisely what we should be trying to avoid? Do you have any suggestions for how to avoid these examples? A.1. Finance is the lifeblood of the economy, and information is the lifeblood of the digital economy. By definition, ``FinTech'' combines both. That means that FinTech firms, either individually or as a group, can potentially exercise an unprecedented degree of control over the flow of money, information, and physical goods in e-commerce--all at the same time. This potential for extreme concentrations of power across previously separate economic markets raises a spectrum of significant public policy concerns, including concerns about dominant FinTech conglomerates stifling (instead of promoting) competition in affected markets and misallocating financial and other economic resources throughout the economy. More narrowly, it also implicates the venerable U.S. principle of separating banking from commerce. Goldman Sachs' recent foray into metals warehousing provides a recent real- life example of how a large financial institution can combine and abuse market power across different, seemingly unrelated, markets. Thus, it has been well-documented how Goldman Sachs' acquisition of Metro, a metals warehousing company, allowed it to control supply--and therefore price--of aluminum in North America, by creating artificial bottlenecks in the delivery of physical aluminum to purchaser-companies. Goldman Sachs' control over the critically important storage facilities gave it both the incentive and the ability to drive up the price of aluminum to benefit its own physical commodities trading and financial derivatives operations. The artificial rise in the price of aluminum, however, significantly increased American companies' production costs and ultimately resulted in higher consumer prices for a wide range of products, from soft drinks to automobiles. Big FinTech conglomerates are well-positioned to commit similar abuses of market power on a far larger scale. This is one of the principal reasons why the direct or indirect formation of such conglomerates, in any organizational from, should not be permitted as a matter of public policy and public interest. Here is a simple hypothetical example of what can happen if, among other things, the Federal Reserve narrows its presently flexible interpretation of what constitutes ``controlling influence'' under the Bank Holding Company Act of 1956 (the ``BHC Act''). Thus, Amazon Inc. can buy 24.9 percent of voting equity in multiple U.S. deposit-taking banks, without technically being deemed a ``bank holding company'' (or ``BHC''). As a result of the Federal Reserve's newly ``clarified'' interpretive approach, Amazon can easily structure these equity acquisitions in a way that leaves it free to continue all of its online commerce, logistics, cloud warehousing, and other data management businesses. Yet, Amazon's size and power in these markets will effectively guarantee it a de facto ability to exercise outsized control over each individual bank's management and business decisions. Amazon's heft as a potential business client, a service provider, or a strategic partner will put it in the driver's seat with respect to the banks in which it technically holds ``noncontrolling'' stakes (let us call them ``Amazon-owned banks,'' for simplicity's sake). Amazon can then use its outsized de facto power over these Amazon-owned banks to do the following: It can get sensitive financial or other information on its competitors--i.e., various nonfinancial companies that also happen to be Amazon-owned banks' banking clients--and then uses that information either to drive those companies out of business or to force them to do business with Amazon on unfavorable terms. Amazon can also pressure Amazon-owned banks to extend credit to businesses affiliated with or favored by Amazon, which will give it additional leverage over those ``favored'' companies and thus increase its market power in the affected sectors. Amazon can also make Amazon-owned banks refuse credit to its direct competitors or to any other ``un- favored'' local companies. In each case, Amazon's self-interested behavior will result in significant market distortions and inefficiencies and compromise federally insured banks' ability to perform the critical task of channeling capital to its more productive uses in the real economy. From this perspective, allowing the formation of big FinTech (or TechFin) conglomerates will pose a grave danger to the country's long-term economic growth--and, ultimately, its social and political stability. To prevent this and many other similarly dangerous outcomes, it is crucial that policymakers always place the arguments that, in one way or another, call for ``facilitating innovation'' or ``modernizing financial regulation'' in the context of how they impact the broader financial and economic market structure and integrity. Rhetoric notwithstanding, no FinTech-related proposals and arguments that could potentially result in the creation of large finance-technology (or tech- finance) conglomerates should be adopted into actual policy. Additional Material Supplied for the Record LETTER FROM THE AMERICAN ACADEMY OF ACTUARIES SUBMITTED BY CHAIRMAN MIKE CRAPO [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]