With the exception of health care, financial services is the most comprehensively regulated industry in the United States. Although states play a role, particularly for the insurance industry, most of the key regulators of the financial services industry sit in Washington, D.C. That’s why the Financial Venture Studio, as part of its goal of helping its portfolio companies quickly establish themselves as leaders in industry, makes an annual trip to Washington, DC to introduce our founders to the country’s most relevant regulatory bodies.
This visit is one of my three favorite days on the FinTech calendar. There really isn’t anything like the annual FVS visit to DC, a small busload of startup CEOs traipsing to the country’s regulatory and policy-making power centers without a lobbyist or trade association in tow. As a former fintech lawyer-turned-investor, I appreciate the unvarnished take on how the regulators are thinking about the fintech space in the absence of an agenda other than an opportunity to get to know one another. Each year, the precise stops vary. This year, we visited the Federal Reserve, the White House, and the CFPB in the span of a single day without a lobbyist or trade association in sight.
Let’s start with the big takeaways:
1. The Fed is very focused on BaaS.
2. The White House is understaffed.
3. The CFPB is focused on big tech.
The Federal Reserve
Our day started at the Federal Reserve. For many members of the FVS crew, this was the first time that they had paid a visit to a Federal agency, and we were all a bit nervous. There is something a bit intimidating about entering any Federal Reserve facility. The Federal Reserve is a bank, and entering means passing through a tight security cordon with lots of bullet proof glass and heavily armed security guards.
Our hosts also seemed a bit nervous. They seemed a bit out of practice. Our primary host mentioned that this was one of the first face-to-face meetings that his team had hosted since the pandemic. And there seemed to be quite a bit of pent-up demand. The meeting was very, very well attended both in person and on the phone. I took down fifteen names with nine in the room across six different groups—innovation, policy and innovation, BSA/AML, consumer and community, inclusion, and systems and resilience.
As noted above and is clear from public actions, the hot topic for the Federal Reserve is banking-as-a-service. We had barely gotten through introductions when the regulators began asking questions about data storage, and the conversation quickly morphed into a question about bank partnership models and customer “ownership.” The team did a great job explaining that for purposes of the banking relationship, the bank sponsor “owns” the customer. But even after that answer, the discussion stayed on that topic.
We eventually moved on to other issues, ranging from fair-lending to quantum. Overall, the Fed was incredibly engaged and curious about a range of innovations affecting banking and financial services and how banks attempt to distinguish themselves from one another.
The White House
Visiting the White House is always special. Besides the venue (which is just cool), it’s a unique opportunity to hear from those setting the national policy agenda. Many of the agencies that regulate the financial services industry operate, as a formal matter, independent of the White House. But what the President says always matters. We had representatives from the President’s economic council, the Office of Science and Technology, even the NSC. And it led to a broad discussion, although one that was a bit less cohesive than our previous meeting—in part reflecting the breadth of the policy issues managed from the White House.
The highlight, from my perspective, was the discussion prompted by one of our portfolio companies about the potential implications of eliminating or curtailing innovation by FinTechs to serve underrepresented populations. Many of the fintechs in our portfolio are working to expand banking services to underrepresented populations, and they currently connect to banks through banking-as-a-service providers. When regulators like the OCC and the Fed subject those providers to increased levels of scrutiny, inclusion is often the casualty.
We discussed a range of other topics as well. The White House is very, very focussed on capital formation for small businesses, and we discussed changes to various small business lending programs as well as efforts to increase access to capital for minority and women owned businesses. Other topics touched on included crypto and quantum technologies.
Our last meeting of the day took place at the CFPB. Our hosts made clear as soon as we were settled in our chairs how the priorities of the Bureau have shifted under Director Chopra. Director Chopra has elevated the importance of competition in the Bureau’s mandate, renaming the Office of Innovation the Office of Competition and Innovation. We were told that the Bureau no longer necessarily views innovation as a solution to the problems that consumers may face in getting access to financial services. All of this reinforced the message implicit in the Bureau’s decision, announced the day before our meeting, to retire a number of the Trump-era innovation mandates.
Although the meeting started on a somewhat somber note, as we went around the table and entrepreneurs explained what problems they were solving—access to banking for small businesses, Spanish speakers, and the LBGTQ community, fairness as a service, emergency assistance, quantum computing, etc.—the mood in the room lightened. The mood further shifted following responses to a question about why entrepreneurs would found companies and whether the motive was simply a desire to get bought by one of the large tech platforms. The answer to that question was universally “no”.
From there, the discussion turned to how the Bureau might help. Three issues surfaced on that theme: (1) the ongoing challenges in accessing Zelle and payment infrastructure generally; (2) access to the financial system for the LQBTQ community; and (3) Rule 1033, referring to the section of the Dodd-Frank bill that mandates consumers be able to access their data, on which much of the fintech industry relies...
Miscellaneous Thoughts and Observations
1. A changed city. I have not visited DC since shortly before the onset of the pandemic. Although the City seemed lively, the streets around the White House (which is where I was staying and where all of our meetings took place) were not as full now as they were then. The simple rationale, reinforced by lunch with a friend, is that people have not come back to the office and will never return with the consistency that they once did.The Federal Reserve has only just begun to ask people to return to the office occasionally. The current expectation is six days a month. As one moves farther away from the commercial corridor, however, the City seems more alive than ever. Restaurants to the north and east of the White House were packed as was the City’s entertainment district.
2. No single agenda. The Federal government is not working from a single playbook with regard to issues in the financial services industry. This was visible in dueling speeches from Vice Chair Barr and Acting Comptroller Hsu about the role of technology in banking, and it was explicit in the questions and statements across the three places that we stopped in on Wednesday. Absent coordination from the White House, this is unlikely to change. This means that whoever chairs the relevant agencies will act with considerable discretion, and specific actions across the agencies (and even within agencies) will seem haphazard and contradictory.
3. Bullish on BaaS. This is seemingly a contrarian view. After all, it was clear from the meeting with the Fed that BaaS providers are in the regulatory crosshairs. At the same time, it was also clear from the conversation that no one believes that the core banking providers are going to be able to upgrade their systems to match the level of service quality and customization that the BaaS solution provide. Not every BaaS provider is likely to navigate the regulatory straits, but the few that do will face less competition and have more opportunity once this period passes.
4. Do the Right Thing. Inclusion, fairness, and efficiency still matter. The Federal government wants to help advance all of these interests.To the extent that firms can show them how to do so, they will take action even if this means countering the actions of other agencies. To the extent that firms raise these concerns to defend against criticism, they may overcome agency animosity. The haphazard nature of enforcement means that some firms, even those that are well meaning, will find themselves in the crosshairs of agency action. This will create additional volatility at the firm level, but at the portfolio level this volatility will likely increase the payoff.