Privacy Concerns Remain as HMDA Implementation Date Arrives


CFPB-12-27-17.pngAfter more than three years, the implementation date for the Consumer Financial Protection Bureau’s amendment to Regulation C of the Home Mortgage Disclosure Act (HMDA) has finally arrived. While much has been written about the increased data points to be collected and reported under the rule, and the regulatory risks this presents to covered entities, the data privacy issues have been largely overlooked and are still being debated at this late stage.

HMDA data is not only public, but the CFPB provides tools that allow anyone to explore this data. The CFPB also allows the raw data to be exported with ease to spreadsheets and other data analysis programs. The fact that the data is so easily analyzed, combined with the increase in data points collected under the new rule, drove the financial industry to repeatedly raise privacy concerns to the CFPB. As early as 2015, covered entities questioned why the rule failed to establish a method to mask certain data fields that would protect an applicant’s identity. The CFPB didn’t directly address these concerns, stating only that the bureau will use a balancing test—a subjective test to explore a legal or regulatory issue—to “determine whether HMDA data should be modified prior to its disclosure in order to protect applicant and borrower privacy while also fulfilling HMDA’s disclosure purposes.”

The results of this balancing test were finally announced in September 2017, when the CFPB published guidance in the Federal Register. Not surprisingly, the guidance was met with criticism and further concern from the industry, as evidenced by a recent comment letter submitted by several industry trade groups. The CFPB’s guidance proposes to modify the public loan-level HMDA data to only exclude:

  • the universal loan identifier,
  • the date of the application,
  • the date action was taken by the financial institution,
  • the address of the property securing the loan,
  • the credit score or scores relied on in making the credit decision,
  • the Nationwide Mortgage Licensing System and Registry Identifier (NMLS ID),
  • the result generated by the underwriting system, and
  • free-form text fields used to report applicant or borrower race and ethnicity, name and version of the credit scoring model used, principal reason for denial (if applicable), and the name of the automated underwriting system.

As the comment letter points out, this leaves all other data points available to the public, including the borrower’s income, age, sex, race and ethnicity; the census tract, county and state; and the interest rate, combined loan-to-value ratio (CLTV), loan purpose and term, as well as many other data points. This makes applicant identification by the public not only possible, but probable. The data being collected and reported can be used for criminal purposes such as identity theft, but will also be extremely valuable to third-party marketing services. In an age where the mining and aggregation of personal information creates valuable data sets, it is reasonable to believe that the reported HMDA data will be analyzed to exploit anyone applying for a mortgage in 2018 and beyond.

Those involved in mortgage lending should be concerned with their applicants’ data privacy, given the litigation and reputational risks that accompany any successful attempt to improperly utilize or re-identify an applicant through reported HMDA data. Consumers are becoming increasingly attuned to their privacy and the need to protect it. Once it is determined that HMDA data was used for an unauthorized or possibly criminal purpose, covered entities should expect a flurry of lawsuits filed and public backlash against whatever institutions were involved in the collection and reporting—not necessarily the CFPB that promulgated the rule and guidance. Given that it is a regulatory requirement to do so, HMDA covered entities will likely avoid liability for this disclosure, but at that point the reputational price and legal costs will already be incurred. Banks and other lenders must start collecting this data effective January 1, 2018, which will be scheduled for publication by the CFPB a year later. The risk presented to not only applicants and lenders through the public disclosure of this data is real, and it must be addressed by the CFPB. There is still more than a year before this data will be publicly reported. All mortgage lenders and industry groups should continue to push for a more conservative plan in regards to the publication of said data, with a greater focus on the data privacy risks to borrowers and the risk exposure to the lenders.

The Blockchain Players: Understanding the Current Environment


blockchain-8-23-17.pngFinXTech Advisor Christa Steele has created a four part series to educate our community about how blockchain is changing the transaction of digital information, its implications and the players who are shaping this technology. Below is the final part in this series.

Part One
Part Two
Part Three

Banks may be slow to adopt blockchain in the long run but commercial clients may force their hand. Companies that use blockchain such as ConsenSys, Linux Foundation, Hyperledger, and R3 aren’t just working with banks. Kaiser Permanente, Toyota, Cargill, Amazon, and several state, local and foreign governments, among others, are looking to implement blockchain technology as well. The list of prospective commercial clients continues to grow daily.

Why Community Banks Must Pay Attention
It’s too soon for a community bank to dedicate precious and limited resources to blockchain beyond just staying educated. Blockchain, also known as digital ledger technology, will no doubt be led by and developed by the larger financial institutions and regulatory bodies. I believe a community bank’s first interaction with the technology will come from interactions through their correspondent banks in excess of $50 billion in assets or larger commercial clients with robust treasury management requirements.

Blockchain is potentially so transformative, banks are likely to see changes in how banking infrastructure works today in the areas of payments clearing and settlement; digital currencies; capital markets, including securities clearing, settlement and custody; digital identification; supply chain management and regulatory compliance.

Current Regulatory Vibe in the U.S. and Abroad
It is safe to say that blockchain technology is becoming mainstream. The Securities and Exchange Commission, Internal Revenue Service and several other regulatory and governing bodies acknowledge the technology and have adopted policy language surrounding blockchain, digital ledger technology and virtual currencies over the course of the last 12 months. The most notable foreign government to announce its acceptance of blockchain is Dubai which aims to be a “city built on blockchain.”

Have You Opened a Digital Wallet?
Though I am focused on the underlying blockchain technology instead of digital currency adoption, I do encourage you to understand how the digital wallet works. It will be increasingly important in the coming months and years as these consumer digital wallets become mainstream. Xapo offers an easy-to-use and secure bitcoin wallet. I found Xapo’s account opening process to be seamless and easy to use.

Resources for Staying up to Speed
I remain convinced our industry will continue to be disrupted by improvements in technology. Technology enhancements are moving faster today than ever before. We can thank IBM and others for leading this technology charge. As you look to stay educated, great resources to consider include a membership with the Digital Chamber of Commerce and Linux Foundation. For more information, you can also check out CoinDesk, a blockchain news source.

The Long Drought in Small Business Lending


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Most Americans have moved on from the financial shocks that struck our economy almost a decade ago. Millions of new jobs have been created, wages are rising and companies have repaired their balance sheets. Yet one unfortunate legacy of the 2008 to 2010 meltdown remains: the tens of thousands of small businesses that still struggle to obtain a bank loan at reasonable cost, if at all.

A new studyby three Harvard Business School economists provides fresh insights into the pullback in small business lending, and its consequences. The researchers found that the nation’s four largest banks— Bank of America Corp., Citigroup, JPMorgan Chase & Co., and Wells Fargo & Co.—not only cut back more sharply than other lenders during the recession, but also showed far less interest in regaining lost ground as the economy picked up again.

According to the Harvard study, the four banks’ advances to small businesses hovered at only half of pre-crisis levels until 2014, even as rivals pushed up their lending to almost 80 percent of pre-crisis levels. All in all, lending by the big four was 30 percent lower than other banks included in a Community Reinvestment Act database.

The lending drought has its origins in the big banks’ decision to focus on other, less risky sectors during the financial crisis. Among other drawbacks, small business loans carried higher capital requirements, and were hampered by inefficient automation of underwriting processes. Once the recession was over, the big four banks were constrained by stifling new regulations imposed by the 2010 Dodd-Frank Act and by the Federal Reserve, notably a large uptick in risk weightings for small business loans.

The pros and cons of the banks’ actions will be debated for years to come. What is beyond dispute is their painful consequences. A county-by-county examination by the Harvard researchers shows that in areas where the big four pulled back, business expansion slowed and job growth suffered, especially in communities where small businesses played an outsized role. Wages also grew more slowly. All these impacts were felt most strongly in sectors most dependent on outside funding, such as manufacturing.

The Harvard study acknowledges that other lenders, including an array of shadow bank start-ups, including online lenders, have largely filled the gaps left by the Big Four. Nonetheless, the cost of credit remains unusually high in the worst-affected areas and, while jobs have returned, wages continue to lag. “Our findings suggest that a large credit supply shock from a subset of lenders can have surprisingly long-lived effects on real activity,” the study concludes. It adds that “the cumulative effect of these factors could explain some of the reason why this recovery has been so weak compared to others in the post-war period.”

These findings are confirmed by the recent performance of the Thomson Reuters-PayNet small business lending index, which measures the volume of new commercial loans and leases to small businesses. Apart from a brief uptick after last November’s election, lending has been stuck in the doldrums for several years. The index has fallen, year-over-year, for 12 of the past 13 months. With a shortage of credit compounded by economic and political uncertainties, many small business owners remain reluctant to invest in new plant and equipment.

We at PayNet estimate that the small business credit gap costs the U.S. economy $108 billion in lost output and over 400,000 jobs a year. Some firms are forced to put operations on hold for two or three months while they wait for a bank to process their credit application.

According to our count, a typical commercial and industrial loan requires 28 separate tasks by the lending bank. It involves three departments— relationship manager, credit analyst, and credit committee—and takes between two and eight weeks to complete. The cost of processing each credit application runs at $4,000 to $6,000. The result? Few banks are able to turn a profit on this business unless the loan size exceeds $500,000, which is far more than most small businesses borrow. The time, paperwork and cost involved are pushing more and more small businesses away from traditional financing sources. We cannot allow such a key sector of our economy to fight with one hand behind its back. Lenders need to be more accepting of new kinds of financial data and fresh approaches to credit standards. Regulators must open the door to more innovative underwriting techniques and assessment processes.

A good place to start would be to examine what has gone wrong over the past decade. As the Harvard study puts it: “Going forward, it will be useful to better disentangle the causes of this shock. If regulation played an important role…then understanding the specific rules that contributed the most would be helpful from a policy perspective.”

Q&A: What Do Fintech Companies Commonly Miss?


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Banks are increasingly interested in having conversations with fintech companies and exploring the potential to partner with them. They have a lot to gain: better technology, increased efficiencies and improved market share. On the other hand, fintech companies don’t necessarily know how to best pitch their products and services to banks. Banking regulations are significant and can complicate any partnership. Large banking organizations are complex and difficult to understand. So we reached out to some of the banking experts speaking at the FinXTech Annual Summit in New York City April 26, with the goal of helping fintech companies improve their approach.

Q: How could fintech companies better sell to banks? What do they commonly miss?

A common problem is that they don’t understand the banks’ regulatory requirements for working with a so-called third party. Banks have to comply with extensive rules on managing the risk around third-party relationships. The fintech companies should read those rules based on the type of bank it is, should be ready to satisfy those questions, and explain how they are working with other banks to give each bank confidence. The bank is responsible for what the fintech does in most of these relationships, including meeting standards for cybersecurity, consumer protection, anti-money laundering and disclosures. Know what those rules are. Many fintechs are caught by surprise by the complexity and difficulty of satisfying these requirements.

Jo Ann S. Barefoot, CEO, Barefoot Innovation Group


What can your technology do now versus what is on the roadmap ahead? At some stage in the pitching process, you’ll need to review your financials, funding, staffing and sales pipeline. Be prepared with details for evaluation of things like what your cost model is and how you are positioned to compete and defend against copycats.—•?_Work your contacts. Avoid the urge to send an email blast to everybody you can get to via LinkedIn. This has a counter-productive effect on a company’s appetite to engage and is a colossal waste of resources for all. A more effective method is to approach a company through a referral from your investor partner, a board member or a key business or technology executive. Also, do your homework! Most larger companies have a wealth of public information in print, online and social media. Understand the company’s scale, business imperatives, risk appetite and more by doing your research ahead of time. Also know who you’re meeting with. Is it senior technology leaders? Their team? Know who they are, and tailor your message for the audience.

—Sherrie Littlejohn, executive vice president, Innovation Group at Wells Fargo &Co.


We see many fintech players running into the same roadblocks when selling into banks.At the core, it comes down to not understanding how buying decisions are made in these organizations.For the larger banks, the purchasing process can be complicated and involve a number of parties, including a procurement organization.We’ve seen these smaller start-ups going to procurement after a few demos, thinking that the deal is done, only to start a lengthy process of becoming an approved vendor for the bank.That is usually just the start of the journey.When dealing with smaller banks, the process may not be as involved and procurement may not be as central to the process.However, these banks usually require strong alignment across the leadership group•?__both business and technology•?__and, in many instances, eventually involving the CEO directly. Being smart about the decision process is key.

—Joe Guastella, managing principal, Global Financial Services, Deloitte Consulting


I would challenge the premise, for starters. As in any emerging relationship, the onus should be on both sides, and many banks probably have a lot of room for improvement in listening to startups. By the way, when we talk of fintech companies, banks are the original fintechs, right? That said, there are three basic hygiene tips to help any startup deal with a large, complex organization like a bank. First, “work like a headhunter”—do your homework, figure out who’s who, focus your firepower and engage tactfully. Secondly, be able to explain what actual bank problem you address. The best pitches abbreviate gloating about the merits of their product and give concrete examples of pain points they solve. Third, you would be surprised at how rare it is to find someone who can state clearly what they do or offer. You need to make it simple enough for a banker to understand!

—Andres Wolberg-Stok, global head of policy, Citi FinTech, Citigroup

Buying Bank Technology: If Not Now, When?


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FoMO, or the Fear of Missing Out, isn’t just a pop culture buzzword created to describe our obsession with social media. It’s an actual, scientifically proven phenomenon described in scientific literature as “the uneasy and sometimes all-consuming feeling that you’re missing out—that your peers are doing, in the know about, or in possession of more or something better than you.”

That feeling probably sounds very familiar to bankers these days. In the press, in blogs, on podcasts, and at every industry conference, bankers are hearing that the time is now to make big technology changes in their organizations. Everyone seems to be busy innovating, and many bankers are left wondering if they’re the ones being left behind.

In this case, the answer may be “Yes.”

We are facing a set of once-in-a-generation circumstances that will determine the winners and losers in banking for the coming decades. And this separation of the “haves” from the “didn’t act fast enough to be among the haves” is already in motion.

Here are the four big trends that have converged to create the opportunity—or threat—of a lifetime for banks.

1) Tech Spending Neglected
A great deal has been written about how antiquated much of the banking infrastructure has become. Some concerns about legacy systems are overblown, but there is undoubtedly a marked difference between the digital experience customers have with their banks and what they encounter in most other parts of their lives. Banks still handle debits and credits as well as ever, but when compared to the Amazon, Netflix or Gmail experience, the gap is widening. Banks cut all spending following the financial crisis, and have been slow to replace those vacated technology budgets in the face of new regulations and shrinking margins. The result is wide swaths of banking technology that haven’t been upgraded in 10-plus years.

2) Expected “windfalls” from regulatory and tax reform
In our interactions with banks, there has been a sudden change in mood. Bankers have shifted quickly from the glass being half empty to half full, in large part because of the outcome of the November elections. Banks now see the potential for big windfalls, in the form of tax relief and regulatory reform, with a recent Goldman Sachs piece suggesting that industry earnings in 2018 could increase by 28 percent over current estimates if the chips fall just right.

3) Interest rates (and margins) are rising
In addition to those windfalls, banks are also getting a long-awaited earnings boost from rising interest rates. The Federal Reserve has increased overnight rates by 0.75 percent, and long-term rates have followed suit, with 10-year Treasury yields up more than 1 percent from their 2016 lows. Deposits rates have been slow to follow along, resulting in margins that are finally improving after years of painful compression.

4) Game changing technology is plentiful and accessible
Finally, in the decade since most banks have been actively in the market, the number and quality of technology solutions has exploded. Computing power, high quality data sets and cheap storage are contributing to a renaissance in enterprise software, and banks now have multiple possible solutions for just about any conceivable business need. You are no longer beholden to your core provider to sell you everything, as the new generation of tools are better at integrating, easier to deploy and easier to use. On top of all that, most of them are also incredibly cheap for the value they are providing, making them accessible to banks of all sizes and shapes.

When you combine these four factors, you see why there is so much hoopla around innovation and fintech. Many bankers are viewing the next few years as their one big chance to completely revamp the critical pillars of their business. Due to the long gap in meaningful technology investment, they are starting with a blank slate, and because of the recent improvement in profitability trends, they have sufficient budgets to make substantial changes. They are approaching the market and finding plentiful options and are excited by the opportunity.

Some will choose wisely and win big. Others will choose poorly and will not fare as well. But FoMO is real: If you simply stand on the sidelines and do nothing, that is also a choice. Your competitors will leave you behind, and soon your customers might just do the same.

If you’re not willing to make some changes in this environment, when will you be?

Four Tips for Choosing a Bank Partner


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In January, I shared four tips for banks to consider when considering whether to enter into a new fintech partnership. How about the other half of that relationship? If you work for a fintech company, let me give you my perspective as a banker who has worked with many of them.

Cultural Alignment: This is probably one of the most important considerations for both parties. If you’re in the early stages of growth, you’re probably used to making decisions quickly, collaboratively and doing it without much red tape. For that reason, you probably consider most bankers to be seem slow-moving by comparison. First, I’d say that understanding the regulatory environment in which banks operate may alleviate some frustration. (There are often good reasons for banks to operate with caution. See tip number four, compliance buy-in, from my January article.) However, that doesn’t mean you should settle for a partner that doesn’t understand your culture—or worse yet, has established one that is at odds with yours. Look for a bank that’s responsive, allows you access to key decision makers, is open-minded to your ideas and commits itself to finding ways to make things work.

Strategic Fit:If you’re able to “check the box” on cultural alignment, you’ll want to consider strategic plans. Make sure you understand a few critical issues: How does this relationship fit into your strategic plan? Do you understand how the bank sees your service or technology fitting into its strategic goals? Exploring these questions helps lay the foundation for a mutually beneficial partnership. If you’re setting out to create a specific product or service, go past the initial implementation phase and consider sharing roadmaps with your potential bank partner. Just as it is important for us to understand where you’re looking to take your company over the next six to 24 months, it is important for you to know where the bank is headed and understand our approach to executing projects—both with the partnership and with other key initiatives.

Compliance Expertise: Look for a partner that not only has deep knowledge of the regulatory field, but is willing to work with you to navigate it. Having the compliance talk early on allows you to test if the bank is one that can help you avoid potential compliance headaches down the line, is willing to help develop alternatives where appropriate, and is genuinely invested in the success of the partnership.

Business Terms: If you have found a bank partner that is both culturally and strategically aligned with your company and has the right mindset when it comes to risk management, the discussions around business terms—while critically important—should fall into place rather easily. Beware of a contentious, back-and-forth negotiation; at this point both organizations should be in agreement around what success looks like. While it is important for you to establish an agreement that allows you to achieve your goals, remember that is exactly what your bank partner is looking for as well. Having a “we’re in this together” mentality also helps. You have a great idea to bring to market and an innovative team to make it happen. Your bank partner provides industry experience, a charter, access to a balance sheet and FDIC coverage—all of which will be valuable (and depending on your business plan, potentially necessary) contributions that will prove to be even more important down the road.

Keeping a few of these concepts in mind as you approach your next business development meeting with a potential bank partner will increase the likelihood that you will have a successful experience.

What Does 2017 Hold for the Alternative Investment Industry?


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Last year was an exciting one in the alternative investment industry, and all indications point to another great year in 2017. Here are five predictions that will dominate the industry in 2017.

1. Capital invested in private equity funds will continue to increase amidst a further decline in hedge funds
Growth in alternative investments will continue to be explosive in 2017. According to a report from Cerulli & Associates, the mean allocation of alternative investments is still less than 5 percent of overall assets. Depending on the industry source, the general guidance is that the ideal allocation should be in the 15 percent to 25 percent range, signaling that there is a lot more room to grow.

Nowhere has that growth been more evident than in private equity funds, which have increased dramatically over the past few years. Assets have risen from $30 billion in 1995 to around $4 trillion in 2015. This growth will continue, as 64 percent of limited partners plan to increase their allocation to private equity funds, which is up from 26 percent just five years ago.

Hedge funds, on the other hand, have struggled as poor performance compounded by high fees resulted in large outflows in 2016.

2. Regulatory and compliance pressures will continue to increase even under a Trump administration
Regulatory and compliance pressures have been a dominant factor in the alternative Investment industry (and especially among hedge funds) for several years now. While some industry leaders are optimistic that a loosening of regulations will occur under the new Trump administration, the trend toward more transparency will continue to grow.

Study after study shows the impact of mounting regulatory and compliance pressures. Here are two reports that paint a clear picture:

  • In a Longitude Research study last year more than 50 percent of fund administrators predicted that the need to keep up with regulation would have the greatest impact on their activities over the following three years.
  • A report from Linedata showed regulatory and compliance being the chief concern facing fund administrators and fund managers alike.

3. Technological capabilities will become as important for fund administrators as accounting capabilities
Fund administrators are traditionally thought of as providers of accounting services. Technology was mostly thought of as internal plumbing, and the decisions made about the use of technology were often left in the hands of an IT department, with little senior-level involvement.

It’s safe to say that those days are over. This year we will see the further emergence of technology as an integral capability for any fund administrator—on par with the importance of their accounting capabilities.

Fund administrators rely on technology to give them the data, reporting and understanding needed to satisfy the evolving needs of their clients and investors. In fact, nine out of 10 fund administrators plan to invest in technology in the next three years.

4. Consolidation will continue to increase in the fund administration business
Competition in the fund administration industry is intense. This is being driven by the explosion in capital being invested, the increasing demands for regulatory transparency, and the economies of scale needed to effectively compete in a low-margin business. No metric shows this better than the one reported by Preqin that 28 percent of fund administrators have been fired by their clients in the past 12 months.

The trend toward consolidation has escalated significantly in the past two years. While this can be good news for the largest of funds that can afford the services of the largest of fund administrators, this consolidation is likely bad news for both mid-market fund managers and mid-market fund administrators.

5. Fund administrators will become a bigger force in private equity and real estate funds, as well as with family offices
The use of fund administrators is pretty much a requirement for hedge funds, as evidenced by the outsourcing to fund administrators increasing from 50 percent in 2006 to 81 percent in 2013. This dynamic really started taking shape in the wake of the Bernie Madoff scandal, which showed the perils of a lack of validation and supervision within the industry.

In comparison, fund administrators are under-penetrated in private equity and real estate funds, with estimates showing fund administrator penetration at around 30 percent of assets under management today. However, this is expected to increase 45 percent by 2018.

The same conditions that drove the shift to fund administrators in the hedge fund space affect private equity and real estate funds as well. Just as happened with investors in hedge funds, investors in private equity and real estate funds are demanding third-party validation of assets and performance. Regulatory pressures are already having an impact on general partners of private equity and real estate funds.

Although occurring more slowly, the need to turn to fund administrators is also happening in the single and multi-family office space thanks to an increasing rate of wealth and investments in ever more complicated asset types.

Is Trump Good for Fintech, or Bad?


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There has been an enormous sense of anticipation flooding through the community and regional banks since the election. President-elect Donald Trump’s opposition to the Dodd-Frank Act, which has created a stifling regulatory environment, is well known and bankers feel that relief is on the way. By contrast, the election results have produced a sense of consternation and concern among the financial technology companies that are trying to partner and compete with community and regional banks. The regulatory picture is much more confusing under a Trump Administration for these enterprises.

One reason for this is that fintech regulation was far from a settled issue before the election. The regulatory framework for fintech is not in place to any significant degree. In many cases, it will take new regulations to allow many of the fintech lenders and payment companies to expand their operations, and that’s a problem. Trump is opposed to new financial regulations of any sort, and it may be difficult to get the new framework in place during his term in office. Rather than pass new federal legislation, he is likely to leave the matter in the hands of the state legislatures and that will not benefit fintech companies.

The creation of a limited purpose national fintech charter as proposed by the Office of the Comptroller of the Currency is an attempt to make it easier for these companies to operate and not have to deal with regulatory agencies on a state-by-state basis. But in my opinion, there won’t be that many fintech companies that are willing and able to handle the responsibilities of a national charter, so this will provide limited relief to the industry. I also will not be shocked to see the concept of a limited purpose charter unwound early in a Trump Administration as bankers have been huge supporters of the incoming president and in my experience, the average bank is not shy about asking for favors.

Fintech firms are also big supporters of net neutrality since it gives them open and even access to bandwidth to offer services to users. Trump is not a supporter, and neither are the ranking members of the GOP in the Senate and the House of Representatives. Republican lawmakers have already put forth a bill to end net neutrality that I think will pass early in the next session of Congress and I expect Trump to sign it when it reaches his desk.

Immigration policies will also be a potential negative for fintech companies. Immigrants make up a significant percentage of the skilled workforce within the financial technology industry, and anything that makes to harder for them to get here and stay here is going to create a talent challenge for the companies in that space. Fintech companies that focus on payments could be hurt as well since many of the people that Trump wants to deport use these systems to send money to family back home, and that volume could drop substantially.

The biggest threat to fintech firms from the new administration will likely come from the repeal or reduction of Dodd-Frank. A lot of the opportunities that fintech companies are pursuing were created by the handcuffs placed on banks by that legislation. If the handcuffs come off under the Trump Administration, then fintech lenders and payment companies will find that they now have to go head to head with the likes of JP Morgan Chase & Co., Citigroup and Bank of America Corp., and that will be no easy task.

The regulatory environment for financial technology was murky before the election, and it is even more so today. While we can expect the combination of a Trump Presidency and GOP-controlled Congress to be pro-business, we can also expect them to be very pro-traditional banking. That will be a big negative for fintech companies that had hoped to compete with the banks in the future.

While many expect fintech to be a major disruptor of the banking industry and some even think it will replace banking, I don’t expect that to happen—especially if banks end up with a more favorable regulatory environment. The fintech firms that prosper under a Trump Administration will be those that can partner with a bank to offer financial products and services to bank customers in a more efficient and profitable manner.

What To Know About the New Fintech Charter


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Don’t expect an onslaught of fintech companies rushing to become banks. The recent announcement that the Office of the Comptroller of the Currency would begin accepting applications for special purpose national bank charters from fintech companies was met with gloom from some in the banking industry, and optimistic rejoicing from others.

For now, the impact on banking and innovation seems unclear, but the hurdles to obtaining a national banking charter will be significant, and include compliance with many of the same regulations that apply to other national banks, possibly dissuading many startup fintech companies from even wanting one. On the other hand, larger or more established players may find it worth the added regulatory costs to boost their marketing and attractiveness to investors, says Cliff Stanford, an attorney at Alston & Bird. Plus, fintech firms can avoid the m?©lange of state-by-state banking rules and regulations by opting for a national banking charter instead. So don’t be surprised if a Wal-Mart, Apple or Google decides to get a banking license, along with some other, less well known names. The online marketplace lender OnDeck has already said it was open to the possibility of a national bank charter.

The OCC is offering fintech companies the same charter many credit card companies and trust companies have. Basically, the institution has to become a member of the Federal Reserve, and is regulated as a national bank with the same capital standards and liquidity requirements as others. The company has to provide a detailed plan of what products and services it intends to offer, a potential hurdle for a nimble start-up culture more accustomed to experimentation than regulation. “They will have a high bar to meet and they might not be able to meet those requirements,” Stanford says.

However, if the special purpose bank doesn’t accept deposits, it won’t need to comply with the same regulations as banks insured by the Federal Deposit Insurance Corp., which means it is exempt from the Community Reinvestment Act (CRA). Although nondepository institutions would not have to comply with the CRA, the OCC described requirements to make sure the fintech companies follow a plan of inclusion, basically making sure they don’t discriminate, and promote their products to the underserved or small businesses. This has caused some consternation among community banks.

“Why should a tiny bank have to comply with CRA and a big national bank across America does not have to comply?’’ says C.R. “Rusty” Cloutier, the CEO of MidSouth Bancorp, a $1.9 billion asset bank holding company in Lafayette, Louisiana. “If they want a bank charter, that’s fine. Let’s just make sure they play by the same rules.”

The Independent Community Bankers of America, a trade group, put out a press release saying it had “grave” concerns about what it called a “limited” bank charter. “We don’t want a charter that disadvantages one set of financial institutions,’’ says Paul Merski, an executive vice president at the ICBA. “We aren’t against innovation. But we want to make sure some institutions aren’t put at a disadvantage.”

Richard Fischer, an attorney in Washington, D.C., who represents banks, says he doesn’t think a fintech charter is a threat to banks. The Wal-Marts and Apples of the world will do what they want to do, whether or not they have a bank charter. Wal-Mart, which abandoned attempts to get a special purpose banking charter in 2007, already has a sizeable set of financial services, although it partners with banks that do have a charter, such as Green Dot Corp. in Pasadena, California.

Could a new fintech charter lead to fewer bank partnerships with fintech companies, as the fintech companies can cut out the need for a bank? Possibly. But it could also lead to more bank partnerships, as some banks, especially small or midsized banks, become more comfortable with the risk involved in doing business with a fintech company that has a national banking charter.

Jimmy Lenz, the director of technology risk at Wells Fargo Wealth and Investment Management, a division of Wells Fargo & Co., says he’s optimistic that a charter could create more products and services.

“I don’t see this cutting the pie into smaller slices,’’ he says. “I think they will be cutting a bigger pie. I don’t see the banks coming out on the short end of this.” Others said that the competition to banks coming from fintech companies already exists, and won’t go away if you don’t offer a federal charter for fintech companies. “The competition is already there,’’ Stanford says.