'If a Bank Did That, We'd Be Taken to the Woodshed'

Richard Hunt, president and CEO of the Consumer Bankers Association, predicts that most fintech startups — 95% by his estimate — won't make it.

But that doesn't mean he isn't worried about the threat to banks posed by such firms.

"The other 5% are the ones I'm afraid of," Hunt said in an interview at Retail Banking 2016. "The ones that are going to make it."

Banks have argued that fintech firms need to be regulated more like banks, but there are signs that regulators are becoming more interested in the space. The Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and European central banks have recently signaled more scrutiny of both fintech companies and bank innovators.

The OCC published a white paper in March laying out its intent to welcome innovation from fintechs and banks, so long as it doesn't conflict with consumer protection rules. The CFPB is letting fintechs and banks apply for “no-action letters” saying the regulator doesn't plan to take enforcement action against a company for introducing a new financial service, though such letters could be revoked at any time. The Group of 20 nations are calling for a global framework of rules that would usher in the use of new technologies like blockchain.

In the interview, Hunt shared views on all these developments. Following is an edited Q&A:

Today a group of House Republicans said they are trying to draft new legislation that would give fintech companies a system in which they would operate more efficiently. They seem most interested in giving the peer-to-peer lenders a break.

RICHARD HUNT: They have not come out with a white paper yet, there's nothing in the legislative language either, so we've been talking to them. I want to make it clear that we're not opposed to fintech. We need fintech. But they've got to have some consumer protection like we do.

Do you think they need to abide by all the same laws banks do, such as Truth in Lending?

You have to take a step at a time. Are they a depository institution? Because there will be different rules. They have to conform to all the CFPB disclosures, they're now being added to the CFPB complaint portal system, which I'm not a fan of.

But if we're in it, they should be in it. [Comptroller] Tom Curry at the OCC talked about responsible innovation. I get a little leery when the government starts defining what's responsible when it comes to innovation.

When I read the OCC's paper, I got the impression they were saying, we want to do better, we want to understand better, we want to be a little more open to technology innovation, instead of examiners saying no or waiting.

It's a step in the right direction, but they need to expedite their walking because the world is moving at warp speed.

In its white paper, the OCC said it may set up some kind of special office, which sounded like a fast track of sorts for new ideas and technologies in banking.

I'm for it. It's a start. They just need to go quicker.

Would you like to see the regulators form some new rules around innovation?

I'm hesitant to have any more rules. I just want people to comply with the rules that have been written.

We're running a delicate line, we know that. We welcome the fintech industry, we don't want to inhibit their innovations. But we don't want our innovation inhibited either. Making sure consumers' data is protected is important. Fair disclosures, those kinds of items.

Are there gray areas out there in what fintech startups are doing today?

Yes, the whole world is gray.

[Fintech firms are] doing small business and mortgage lending without taking deposits, so they're exempt from many of the regulations out there. If you look at the SoFi commercials [at the Super Bowl, which showed people jogging and getting coffee, with a voice-over declaring that some people are "great," while others are "not great"], they go out there and say we're not for everybody. Can you imagine if a bank said that? We're only going to serve our top customers and nobody else? If we did that, we'd be taken to the woodshed.

The other thing that's happening is the CFPB doesn't have the manpower to regulate all banks over $2 billion plus a new frontier. Sometimes I'm jealous of fintech. They don't have the elephant of branches and they don't have regulation. They're free to do basically anything they want to do. That's why I get frustrated with the OCC. Let us evolve. Let us innovate.

[In response to Hunt’s comments, SoFi's CEO, Mike Cagney, said: “There is a myth that fintech exists because of regulatory arbitrage.  The reality is, we operate under the same rules as the banks.  Fintech has grown through better products, better service and better delivery. If you look at the criteria to get a SoFi loan — clean credit history and making more money than you spend — it's not dissimilar from any bank.  A bank's ‘top customer’ is not SoFi's customer; instead, our customer is everyone else in the bank. Our belief is that if you are doing well but not rich, banks don't deliver great value to you.”]

Fintech entrepreneurs are very concerned about regulation. Many feel it's not clear what's going to apply to them and the regulators aren't saying anything negative to them now, but that they could suddenly get an action letter and be instantly out of business.

Welcome to the jungle.

Do you think there should be a separate group regulating them?

Oh, no, no. You saw the GAO report that came out recently that showed regulation in our industry is fragmented and many times redundant. The last thing I want to do is have a new regulator on another aspect of financial regulation.

The GAO report shows a convoluted mess of overlapping regulatory oversight. Do you think there needs to be some kind of streamlining?

Sure. But it's not going to happen any time soon, the only way it could be streamlined is if we have another financial crisis. And I think it would make it worse, not better. Only in Washington can they say the net of three new regulators is an improvement. That's the CFPB, FSOC [Financial Stability Oversight Council] and OFR [Office of Financial Research].

Too many regulators is part of the problem for fintechs, too, especially in payments where they have to get a money transmitter license in every state. For some it's too daunting and expensive.

That's why 95% are going to go under. The other thing is when you have examinations, you have different interpretations of examinations. If you have the CFPB and the Fed in, they interpret your data totally differently

Mark Carney, chairman of the G-20 Financial Stability Board, has also been talking about evaluating risks posed by fintech to global financial stability and coming up with global rules for innovation and Fintech. What do you think of that idea?

At first blush, I don't want to see it go that way because every economy is different. I don't want to say one size fits all across the entire globe.

A key concern for the G-20 is creating rules around blockchain technology. Do you see a threat there?

It's definitely worth looking at. There's nothing in banking that can't be disrupted. That goes for everybody, everything.

Is there anything you like about some of the fintech innovation that's happened?

Sure. I like the fact that they're trying to streamline the process and I'm jealous of them at times. We know we can make something look great on our mobile app, but at the end of the day, the consumer must be qualified, they must pass the QM [Qualified Mortgage] rules and TRID disclosures, and it seems like on their side, they don't. They can take the vast majority of their money and think about innovation. We take the vast majority of our money and think about compliance.

Do you think some disruption from fintechs might be healthy?

We've been a banking system since pre-1884. There's always been some type of disruption. The whole economy is in disruption. The hotel industry is being disrupted by Airbnb, cabs have Uber. Look at your publication. You don't print a newspaper any more. You email or tweet it out or whatever. And Amazon prime, everything is being disrupted. I'm hoping the regulators understand we're in a 21st-century mentality. Everything is moving at warp speed.

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.