FTA's Penny Lee on Federal Fintech Developments and Open Banking

In this episode of Fintech Layer Cake, host Reggie Young chats with Penny Lee, President and CEO of the Financial Technology Association (FTA). Penny shares insights on key federal fintech policy developments, the implications of open banking, and how fintech companies can navigate the evolving regulatory landscape. They discuss recent court filings related to CFPB’s final open banking rule, regulatory trends under the new administration, and opportunities for fintechs to influence policy.

Transcript

Reggie Young:

Welcome back to Fintech Layer Cake, where we uncover secret recipes and practical insights from  fintech leaders and experts. I'm your host, Reggie Young, Chief of Staff at Lithic. On today's episode, I chat with Penny Lee, the CEO of Financial Technology Association, which is one of the preeminent fintech trade associations.

Penny covers some of the initial developments in DC under the new administration, some important court filings related to CFB's final open banking rule and much more. I loved Penny's callout about how fintechs not having access to charters, even limited special purpose charters, is inconsistent with the course of folks saying that fintechs need to be more directly regulated. 

Fintech Layer Cake is powered by the card issuing platform, Lithic. We provide payments infrastructure that enables teams to build better payments products that improve lives. Nothing in this podcast should be construed as legal or financial advice.

Penny, welcome to the podcast. Really excited to have you on today. A lot of fascinating news happening at the federal level right now. And I know you're kind of at the forefront of it, and FDA does a lot of great stuff at the forefront of fintech policy. So excited to chat today.

I think first topic I'd love to cover is just what's happened so far under the new administration? What should folks in fintech, maybe some of the top, I don't know, two or three, whatever, key developments that you think folks in fintech should be paying attention to?

Penny Lee:

Well, we've seen a lot since the election. We did see Rohit Chopra, then director of CFPB, continue on. It appears that he broke the tape, as many would say. There was not a pause as in other regulatory bodies that did take a pause on any type of rulemaking, but he definitely did break the tape. So we saw a lot of activity even post-election up until President Trump was inaugurated. There was a little bit of a lag between naming an acting director at the CFPB in particular. Other prudential regulators were named a little bit more immediately, but there was a little bit of lag.

But once the Trump administration did appoint two acting, back-to-back, almost within days of each other, you've seen a lot of activity over at the CFPB, and that is pausing or directives to pause all activities, all supervision examinations, to pause any effective date, compliance dates. This has been trying to parse through the various different languages.

When the first directive came out, it didn't include supervision. Then there were a lot of lawyers on phones. Well, was that an effective date? But that's different from a compliance date. Those are two different times. What does this mean? I would say there's a lot of activity that is happening, a lot of questions still being asked as to what is in effect, what has been actually paused.

As we all know, many of these rules are final law, and a simple tweet or a directive doesn't stop them from being law. And so I think a lot of folks right now are just asking for that clarity and wanting some greater amount of certainty, especially knowing that there are other jurisdictions, state attorneys, generals, and others that will be enforcing this law. So is it indeed paused? Is the effective date really in effect? What happens with compliance? What happens when you've been asked, you are now being considered to be a supervised entity, when in fact, the rule has been paused. So without some formality of filing in the Federal Registry, making sure that there is an actual notification that it has been, there's just a lot of uncertainty right now.

Reggie Young:

Yeah. And I think it's particularly interesting when you think about how their entire business is built around some of the ecosystems, like 1033, which I know we'll chat about in a second. But open banking, you look at companies like Plaid that gives them a lot of certainty, Plaid, Trust, and others. To see if the Bureau definitely kind of pushed the envelope, I think a lot of folks would agree under Chopra and some opinions that were maybe a little too far reaching for what an opinion should be. But there's definitely some things, like final rules, that are now a bit up in the air. We'll return to that in a second.

Using your predictive capabilities, based on what you've seen so far- I recognize it's early, we're recording this the second week of February, so it hasn't been that long. But in light of what's happened, what do you see as the path forward for financial services policies? Reading between the tea leaves, is there anything you can now say , oh, I think this is where things are going?

Penny Lee:

I think with the appointments of Jonathan Gould at OCC, and also acting with Rodney Hood, with Travis Hill, acting chair of the FDIC, Jonathan McKernan, acting director potentially at the CFPB as well, you are seeing individuals in their- you can take their past actions as maybe where they might be heading and where they might be thinking and where they might be going as individuals that are more innovation friendly, that are thinking about the future of finance and where the US needs to go.

For the last four years, I think we've had more of a backward-looking administration, one that was concerned or intimidated by many of the fast innovations that were coming into the marketplace.

And there was an immediate reaction to let's pause or let's apply rules that maybe aren't quite right fit. It was a very different atmosphere that you had the last four years, which was just a lot of high skepticism towards innovation, the removal of sandboxes and being allowed for industries to innovate with regulators or have that interaction, the removal of financial innovation offices. You just saw a lot of kind of hunkering in on establishing almost the status quo and not allowing these innovative products that are democratizing access, allowing for more access to savings and lending and small business lending and other aspects of the financial sector.

So now, forward looking, you do see those that have been nominated for the various different regulatory bodies to have had a history and a record of embracing innovation and thinking through, instead of how do we shut something down, what is the market gap that they're trying to fill and how can we best put regulatory parameters around it to ensure that they thrive, but also ensure that consumers are protected, small businesses are protected, and that there's not fraud and abuse in the system. So looking forward to having those conversations.

Reggie Young:

Yeah, I think that Travis Hill call was a great one. ZEE had a release in the past, I want to say within the past week, around just give folks a concrete example around willingness and interest in accepting the last four numbers of a Social Security number for  KYC purposes. That's something that I think regulators have not been the most endorsed. Some have been open to it. Other regulators have been a little less open to it. That's the sort of thing that I think we're going to see. I think there's a lot of good reasons to go that route. If you're collecting everybody's full nine and then there's a breach, then you have all these users. Whereas if you're only collecting last four, it's a little safe. There's a lot of thoughtful ways to do it.

Penny Lee:

Yeah. And that was one that was kind of head-scratching. You had the FDIC, our companies and others, it had been kind of standard to only have the last four. And then all of a sudden, they came out with a directive saying, nope, you need the last nine. And depending on where you were on your examination cycle as a bank, some were still only collecting the last four, others were collecting the last nine. And then you had an RFI, a request for information, come from FinCEN saying, hey, what are some innovations that we should be thinking about KYC and other things? So you had this directive coming out of one body where you had two other bodies at FinCEN and at OCC saying potentially, no, no, we're okay with just the final four. Having Travis Hill understand that lack of clarity and just one of his first acts was to clear it up and say, no, it's fine, the last four is the safe and actually more secure way to identify somebody than providing a full nine.

Reggie Young:

That was great. Next topic that I think you're a perfect person to chat on is what are the opportunities for fintechs? I think, obviously, Financial Technology Association is a key player in this space. I think of the group as the preeminent fintech trade association. I think there's a lot of flavors and I do want to spend some time talking about FDA, what folks should know about it. But I think generally, what are the opportunities if I'm a fintech that wants to have an impact over the next four years? How should I think about that? What are the opportunities for fintechs to help shape the last four of SSN, those sorts of questions and issues?

Penny Lee:

I think there's a conversation that needs to be had. And as I said, there's a lot of innovation that is happening. And members in our organization, many of them are global. And so they are interacting with jurisdictions across the globe that are actually, I would say, ahead of the US as far as faster payments, issuing and acquiring, settlements, cross-border payments, and kind of that access into Fed services and other ways in which to extend credit. We are looking forward to having those conversations and thinking through what is it that the US needs to do to continue to stay on the forefront. It's ironic that many of these fintech companies are born here in the United States, but yet our own rules and regulations are more limiting than where they are in global jurisdictions. So wanted to think through.

So the opportunities, one that immediately comes to mind is this whole notion of non-bank access into Fed services, which is globally set as faster payments. Currently, we do have a system with the clearing house and FedNow to allow for that instant settlement, but that's only available to banks. Fintechs, non-bank entities cannot have access to that. That's why you still have three days to clear a paycheck, four days to clear an invoice. Having that instant settlement to be able to allow for small business to have more invoice clarity, to have their invoices paid immediately on time, that just helps with cashflow management and allows them to run more efficient and effective businesses.

It also will reduce cost. Right now, when you send a Venmo or when you pay for services, oftentimes there are fees along that trail from banks, from core providers and others that add to the overall expense for the consumer. So trying to eliminate those or providing that kind of innovative mechanism to allow our companies to be able to allow consumers to have access to these services faster, cheaper, and be able to better manage their own cashflow.

Reggie Young:

Yeah, I agree. I think that's a great opportunity. Can help unlock a lot of important value for end user every day, small businesses, consumers, everyone. I'm excited for that. I'm excited for potentially some movement on the charter front. I think we're overdue there.

Penny Lee:

We are. I mean, we just saw an absolute pulling back on all charters. And so I was pleased to see Travis Hill at the FDIC mention looking into de novo charters, allowing for kind of that reopening of all charters, whether you want to pursue an ILC, a special purpose charter, a non-depository charter out of Connecticut, all of these things.

It's always ironic for me is that oftentimes, the banks say, well, if you look like a bank and crack like a bank, you should be regulated a bank. And when we go to apply to be either a bank or a financial institution, it's like, oh, no, no, no, do not allow for that to occur either. So it's like, oh, I see. This is just about incumbency protection. I got it. And so the irony is not lost.

Reggie Young:

I hadn't thought about that. That's a really, really interesting point of, yeah, a lot of folks have wanted fintechs to be more directly regulated, but the avenue for that is charters that fintechs can go get and then be directly regulated. More limited charters, they're going to come with needing that AML program. They're going to come with all of those obligations. That's really funny. I hadn't thought about that.

Cool. Next topic and one of the reasons that spurred this podcast is 1033 and open banking. What's happening there in light of the new administration?

Penny Lee:

As we know, this rule was finalized in October, and it is saying to consumers or mandating that consumers do have the right or protecting that right to permission their data. As we know, 8 out of 10 Americans right now use an app for their financial lives. And so we've always believed, and I would say affirmed by- this was started in the Trump first administration and then finalized in October, is that consumers do have the right to their data. And if they want to permission it, they have the right to permission it to third parties, be able to interact and engage with those services and platforms that best fit their own needs.

So 1033, a rule out of Dodd-Frank, not to get too into the weeds, promulgated under the Dodd-Frank that's been in existence, guarantees that right. Earlier this week, we did file to intervene- this rule was finalized in October, and immediately within hours, the Banking Policy Institute and others filed suit to block this from being enacted. Given some of the uncertainty around CFPB and whether or not they will be engaging in any of the litigation, we did feel we needed to have the voice of our industry and that of the consumers being heard in court. And so we have asked to intervene to be able to present that point of view, concerned about if BPI was to prevail, a lot of the protections that are currently in place would be neglected or be denied. That's why we entered into the intervention and hope that we will be allowed to be represented.

Reggie Young:

Yeah. I think 1033, there's a lot of bipartisan support from the folks I know in fintech on both sides of the aisle. I think it's a really good proposal. I think it's an interesting example of a final rule that has a lot of practical considerations. In a lot of the drafts, there's kind of clear shout-outs to putting more terms in front of somebody isn't necessarily effective. I really like some of the practical call-outs. I actually think there are areas that could be improved, always are, but I think it's a pretty practically useful-

Penny Lee:

Yeah. And to that point, I would say it's not perfect, and there are issues. Again, hoping that the CFPB does reopen in some form because we would like to revisit some aspects. We think the restrictions on secondary use of data is too limiting. It doesn't allow companies and products to be able to update for fraud controls, being able to update their own product offering. It doesn't allow it for research. We're concerned about and would love to see that revisited and revised on the secondary use of data.

Also, some of the other restrictions that were in place, we’d like to work with the CFPB to think through how it can be improved and changed. As we know, no laws are ever perfect. And so we know that there was a lot of thoughtful considerations taken into it. We do absolutely support the mandate that consumers have the right to permission their own data and not in the control of banks and financial institutions. We want to see that preserved, at the same time, work to revise and re-scope and improve some of it.

Reggie Young:

Yeah. And if I'm remembering correctly, that, to your data, is, what, a decade old in some countries? We're a little behind there.

Okay, last topic. What is the Financial Technology Association? What should folks in fintech know about it? I already mentioned the preeminent fintech group. Maybe one interesting thing to cover, too, is the different flavors of fintech trade groups. I've worked with trade groups before. I understand that you need to get a group together that is mostly aligned. It's a whole complicated act, but I think you all have done a really good job.

The reason I mentioned that I think of you all as kind of the preeminent fintech group is because I think you do have great companies, Plaid, Stripe, Mercury, Chime, a lot of innovative companies that are members. And I think FTA tends to focus on some of the higher-impact, innovative policy stuff, at least for fintechs, other trade groups, folks who aren't banking and related issues. So what should our listeners know about FTA?

Penny Lee:

Well, appreciate it. The organization was launched about four years ago. It really was to kind of be this collective voice for what we would consider digitally native financial technology firms, short-term fintechs. Many of them are on the leading edge, not only here in the United States, but globally. And so recognize names from a consumer perspective or small business perspective, such as PayPal, Stripe, Block, Chime, Plaid, I don't want to name all of them, but a whole host of those that are on the leading edge, as you were saying, that are thinking through, how can we bring access to service, both from an individual and small business, and allow you to live kind of this financial life?

A lot of the work that our member companies do are now taken for granted. That is just so ubiquitous, the ability to purchase an item online, being able to pay for it installments. We do represent for the large buy now pay later companies, earned wage access companies, infrastructure companies. Those are in the capital market from a Carta or a Buttermint, and then in the small business, so you mentioned Mercury, Ram, Brex, all of those companies that are trying- Bluevine. Now I'm going to get in trouble by not mentioning somebody.

Those that are on the forefront and trying to think through, what is the market gap that we're trying to fill? How is it that we can bring access to more individuals and small businesses? How do we think through and what we work with is on the federal and state rules and regulations to how we shape? How do we think about how access to credit should be? How do we think about how we bring innovative products? If you're only getting your paycheck every two weeks, what is a product that can come into the marketplace safely, responsibly, with low fees that allow you to actually manage your own household income better by getting access to your paycheck on a daily basis?

All of those things is what we work. And like I said, we do have some of the US and global leaders as part of our membership, and just trying to be very thoughtful, very purposeful, engaged. We have litigated when we needed to, when we felt a rule was outside of where its intention should be. And so we will advocate, fight on behalf of the industry, but also promote the incredible amount of activity and good that it does for consumers and small businesses.

Reggie Young:

Love it. I remember watching the first press releases around FTA launching. It's funny, before this podcast, I was looking at all the members online. They're too many to list, which is great. Like I said, I've worked in trade groups, and you can have this critical mass problem where when there's not enough members, there's not enough activity, then it kind of fizzles out and seems like you all have blown through that critical mass threshold a long time ago. So love to see it.

It's important. I think one of my big lessons from doing some policy work from the time I was at Bluevine, which is glad to hear you throw them in there, because I know they're a member, you can definitely have a big impact, but just sharing your point of view and the rational considerations, because a lot of times, policymakers, they don't have perfect knowledge. They might have some expertise in an area, but they don't have the deep expertise that folks actually working in financial services and companies can bring. So just having those conversations, you'll have a lot of conversations where they'll say, oh, I didn't think about that. I didn't realize that the secondary consequences of that are going to be X, Y, Z. So it goes a long way.

Penny Lee:

Yeah, and what we try to do is bring that collective voice of the industries so that in talking with regulators, legislators, and others, that we can speak to a wide swath of what the industry is thinking and provide them not only real-time market information as to kind of the scope, the size, the concerns, how this will impact somebody in their own state, and we could talk about it in a collective.

Sometimes, it's hard for individual members to just speak. They can speak to just their own particular concerns, but speaking for the industry writ large is harder for individual companies. And so bringing that collective voice, that kind of thoughtfulness of where we want to advance, where the industry is going, I think is one of the reasons why we exist is to be able to bring that collective narrative to the conversations.

Reggie Young:

Definitely. And last question, if folks want to get in touch with you or explore, if they're at a fintech that wants to explore membership in the FTA, where should they go?

Penny Lee:

They can go to our website, Financial Technology Association, FTAssociation.org. Contact us, info@ftassociation. Visit our website. All the information is there, and we would love to be in touch.

Reggie Young:

Amazing. Well, thanks so much for coming on the podcast. I'm sure I will reach out to have you back on at some point in the next four years because there's a lot of interesting policy stuff that's going to be coming.

Penny Lee:

Yes, exactly. This stuff is moving. A lot is happening in an hourly basis, so look forward to another conversation.

Reggie Young:

Thanks so much, Penny.

Penny Lee:

Thanks, Reggie.