▶ 0:25:52The subcommittee on digital assets, financial technology, and artificial intelligence will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. Today's hearing is titled partnering for innovation, how bank fintech collaborations enhance financial infrastructure. Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. I now recognize myself for 4 minutes for an opening statement.
▶ 0:26:23When we think of innovators, sometimes we picture scientists or engineers working by themselves, toiling away in their labs, or entrepreneurs building companies from a garage or a dorm room by themselves. And while we celebrate the achievements of individual innovators, some of the most important innovations in America are actually happening through really significant collaboration. The financial services sector is a prime example of that.
▶ 0:26:52In fact, across the country, we see how collaboration in the sector has supercharged innovation, increased consumer choice, and broadened access to the financial services space. In our current financial system, innovation is increasingly driven by partnerships between banks and fintechs working together to bring novel financial products and services to market and expanding choice for all Americans.
▶ 0:27:18By combining the speed and technology and and technological expertise of software developers with the consumer protections, compliance, and trust of regulated banks, these partnerships are helping cement the United States as the global leader in financial innovation. Bank fintech Bank fintech partnerships are a win-win.
▶ 0:27:42Fintech firms gain a partner that can help them scale their business in a compliant way, while banks gain access to new technologies, consumer bases, and growth opportunities. And consumers can reap the benefits. It's no surprise that we see community and regional banks leading the way in partnering with fintechs. As fintechs innovate, they can give consumers and businesses of all sizes access to more efficient financial services.
▶ 0:28:12With adherence to prudent risk management and strong oversight, these relationships can better serve communities. This includes facilitating expanded opportunities and inclusion in the form of access to financial services to those who may be less likely to access financial services through traditional bank products.
▶ 0:28:33As we examine the benefits of these partnerships, bring cons- As we examine the benefits these partnerships bring consumers, we must remain cognizant of managing risk and ensuring strong due diligence, consumer protections, and compliance safeguards. At the same time, federal regulators and examiners should not stifle innovation simply because a product or technology is new or unfamiliar.
▶ 0:28:59I look forward to exploring recent developments in the space and hearing from our expert witnesses on what we can do to foster innovation through bank bank fintech partnerships. Also, on a on on a on a separate note, uh moments ago I was uh informed uh of the passing of the former chairman of this committee, Barney Frank.
▶ 0:29:22Uh he had a 32-year career in the United States House of Representatives uh and was one of the most impactful chairs of this committee. Why his uh portrait sits to my right. Uh obviously, uh Dodd-Frank uh being one of the most transformative bills that he was engaged in uh and affordable housing uh was a topic uh that he spent a lot of time working on.
▶ 0:29:48Uh maybe all the more appropriate uh that today the House will vote on a strong bipartisan uh housing package. Uh and so, with his loss, I think we all reflect on the service and commitment he had uh to improving not only the financial services and housing space in this committee, uh but to his commitment uh and work on behalf of all of us here in the United States House of Representatives.
▶ 0:30:13Uh so, I request we all take a moment of silence uh in uh in in following his passing. I now recognize the ranking member of the subcommittee, Mr. Lynch, for 4 minutes for an opening statement.
▶ 0:30:41Uh thank thank you, Chairman. Let me just say uh, when I first came to this committee when I was a freshman Barney Frank was the top Democrat and and welcomed me. Actually persuaded me to come on to this committee because of what he thought we could do together uh, Democrats and Republicans on issues like housing and consumer protections, investor many people remember Barney Frank uh, and and and view his legacy of the work that he did
▶ 0:31:11as a champion on behalf of LGBTQ+ individuals in this country and that is rightly so. But having sat next to him for for many of those 32 years that Barney was here uh, he was he was equally a champion of working people. Uh, Barney was a I I remember when I was president of the Iron Workers. He was our go-to person here.
▶ 0:31:36Uh, he and Joe Moakley uh, in terms of protecting worker rights and and decent working conditions for Americans across this country. Uh, he also uh, worked mightily on behalf of the fishermen uh, in Massachusetts from Gloucester to New Bedford and Fall River uh, and they were greatly appreciative of his his work on their behalf. His work on housing uh, ironically we we we'll pick up that bill today in the House and that was a that was a an area of keen interest on behalf of Barney Frank.
▶ 0:32:06So uh, he had so many so many accomplishments here during his 32 years. I I appreciate the moment of silence on his behalf. And uh, and and as as Mr. Chairman you you you rightly note uh, the Dodd-Frank Act which uh, continues to be part of his legacy from a legislative standpoint here uh, in Congress.
▶ 0:32:31That bill when it passed was meant to rescue our markets and and rescue homeowners who were losing their homes after the collapse of of markets in And every bit of it was meant to re-stabilize markets and and uh and stabilize our economy. And it and it worked. It worked.
▶ 0:32:53Uh there were contentious parts of it, but in his in his to his credit, uh he was he was the person who drove most of the the stabilizing influence within that And uh we are grateful for for his service here. And and he was an example to many of us here. Uh a lot of people said Barney Frank was the smartest guy in the It wasn't from his natural ability, he worked at it.
▶ 0:33:23He was a voracious reader and and and consumed every bit of data and information he could get before he came to this podium. He was the best prepared uh person in the room and that that was to his credit and to his work ethic. So, uh my prayers go out to his partner Jim whose tender care uh surrounded Barney in his his his uh his final days and and throughout his sickness.
▶ 0:33:48So, uh my my prayers and and the prayers of the entire Congress go out to him and and to Barney's family. Thank you. I yield back.
▶ 0:33:58The gentleman The the gentleman yields back. Um today we welcome the testimony of Ms. Ms. Alexandra Steinberg uh Barrage, a partner at Morrison Foerster. Ms. Henrietta Henrietta Thomas, the executive general manager for advocacy risk and compliance at Zero. Uh Ms. Sheetal Parekh, the general counsel and chief compliance officer at Treasury Prime. Ms.
▶ 0:34:28Erica Kalil, the co-founder and chief legal risk officer at Lead Bank. We thank each of you for taking the time to be here. Each of you will be recognized for 5 minutes to give an oral presentation of your testimony without Your written testimony will be made part of the record. Ms. Steinberg Barrage, you're now recognized for 5 minutes for your oral
▶ 0:34:51Thank you. Subcommittee Chairman Style, Subcommittee Ranking Member Lynch, members of the subcommittee, I'm honored to be testifying before you today. And I appreciate
▶ 0:35:02I'm sorry. May I ask you to just speak a little bit more into the microphone? That would be great. Thank you. Thank
▶ 0:35:08I'm honored to be testifying before you today and I greatly appreciate your acknowledgement of the accomplishments of Barney Frank. I'm a partner in the financial services group of Morrison and Foerster and I advise a wide range of banks and technology companies on bank fintech Um my clients are building products at the forefront of payments and AI and I'm also a former FDIC executive.
▶ 0:35:34So I bring a former regulatory perspective to this The Bank Fintech Partnership Enhancement Act is an important way to ensure that we remain focused on US competitiveness, innovation, and of course, consumer These partnerships are quite varied. They cover many different types of products and as my written testimony notes, they're continually evolving.
▶ 0:36:00My [snorts] testimony is going to focus on a few common frictions that I've seen in my practice across these very different types of partnerships and I'm going to suggest a few targeted ways I think reforms can help strengthen these arrangements as we move to the future. first a brief history.
▶ 0:36:18Five years ago there was a significant growth in banking as a service We saw tremendous scale both at banks, largely community banks under 10 billion, and an array of FinTechs looking for bank partnerships to scale their products. Most of these products were lending, deposit-related products, and card Um the truth is that at this time many FinTechs and many banks uh were not ready to risk manage these arrangements.
▶ 0:36:49Uh they are they are operationally complex. They require a high degree of And regulators took notice. We saw a spate of public consent orders, civil money penalties, uh and a number of banks getting caught up in public enforcement actions. Um one middleware in particular failed pretty colossally uh at the grave cost to many So, 2023-2024 was a real reckoning for this industry.
▶ 0:37:17Um some basic lessons uh from from this uh know your product, know your partner, whether you're a FinTech or a bank. Make sure you have the right subject matter expertise internally as a bank, including at the board level. relentlessly focus on compliance, and especially record-keeping. And of course, don't lose the money, right?
▶ 0:37:41So, those are uh very important lessons that uh I think many banks and many uh FinTechs today take to heart. The vast majority of these arrangements actually really work well. They're they're risk managed. They're not the ones that you typically hear about. And they haven't gone away. In fact, a lot of these products are just morphing. We're seeing more and more bank-FinTech arrangements. Now, we're looking at digital asset use cases, uh digital asset custody, tokenized deposits.
▶ 0:38:12So, the flavor changes, but the underlying partnerships and the need for these different entities to come together really hasn't changed. I think there is real opportunity to improve the way these partnerships are entered into and to and and how they're conducted. And my testimony focuses on two areas.
▶ 0:38:31The first is making sure our the folks in the field looking at these partnerships, overseeing the banks, have the right tools they need to understand and identify what those risks are, how to prioritize those risks. Uh the GAO report that's cited in my testimony notes that there's a real gap there. I think that there is an opportunity for thoughtful private sector collaboration uh with bank supervisory teams to help address these gaps.
▶ 0:39:00Um some of that may involve more experimentation by staff with the actual technologies. Um but others may just be formal training sessions focused on anonymized case studies to level up. And it's not just the bank examiners that I think need the upskilling. I think it's the industry, too. They need to understand what supervisory teams are looking for. So, do view this as a two-way street. The second is a rethinking of how we treat confidential supervisory information.
▶ 0:39:28There've been many examples in my practice and the practice of my colleagues where banks um do not feel they can share important information with their fintech partners because of existing rules. Uh there are potential criminal penalties if information that's deemed confidential is is shared without authorization. And so, this has in many ways uh hampered our ability to support safety and soundness at our banks. Um and so, I think more uh focus on those areas would be very helpful. I'm happy to answer any questions.
▶ 0:39:59Thank you very much. Uh Ms. Thomas, you're now recognized for 5 minutes for your opening remarks. Chairman [clears throat] Steil, Ranking Member Lynch, and distinguished members of the subcommittee, good morning and thank you for the opportunity to appear before you I'm Henrietta Thomas, the Executive General Manager of Advocacy, Risk, and Compliance at Xero.
▶ 0:40:21I'm a lawyer with 25 years experience in financial services, including servicing serving as a regulator, and specializing in financial crime, retail banking, and payment systems. The subject of this hearing today is part of what I work on every day at What is Xero, you might ask? Well, Xero is a trusted financial operating system for small businesses, serving nearly 5 million customers in over 180 countries for the last 20 years.
▶ 0:40:48Our purpose is simple, to make life better for small business owners, their advisors, and communities around them. We serve a variety of businesses, restaurants, farmers, special specialist manufacturers, technology companies, and many more. What small business owners have in common is that they often do every job in the business.
▶ 0:41:12And every hour spent on financial administration is an hour not spent working on what they actually set out to Xero's mission is to give those businesses the financial visibility and control they need to to focus on growth. How we do that in partnership with banks and FinTechs is what I what I'm here to talk about today.
▶ 0:41:34Our Xero small business insights data, drawn from real transaction behavior of tens of thousands of US businesses, not a self not a self-reported survey, shows that in the first quarter of this year, American small businesses waited an average of nearly 29 days to be paid on their invoices, with those invoices running 9 days past the agreed due date.
▶ 0:41:57For a For business operating on thin margins, this is not just an It constrains hiring, investment, and And our research shows it affects the the personal well-being of people running these businesses. Cash flow is the number one reason for small businesses failure. And bank fintech collaboration is one of the most important, powerful tools we have to change that.
▶ 0:42:24As a global small business platform and a trusted financial operating system in the AI era, Xero is building around the jobs that matter most to small businesses financial health, accounting, payment, and payroll. And I want to focus today on the first two because they are where that collaboration comes to life most I'd like to give you a tangible example.
▶ 0:42:47Imagine a restaurant owner in Wisconsin or Boston who uses Xero to connect their bank and their and the transaction data flows automatically into their ledger overnight. When a supplier invoice arrives, they approve it inside Xero and pay it. Funded from their bank account, delivered by ACH, and reconciled automatically in their books. Their accountant sees the same real-time picture they do. That experience is made possible by a specific kind of collaboration.
▶ 0:43:17The bank holds the money. Financial data networks carry transaction data securely to the platform. Licensed payments infrastructure processes what moves in and out, the invoices getting paid, the supplier bills going out. Our recent acquisition of Melio, a US-based licensed payments business, means bill payments can now happen on the Xero platform for US customers. Automatically reconciled with customers saving up to 15 hours a month on accounts payable alone.
▶ 0:43:48And our data shows that customers who use our payments capability end more months cash positive than those who Each of the parties in the scenario I just described perform a function that others cannot. And Xero serves as the foundation where they all seamlessly connect, the workflow, the visibility, and the reconciliation. Turning discrete financial services into a coherent ex- experience for small business owners.
▶ 0:44:17We find that this matters particularly in the United States, where nearly 10,000 banks and credit unions serve America's small business, including the community banks and credit unions that are central to the local economies across the country. The partnership model we've described is how a small business in rural Minnesota gets access to the same modern financial tools as one based in the city in the major city. That reach across institutions of every size is what bank fintech collaboration makes possible.
▶ 0:44:46In closing, when banks, fintechs, and pay- and platforms each do what they do best, for small businesses get the visibility and control they need to thrive to thrive. What we have seen across every market we operate in is that clear proportionate frameworks, which treat collaboration as the expected model, produce better outcomes for small businesses.
▶ 0:45:09The United States has a very has every ingredient to build the best version of this, and we are here to support that work and welcome the discussion. Thank you.
▶ 0:45:18Thank you very much. Uh you're back. Uh Ms. Parekh, you're now recognized for 5
▶ 0:45:24Chairman Steil, Ranking Member Lynch, and distinguished members of the subcommittee, thank you for the opportunity to appear before you today. My name is Sheetal Parekh. I'm the General Counsel and Chief Compliance Officer at Treasury Prime. Over the course of my legal career, I've practiced both inside large financial institution and at the leading edge of fintech, advising both banks and technology companies alike. That dual lens, understanding traditional financial services and the vantage point of those reimagining it, is precisely why I am here.
▶ 0:45:54Before I describe what Treasury Prime does, I want to offer a brief explanation of how bank fintech partnerships work in practice, because the mechanics matter to the policy questions this subcommittee is An API, an application programming interface, is essentially a standardized set of instructions that allow two different computer systems to communicate securely and in real time. The most intuitive analogy is an electrical outlet. The outlet in your home is a standardized interface.
▶ 0:46:21Any device with the right plug can connect to it and draw power without knowing anything about the underlying wiring. The utility company provides the electricity and your device accesses it through that standardized connection. Treasury Prime's platform works the same way. We are the outlet, the bank is the utility providing the regulated financial infrastructure, the deposit accounts, the payment rails, the FDIC insurance. The fintech is the appliance, the one with the innovative product and the customer experience. The API does not hold money or own data.
▶ 0:46:50It's a secure, real-time conduit, and the bank is integrated into every flow of funds at the transactional level. To understand why that architecture matters, it helps to understand the structural challenge that Treasury Prime was built to address. Community banks sit at the heart of American economic life, but the technology available to them has lagged far behind what customers now expect. That's the problem Treasury Prime was built to solve, to help community banks modernize in the world they're operating in today.
▶ 0:47:19Treasury Prime's bank operating system, the bank OS platform, bridges that connection. A modular software layer that links a bank's existing core systems to fintech and enterprise partners, synchronizing in real time. Bank fintech partnerships built on this kind of infrastructure are not a convenience for the financial system. They are how millions of Americans, particularly those who've been historically excluded by traditional channels, access basic financial services today.
▶ 0:47:46Consider Atlas, a fintech company on our platform that offers a 0% APR credit card designed for consumers with no credit history. This is a population caught in a structural catch-22. You cannot build credit without access to credit, and you cannot access credit without a credit Academy Bank, a Treasury Prime Bank partner, provides the infrastructure and the compliance backbone. The fintech provides the underwriting innovation and the customer reach.
▶ 0:48:13Together, they've served over 100,000 active members with users building credit scores by an average of 50 points in the first year. Well-structured bank fintech partnerships do not dilute the bank's compliance obligations. They actually have the ability to strengthen the bank's ability to meet them. Our platform is built on the principle that the bank must own its data in real time. Automated KYC, AML reporting, and reconciliation, all through a single control center that gives the bank complete visibility.
▶ 0:48:42That is the standard model this subcommittee should come to expect of every partnership operating at scale. The regulatory response to these partnerships has too often been overbroad, causing many community banks with the intent to modernize responsibly to pause their strategies altogether. And here's the reality of this dynamic. A regulatory posture that it inadvertently discourages community banks from these partnerships does not inherently make banking safer.
▶ 0:49:07It makes community banks less competitive and ultimately drives customers outside the supervised perimeter entirely. Displacing activity to less regulated corners of the system is not consumer protection. It's risk transfer with no net gain. This subcommittee has an opportunity to provide the statutory clarity this ecosystem needs. Directing regulators to study the impact of bank fintech partnerships on innovation is a great first step.
▶ 0:49:33Beyond that, we need a framework that creates uniform standards and calibrates supervisory resources to promote the investment that durable innovation I've spent enough time at the intersection of regulation and innovation to know they are too often framed as opposing forces, as if safety requires slowness and innovation happens in spite of regulatory oversight rather than alongside it. Treasury Prime's experience and the experience of the community banks on our platform tells a different story.
▶ 0:50:03Banks that invest in strong governance infrastructure and genuine compliance capability are better positioned to animate innovate and move with confidence rather than uncertainty. The framework this subcommittee establishes should make both achievable at once. Not as a compromise, but rather as a design principle. I believe that's possible and I'm grateful for the opportunity to contribute to that effort. I look forward to your
▶ 0:50:26Thank you very much. Thank you very much, Ms. Parekh. Ms. Khalili, you're now recognized for 5 minutes.
▶ 0:50:31Chairman Style, Ranking Member Lynch and members of the subcommittee. Thank you for the opportunity to testify today. My name is Erika Khalili and I'm the co-founder and Chief Legal and Risk Officer of Lead Bank. Lead Bank is a community bank headquartered in Kansas City, Missouri and I have spent my career building compliance infrastructure financial institutions operating at the intersection of technology and banking. I say that Lead is a community bank, but we're also a partner bank.
▶ 0:50:56We work with innovative fintech and digital assets companies to offer products and services that expand access in a compliant technology enabled manner. We have seen firsthand that strong compliance and sound technology enable fintech partners to innovate in ways that strengthen the banking system and open new lines of business for community banks. What distinguishes our model is a clear and deliberate allocation of responsibility.
▶ 0:51:20Lead owns every compliance stack and Lead is accountable for the consumer experience of each and every product and service that we offer. Fintech partnerships extend the reach of our services, but in no way that do they displace our obligations. This is a key component of responsible bank fintech partnership model. Lead's experience is consistent with broader data demonstrating that community banks that have built strong and sound partnerships have actually grown as a result.
▶ 0:51:47That being said, we have never lost sight of this business We have never lost sight with the with the inclusion of this business line of our Kansas City lineage and serving the local community in the agricultural The risk management that's required to engage in a bank fintech partnership is technically demanding. It requires fluency across bank regulation, best-in-class information security, software systems, data architecture, financial crimes compliance, and consumer and consumer protection.
▶ 0:52:17Before Lead enters into any partnership, we conduct robust technical and regulatory due diligence on every prospective partner. But, that's just one part of the process. Once engaged, the ongoing third-party relationship, our oversight framework includes governance, reporting obligations, contractual rights, and exit protocols sufficient to identify, escalate, and remediate and remediate compliance issues.
▶ 0:52:42Understanding each partner's business model is central to our compliance practices and to maintaining productive coordination with our regulators. The importance of bank fintech partnerships to consumers is well-documented. For consumers, the financial products made possible by responsible bank fintech partnerships represent a meaningful path to mainstream credit choice and access.
▶ 0:53:05These partnerships dramatically reduce the cost of reaching underserved Digital partnerships reduce customer acquisition costs from between $100 to $200 per customer down to 5 to 35, which is what makes it economically viable to serve populations that often larger institutions have concluded are not cost-effective to reach through traditional channels.
▶ 0:53:28Partnerships also support fintech underwriting tools that enable credit decisions based on a more complete picture of a borrower's financial Individuals who depend on these responsible bank fintech partnerships for access to products and services to meet their financial needs benefit from a well-calibrated regulatory framework that holds banks to rigorous standards while also enabling responsible With this in mind, Lead Bank appreciates the opportunity to offer the following
▶ 0:53:59policy recommendations. First, we support greater standardization of bank exam manuals across the prudential regulators combined with investments in examiner training. The FDIC's emerging technology team offers a useful model.
▶ 0:54:13By embedding specialized examiners alongside local exam teams, the FDIC has created a more iterative, dialogue-driven process that clarifies regulatory expectations and sharpens the focus of exams on material Second, Congress should affirm that the chartered bank is the true lender in a bonafide bank fintech partnership with clear preemption. This concentrates accountability where it belongs, with the bank.
▶ 0:54:40Third, Congress should address the uncertainty created by the 10th Circuit's decision in the National Association of Industrial Bankers versus Weiser, which held that out-of-state chartered banks must comply with Colorado's usury limits when lending to Colorado residents. If replicated elsewhere, state-chartered banks would face a fragmented, state-by-state compliance regime that constrains credit choice and availability and erodes competitive parity between state and national banks.
▶ 0:55:09This is exactly what Durbin was designed to preserve. We support the American Lending Fairness Act introduced by Representative Davidson and Senator Moreno, which aims to resolve this uncertainty. Bank fintech partnerships, when approached responsibly, expand access to financial products and services for consumers underserved by traditional banking channel channels and strengthen our community banks, which are the lifeblood of America. I look forward to your
▶ 0:55:36Thank you very much. We'll now turn to member questions. I recognize myself for 5 minutes for questions. I'll start with you if I can, Ms. Barrage. Um I want you just to help me level set not only what the landscape looks like today, but what market trends you're seeing that are shaping these arrangements into the future. I think we all look and think about the familiar are familiar with banking as a service. That's just one example.
▶ 0:56:04What market trends in succinctly are you seeing in the bank fintech relationship?
▶ 0:56:09I am seeing a tremendous amount
▶ 0:56:11Is your Can I just check your microphone if it's on?
▶ 0:56:14Is this better? Thank you. Thank you for the question. Um The types of arrangements that we're seeing are very focused on digital assets and AI consistent with the mandate of the subcommittee. Uh we are seeing banks looking to third parties to help them do digital asset custody, so on-chain activities. We are seeing banks um band together to figure out how they're going to uh do tokenized deposits with fintech parties.
▶ 0:56:43Um We are also seeing some banks publicly uh partner with exchanges to allow their customers to buy, sell, and hold crypto. So, there a wide variety of these types of arrangements. Um I think they will and on the AI side, um as my testimony describes, I feel like there's a lot of opportunity for upskilling in this area.
▶ 0:57:05Are you also seeing uptake by smaller bank community banks in fintech? What's the What's the trend line you're observing there?
▶ 0:57:12I think over the past 5 years uh we've seen I personally have seen fewer community banks uh engaging in these partnerships. That may be a result of the 23 20 2023 2024 events that I discussed earlier. Uh that said, there are some that do do these types of partnerships very effectively. They're well risk managed. They have experts at the bank. Um and I think some of the testimony uh today bears that out. So, it's a mixed
▶ 0:57:40Thank Thank you very much. Let me jump to you, Ms. Thomas, if I can. Um is we're looking at all these new financial products that are coming to market. They're often raising questions about how easily they fit under our existing financial services uh regulatory framework and under what legal legal structure, such as a bank charter, money laundering, uh or money transmitting licenses, uh best aligns with fintech based on uh the product and on the size.
▶ 0:58:05Can you describe the factors that informed your firm's decision regarding which licenses uh and regulatory structures to pursue?
▶ 0:58:14Absolutely. Thank you for the um the question, Chairman. Um our licensing approach is generally driven is generally driven by a desire to support small businesses. That's at the core of what we um at the core of our purpose. Um and we provide them so that we can provide them with the best tools to effectively run their business. Um our accounting platform, for example, itself does not require federal financial services uh federal financial licenses because we do not hold customer money or extend credit.
▶ 0:58:42Um that said, we have found um that giving our customer our users and our customers the ability to process payments directly on the Xero platform provides valuable time saving, as I've discussed in my in my testimony. Um that has led us to look at ways in which we can provide those sort of services, um which led us to acquire payment services a business recently that holds money money transmitting licenses that that allows our customers better access to payments.
▶ 0:59:12Um in addition to that, we also operate um as every other corporation under SOC 2 um ISO certifications and and um the applicable customer and data um protection um frameworks that apply.
▶ 0:59:25Thank you very much. Uh let me come to you, Ms. Parikh, if I can. I want to come back uh to what I was what we were speaking about at the beginning with Mr. Ms. Barrage. Can you describe the interest you're seeing in fintech partnerships from smaller institutions and what change you're seeing in this space most
▶ 0:59:41Sure. And I think I cite to this research in the written testimony, but unequivocally, community banks are very interested in these partnerships, but if you look at the number of community banks that can actually convert, there has definitely been a chilling effect, post 2024 era where we saw a lot of consent orders, disproportionately, some would say, against partner banks. So, I think by Q1 2024, we saw almost 35% of all consent orders were directed at partner banks in this space.
▶ 1:00:10And so, that has definitely had a trickle-down effect where community banks that need these partnerships to stay relevant are very hesitant for that reason to get tend to them.
▶ 1:00:20Thank you very much. I appreciate all of your testimony here today. I yield back. I now recognize the ranking member of our subcommittee on digital assets, Mr. Lynch of Massachusetts, for 5 minutes.
▶ 1:00:31Thank you, Mr. Chairman. I want to thank all the witnesses. This is a really And while we have benefited greatly, I think, in this country from technological innovations in the area of there's no question about that.
▶ 1:00:46But, from where I sit, most of that technological change has been in support of the traditional banking system with all the safeguards for depositors and and uh people who take out loans and there's there's been a a reaffirming aspect of of all those fundamental protections that have put out there for consumers.
▶ 1:01:11If if you look at the culture of these two industries, you know, banking in in our country and banking regulations have been the result of you can actually, if you read the banking regulations, it's almost like a chronology of this the the market failures in this country. You go back to the Great Depression. We ended up with bank failures, so we put in the uh Ms. Barrage.
▶ 1:01:34Uh you know, we had uh you know, stock market crash, we put in, you know, regulations around stock trading and and the use of uh leverage. Uh you you go forward where we had uh the stock market crash of of of 1987, uh we put in provisions that might prevent that from happening again. Uh we've got the savings and loan crisis, major major uh regulatory changes after that. We had the global financial crisis.
▶ 1:02:03If if you read all of that all of that is in response to market failures. Now and and and that was the culture because we learn from the disasters that we experienced. we have fintech coming in and and and and technology in general. And and the culture there is to move fast and break things. They they So so this is the subcommittee on digital assets, financial technology, and artificial intelligence.
▶ 1:02:32So this is the crossroads of where all this And and it's the same for fintech as it is for crypto as it is for AI. They come here and they fight regulation like hell. They do not want to be regulated. And they spend millions and millions of dollars trying to persuade members of Congress to to give light touch regulation or no regulation or self-regulation to the industries. And I see that continually. It's just it's just a drumbeat.
▶ 1:03:03And some of these countries some of these companies are so big now, trillion-dollar companies with market cap over trillion dollars that that their power is only increasing. And their influence is only increasing. And how how do we resolve that Miss Khalili?
▶ 1:03:19How how how do we How do we protect How do we maintain the protections that we have afforded to and to businesses and and you know, fair and and yet on board on board some of this technology that we we we agree is very important and transformative in many ways and may in fact help to bank the unbanked.
▶ 1:03:46So, there's some good here, but we're trying to get the good and then hold back on the things that we we think will undermine the legitimacy and integrity of the financial system.
▶ 1:03:56Thank you so much for the question, Congressman. And I think that's a great example of where the bank fintech partnership model is actually massively accretive. In this model, you have the fintechs who are able to manage the distribution channel and the product innovation side. But, the best partners that make it onto Leads platform are those that view this as a partnership partnership and not a vendor relationship.
▶ 1:04:19Meaning that we have to understand the products and services that we're offering and we remain responsible for ensuring that they that they maintain and adhere to all bank regulatory standards. And we're sort of where the buck stops, so to speak. And so, that is the internal check that you have for these technology companies as they're iterating and it keeps it grounded in the most important regulations that protect our consumers and also protect the general safety and soundness of the financial system.
▶ 1:04:47So, I think this is a way where we ensure that the fair lending considerations are taken into account. We make sure that the complaints are being monitored. We make sure that all of these things remain regulatory compliant. And then we discuss them with our regulatory bodies on a regular basis to ensure that there's never any surprises and that it's an iterative process versus a {quote} move fast and break things
▶ 1:05:11Yeah, Miss Parekh, what do you think?
▶ 1:05:14Yeah, I I don't see the two as binary and I think what we see in our experience is uh there is not a need for not having regulation. It's ensuring that the regulation is tailored to the the risks we're seeing. Um and a lot of the fintech partners we're working with want to be compliant. They want engagement and there's a very healthy partnership with their banks um because they understand the space they're in.
▶ 1:05:36I yield back. Thank you. Gentleman yields back. The chair recognizes
▶ 1:05:40vice chairman of the full committee, Mr. Huizenga of Michigan for 5 minutes.
▶ 1:05:43Uh thank you, Mr. Chairman. I'm going to take uh a moment here of personal privilege if that's okay to uh to acknowledge uh the passing of Barney Frank as well. I um am on this subcommittee at least the only Republican who had the opportunity to serve with him. I was a freshman. Uh he was in his uh last term uh and uh while I disagreed with him on many things, I did respect him and uh I I actually had a unique opportunity.
▶ 1:06:13He and I became co-sponsors of a bill that uh that my predecessor had worked on with Mr. Frank on regarding federal prison industries and what was happening with that. Um Mr. Lynch is nodding his head. He remembers remembers a number of those debates. Uh Massachusetts had lost a lot of glove and uh textile uh industries.
▶ 1:06:34In Michigan, we had lost a lot of uh office furniture opportunities to federal prison industries and I had the unique opportunity to work with Barney Frank. Um he also then provided me the opportunity to uh to to really test myself on the House floor.
▶ 1:06:50At one point, I was for some reason as a freshman, I was I was given the opportunity to um uh be the counter voice to him as the ranking member uh on a housing bill and it might be my background in housing uh might have had something to do with it. And uh I uh I I took a moment and I debated and I debated and I debated inside my head whether I should ask the gentleman to yield. And I did. I finally did.
▶ 1:07:17And he looked at me much like a cheetah would look at a limping gazelle at the back of the herd. And and very gladly said, "I'd be happy to yield to the gentleman." Knowing that he was ready to pounce at any moment. And uh I I got my point in so uh succinctly and I think to the point that he pounded the lectern and demanded I re uh I re [laughter] uh I I re uh regain my time.
▶ 1:07:43I I I take my time back and he started yelling into the microphone and I knew I had arrived. Uh that I could actually do this job here in Congress. That I could go and uh and battle back and forth with uh with Barney Frank while working with him on another piece of legislation. And I think that is just illustrative of uh of what Barney Frank was.
▶ 1:08:04Uh he was someone that uh that uh would be an amazing ally, but we could also be a formidable foe uh all within the span of a very short period of time. So, blessings to uh to to his family and and his memory. So, I I appreciate that opportunity to share that moment. Um So, moving on to our uh to our hearing here uh Ms. Steinberg uh Barrage, I'd like the to ask you.
▶ 1:08:31We've seen supervisory attention to bank fintech arrangements accelerate, particularly under the Biden administration uh in my opinion, but uh several witnesses have noted material examiner expertise gaps. I think that's a polite way of saying was we've got regulators that aren't up to speed necessarily. In fact, uh GAO had a two uh 2023 report uh which flagged the need for examiner upskilling. That that was their term.
▶ 1:09:02In fintech, IT, digital assets, and it seemed your your statements echoed this. I personally had a couple of weeks ago an opportunity to spend 4 days in Silicon Valley looking at tech, looking at sort of innovation that's happening.
▶ 1:09:17And frankly, I was struck by the speed of innovation, the speed of change in technology, and I I I was I think it underscored my fear and that fear that many have is that regulations and regulators are not keeping up with the speed of change in business.
▶ 1:09:38That's That's not unusual, but we're seeing it in hyperdrive now here with this fintech side of things. So, I'm curious how can and I assume you mean believe that agencies should, but how how should and how can these agencies close these knowledge gaps and and and what what impact is there if they don't do that?
▶ 1:10:05Thank you for the question and for sharing those observations. I I have those same observations in my practice. I feel like I'm always on a learning curve and I'm learning from our clients. Um so, I think technology moves in real time and our regulatory agencies do not and they don't have time to pivot and closing that gap is perhaps the wrong goal. Addressing that gap robustly and thoughtfully, I would say is the goal. Because it's going to be impossible to always close that or anytime close that gap.
▶ 1:10:34Um what can we do? I think we need to find the examiners on the ground who need the expertise following the GA report. I think Ms. Khalili had a great example of how the FDIC is embedding subject matter experts on their exam teams. Um to the extent the other agencies are doing that, I think
▶ 1:10:52Are they on loan or are they from other areas or are they from private sector coming in for a period of time or are they actually adding them to their
▶ 1:11:01My understanding is that they are from the FDIC. Um but they're just being redeployed for different types of exams for different
▶ 1:11:09So obviously I would support that. Um I also think that we need to be willing to invite private sector collaboration without fear of um enforcement or something like that. We can do this in a way that is anonymized, that is addressing the gap, um that's also giving staff the ability to engage directly with the technology, which probably isn't happening as often as it should. So those are just some ways. There are probably other ways too, but those are the ones that
▶ 1:11:39that. And Ms. Cleary, you were you were referenced in that. If you want to uh just be I do have a question for you as well, but if you want to quickly just shed some light on the FDIC situation.
▶ 1:11:48Yes, so we have experience as a bank that is prominent in the bank partnership sector as well as digital assets. We have seen our exam teams now comprised with subject matter expertise from the DC office that comes specifically with respect to those novel activities that we engage in. We find that to be incredibly accretive during a bank examination because there's more of an open dialogue and there's more depth in the understanding which then leads to a better evaluation of the material risks associated with the activities.
▶ 1:12:19I think one other thing that I see as a big need is both industry and the banking community need to increase their transparency. At Lead, we meet with our regulators at least quarterly so that they know exactly what we're doing and we answer questions in a collaborative manner because we do recognize especially for our region, specifically with respect to our banking as a service and our digital assets partnerships, this is something that we're the only bank doing.
▶ 1:12:43Can you can you explain a little bit about the pre-launch uh and what what might be happening there? Um yeah, what's what's going to happen if consumers uh uh How would they How would they potentially lose out if policymakers made it harder for bank and FinTechs to work together?
▶ 1:13:01I think with the FinTech innovation that we're seeing, we're seeing things like credit that's opening the aperture of those that responsible credit can be extended to. And that's something that's incredibly important. I think Ms. Parikh mentioned a credit card that was targeted to people with low credit at a 0% APR that assists them to build. That is something that from the customer acquisition cost, a traditional bank would never be able to offer and needs the digital distribution and the innovation of their FinTech partners to be able to do in a cost-effective and a creative manner.
▶ 1:13:32And so, this is one example where you see customers being protected and actually great products and services that they desire being offered to them.
▶ 1:13:39Thank you. I yield back.
▶ 1:13:40Gentleman yields back. Representative Garcia of Texas is recognized for 5
▶ 1:13:44Thank you, Mr. Chairman, and thank you to all the witnesses today who were here with us. Um there was no debating that as an industry, the financial system should continue to innovate and leverage new technology. I chose to become a member of this subcommittee to make sure that as we discuss the adoption of financial technology, we keep underserved communities in mind. Too often, they're left behind.
▶ 1:14:10I represent a district that has been historically excluded from the traditional banking system. Unfortunately, we're not able to hear from the Democratic witness, Mrs. Foster, today. However, in her written testimony, she wrote about the wide spectrum of bank FinTech partnerships with the arrangements with the arrangements as one end generally expanding access and arrangements at the other end evading consumer protection rules. Ms.
▶ 1:14:38Barrage, given your experience of working in the bank FinTech space, what have you seen more of? Arrangements that increase access or arrangements that put consumers further at risk.
▶ 1:14:51I would say across the board, the arrangements that I have worked on are not really falling into either one of those buckets necessarily. I think that the arrangements that I work on either from the technology side or the bank side are very well risk managed arrangements. Some of them do touch consumers and others are B2B products.
▶ 1:15:12For the ones that have addressed um more of the consumer side, uh I think that there has been uh a real understanding through some of the models and some of the credit decisioning that fintechs often use that um better approaches and expands access to more consumers on the credit side.
▶ 1:15:32Well, you said in your testimony, however, that one of the challenges was managing risk.
▶ 1:15:38Yet you don't think it that alone would put it in one of the the the the risk bucket?
▶ 1:15:44I think managing risk is always an important thing for both the bank and the technology company to do. That doesn't change across any Um but I do think that there is an important lesson to be taken from the 2023 set of as um of um Sorry. Uh the 2022 2023 set of consent orders. If you look at those consent orders, um some of them touched on fair credit.
▶ 1:16:14Some of them touched on BSA AML. In fact, many of them did. Uh so, it it really depends on the type of partnership. I think that we should learn from the lessons of that period and make sure we don't repeat those And part of that is going to involve a really um a really important focus on understanding and describing the products to consumers
▶ 1:16:39Well, my concern Uh, is simply if we're expanding and and embarking on new partnerships, we should do it for access and convenience for not only for the customers that you have, but but to reach the unbanked and the underbanked. Uh, Ms. Foster, um, also clarified in her written testimony that the partnership should expand access that are safe and And I completely agree.
▶ 1:17:09Access is great, but the quality of access is even more important. Ms. Thomas, you also mentioned the importance of safety a few times in your testimony. Can you discuss why simply increasing access is not enough and we need to make sure that it's safe and affordable, especially as we keep in mind the communities that unbanked and underbanked and I think, um, Ms.
▶ 1:17:30Khalid, you put in your testimony you have the um, you noted that, um, 4.2% in 2023 were unbanked and an additional 14.2% were underbanked. can we make sure that these communities are kept in mind? No, the question was for you, Ms. Uh, Ms. Thomas. thank you.
▶ 1:17:56No, I just referenced that she put the she's talked about it, too, but she she put the the stats in in her written
▶ 1:18:03Absolutely. Thank you very much. Um, absolutely these communities should be kept in mind. I think the the balance is ensuring that there's in the way regulation is administered, but also accessibility to those communities. And I think, um, as Ms. Barragan mentioned, having looking at the commensurate risk of, um, of the way you, um, of of the way those systems work is going to be quite important in ensuring that those communities are also taken into account.
▶ 1:18:32Well, it also in her testimony she noted that a recent study showed that 62% of black Gen Z respondents aspire to own businesses. 55% of Hispanic Gen Z share that aspiration. We certainly have to make sure that there is safe and affordable access for them so they can grow their wealth and that is a deep concern of mine and thank you and I hear the gavel so I need to wrap it up. Thank you. I yield back.
▶ 1:18:57Gentleman yields back. The gentleman from Arkansas, the chairman of the full committee, Chairman Hill is recognized for 5 minutes.
▶ 1:19:03Appreciate the chairman and thank our panel for being with us today. We're grateful to have your expertise. As somebody who spent really the better part of their career in the intersection of finance and technology, I've seen firsthand throughout my experience that financial institutions embrace of technology can really enhance consumer choice and improve Americans' financial lives in so many different ways and also improve the operation of the institution from a compliance point of view and documentation point of view.
▶ 1:19:33But we also have to recognize and the purpose of this hearing today is to think about the regulatory framework. Is our bank our bank supervisors and uh, you know, got the training that they need? Are they properly accounting for these relationships? And in the last year, you know, we've seen some issues. We've seen over the last 2 years, I'd say the last 24 months, we've seen some fintech power uh, partnerships that didn't work out so well.
▶ 1:20:00Where it wasn't clear in the due diligence responsibilities of the financial institution and of the fintech partner that it they were in in sync, which is a fundamental business obligation. It wouldn't make any difference, you know, no matter what industry we're in. uh, Ms. Barrage, let me start with you.
▶ 1:20:19What updates, if any, to that regulatory framework such as the third-party risk management approach, uh, do you think needs to be amended to foster these partnerships and make sure there's more certainty that they're being conducted in the right way.
▶ 1:20:35Thank you, Chairman Hill, for the question. Um first, I think we need to think about what should be regulated and and what shouldn't. Maybe there's a role for standard setting that helps fill some of those gaps. And the reason I mentioned that is because these partnerships are so varied and they cover so many different products and so many different types of banks. Um so, we should give the we should give some thought to what we regulate and why. Uh the guidance that has come out is purposely general. It doesn't apply to any one type of partnership. So, where could we do better?
▶ 1:21:06I think across the board, to your earlier point, uh we would all here agree that examiner training is top of mind. Feels like low-hanging fruit. There's got to be a way we can collaborate with the private sector to get better and smarter, especially with these new types of technologies and new partnerships coming
▶ 1:21:23Thanks. And and that's why Senator Rounds and I have approached, you know, uh the AI sandbox issue. And I don't want to AI is a catch-all, but I've I believe strongly in the fintech sandbox issues, too. I saw that in practice in Little Rock when FIS had their sandbox as a core processor for all the community banks to come participate, and all the examiners from the regional offices at the OCC and the FDIC came and actively participated in that. And I think that kind of give and take is important.
▶ 1:21:54And I take for granted all safeguards in a sandbox should be met. So, uh time frame, exact features, full approval. So, I recognize that, but I am concerned that maybe we don't have people trained well enough to look at novel risks. And as a bank CEO, I also believe that it is the board of directors and the due diligence the board of directors and the management team in any partnership at the bank, any vendor of the bank.
▶ 1:22:25But what's a little different here is the operational integration of the fintech and the bank. That's a quote vendor type relationship. It really is a partnership and there things can go wrong and when they go wrong, go wrong badly as we saw uh summer before last. Um So um Ms.
▶ 1:22:47Parekh, could you describe how Treasury Prime Solutions offer due diligence and risk management tools for both banks and fintech and fintechs to
▶ 1:22:57Yeah, absolutely. And it's interesting you mentioned Fiserv FIS because we see ourselves very much akin to those core technology providers. And so the way we see our technology is we're actually enabling risk management by building it in directly into the tech. So for example, you look at um fintech onboarding.
▶ 1:23:17Our banks have tools to actually be able to identify from whether that's a funding perspective or whether it's a business continuity um really being able to isolate specific risks and then making sure that the fintechs they're partnering with have risk mitigation strategies in place. So you could automate that through the tech itself. Um and it's no different than how bank core technology companies like the FISs and the Fiservs are doing it
▶ 1:23:43I think it's important I think uh just having this template in place will help examiner training, but it will also help those boards ask the right questions on something as fundamental as a really significant business relationship. I thank the chairman. I yield back.
▶ 1:23:58Gentleman yields back. Uh the gentleman from California, Mr. Luccardo, is recognized for 5 minutes.
▶ 1:24:03Thank you, Mr. Chair, and I want to thank uh our other chair uh for his comments this morning. Uh I recall uh there were some statements that Chairman Hill made uh about uh the importance of having hearings on the topic, which we look forward to on payments processing.
▶ 1:24:21Uh and uh the imperative for or at least an interest in a nationwide payments licensing regime, which is certainly something I strongly support, uh, rather than being reliant on on state-by-state regulation. Um, I wanted to ask a a question of Ms. Thomas because I know you have responsibility over regulatory compliance and risk mitigation for a company fintech. And partnership between fintechs and banks, uh, is certainly uh, the subject of the hearing.
▶ 1:24:51They're helpful, certainly, but there's also competition in some submarkets. Uh, and when it comes to protecting consumers and reducing fees, that competition can be pretty important. Um, I I think you're aware that Congresswoman Kim and I have introduced a bipartisan bill, the PACE Act, to help reduce fees and accelerate processing for millions of Americans, uh, by offering fintechs an opportunity to get access, uh, to the federal payment rails, ACH and others, uh, with a federal license.
▶ 1:25:21Um, now I know that there is some disagreement within the financial services industry, uh, so I hear. And I think federal government, uh, Governor Waller, uh, expressed uh, he was hearing, uh, quite a bit, uh, from all sides. And and what I'm hearing, certainly from the banking industry, is concerns about whether or not these companies will be appropriately regulated with KYC and anti-money anti-money laundering regulations.
▶ 1:25:47Uh, and I'm also hearing concerns about deposit flight, uh, that diverting deposits away from insured banks will reduce capital available for lending. Um, so Congresswoman Kim and I attempted to address these concerns in the text of the PACE Act by ensuring that fintechs that participate, that get the federal license, would have know-your-customer and anti-money laundering requirements that would be federal and
▶ 1:26:17there would be no ability for companies to engage in maturity transformation as taking deposits, engaging in lending. And so for funds with a one-to-one reserve requirement, it would still be sitting likely at a depository Um so I like to think that we might get the benefit of competition, that is a cost a costly layer in this process that we know is imposing uh many many millions of dollars in fees
▶ 1:26:48on Americans who need payments processing for everything from being able to make their down payment on a on a on a home to being able to provide remittances to families who critically need them at home.
▶ 1:27:03Um so is it accurate to say that an approach like this could actually enhance the partnership between banks and FinTechs to allow each entity each institution do what it does best, which is allow banks to focus on lending and deposits, allow FinTechs to accelerate our financial system to the betterment of consumers who would pay much less?
▶ 1:27:28Um thank you for the question, Congressman. Um the short answer would be yes. I think it you know any type of collaboration in that way and clear definition of roles and um and some clear guidelines on uh on how to ensure that the industry remains regulated and and also to your point to earlier points, ensuring that consumers there is protection for consumers from a KYC KY um and AML perspective is important.
▶ 1:27:54I think the policy objectives of ensuring that there is better access to payments for consumers and for small businesses is something that we would support and happy to have a further conversation about that.
▶ 1:28:05Thank you. I appreciate that and I I hope that uh we'll obviously continue the conversation not just with our FinTech partners, but also folks in the banking industry, because I think that a lot of work has been done to ensure that this license is one that does not intrude on or impose too much on on their key competency around uh deposits and lending. Um I uh I I realize that I'm uh just about out of time, so I'll yield at this time. Thank you.
▶ 1:28:35Gentleman yields back. Uh the gentleman uh from Ohio, the chair of the subcommittee on national security, Mr. Davidson, is recognized for 5 minutes.
▶ 1:28:43Uh thank you, Chairman. To our witnesses, thank you for being here today, your preparation, your written testimony. I really appreciate it and um helping us clarify bank fintech partnerships here. And uh you know, Mr. Uh sorry, Ms. Parekh, I wanted to uh talk with you about the Bank Secrecy Act and just looking at it as we apply it to bank fintech partnerships, you know, one of the most basic things is who's bound by their obligations under the Bank Secrecy Act. Is there any shift of responsibility?
▶ 1:29:11And what kind of compliance things should we give attention to in an era where bank fintech partnerships are incredibly important, and maybe particularly with respect to payments.
▶ 1:29:21That's a great question. Thanks for the question. I think what's interesting in our model is these are still bank accounts. So, the bank still has all of its regulatory obligations, particularly under the BSA AML regime, and so so that doesn't change. I think what we do see change and where tech is actually enhanc- ing our ability to detect risk is we see the changing um anomalies in the risk patterns. So, for example, in a traditional deposit account, you see something like structuring, which is cash coming in and cash coming out.
▶ 1:29:51That's not necessarily a risk you see with digital payments or or payments in general in the digital world. It's more money moving quickly between payment rails like ACH. So, we've actually been able to use with regtech and specified tools to actually identify risks that are um endemic to electronic payments. And so, it's evolving how we calibrate risk and the types of risks and the patterns and the anomalies that we're looking at.
▶ 1:30:18Is there anything that changes there? Because traditionally with account-based relationships, kind of there's, you know, daily or over the weekend netting versus, you know, going to blockchain-based real-time payments, you have a clear chain of custody, but it's real-time and 24/7 in theory. So, compliance and oversight for that, how does that change?
▶ 1:30:41Yeah, I mean, the way we've dealt with it is we adhere to the banks, you know, the banks already, for example, for ACH, we look at the windows that already exist and then look at the type of risk to see if you need any additional coverage, but it's no less than what already exists today. And then obviously with with digital channels, that has to be 24/7 with with risk.
▶ 1:31:01Yeah, and just to confirm under the law, all the obligations that a bank would have to account-based customers, people who you know, accounts with financial whether they're using a payment card or other things, regardless of how the bank does the back-end fintech partnership, they're still obligated to provide kind of the risk mitigation that you do. You say on a Visa Mastercard kind of payment, did was there fraud? Was there payment? Can the account be done? Those are still the law, right?
▶ 1:31:30Absolutely. Those are those are absolutely still true. And I think what changes is sometimes the banks can lean on the fintechs who often are the face of the applications to get additional context to determine, but the bank still has that responsibility and the and the fintechs respect that in our opinion.
▶ 1:31:47Yeah, I'm intrigued by Mr. Lacardo's reference to the PAISA Act. I haven't co-sponsored it yet. When you look at the the skinny master accounts, fintechs aren't really included in that. And, you know, Custodia Bank, for example, complied with the letter of the law under the Fed's statement, if you do these things, then shall issue is the standard. Of course, they were not issued an account.
▶ 1:32:08Uh and now, you know, they're leaning on language that basically says, "Well, you're not really one of us." Uh so, how do you change the status quo there and facilitate what the consumer demand is in payments?
▶ 1:32:20Yeah, and and I think we've focused a lot of the accessibility question to consumer accessibility, but I think it would be the um important part of that question is bank accessibility. So, you look at payment rails like RTP and and FedNow. Those are rails that are not often available to smaller community banks. And so, to your point, this issue of um creating better access and having innovative technology fill that gap is, I think, going to make sure community banks have the same access.
▶ 1:32:47Yeah, you think about uh you know, payments, for example, it's and you mentioned smaller community banks. A lot of them are state-chartered banks, and we're dealing with a a a fixed to demico where Colorado and other states are trying to basically regulate uh banks as if, you know, an Ohio bank's based in Colorado. Well, they're regulated in Ohio, and they're supposed to be federal preemption, so you can bank customers, including people from Colorado, uh but they want to apply Colorado's laws to them.
▶ 1:33:12Uh do we need a fix here in Congress to clarify what I think the plain meaning of words are, but Colorado and other states have done? Would that help if we had a a law that clarified that?
▶ 1:33:22I I think there's a need for a lot of clarity in general with the regulatory regime and how how it applies to evolving technologies.
▶ 1:33:28last thing, peer-to-peer payments, you know, digital cash, things like that. Uh if the custodian is the individual, uh how's that different than cash? Do the banks have any other obligation in the sense that same kind of things that they would have in a cash payment if they moved it to a self-hosted wallet and they had custody of their own resources? Uh you can respond in writing or any of our witnesses to that kind of open-ended question. Uh thanks, Chairman, for this hearing, and I yield back.
▶ 1:33:52The gentleman yields back. Uh the representative of Florida, Mr. Herodopolous, is recognized for 5
▶ 1:33:57Thank you, Mr. Chairman. I appreciate the opportunity. I appreciate the candor of the witnesses as well. Ms. Thomas, this first question is for you, if you don't mind. In general, one of the goals I think we should always have is to try to take the mystery or our fear out of handling new technology. And and with that, especially the advancements we're trying to make to make it more accessible to everyone, and they don't fear that something nefarious might happen.
▶ 1:34:20So, I'm getting into the regulatory environment, what gray areas are making it more difficult for fintech companies to serve not only businesses, but most importantly the consumers?
▶ 1:34:32Thank you for the question, Congressman. It's a good question. Um I think I would I would look at it more from the perspective of education rather than gray areas. I think what what we find is that better alignment, clarity, and guidance um will will better serve the participants in the industry.
▶ 1:34:50I think having regulators that um that have that shared understanding and uh knowledge of uh the constraints that industry faces, and much like um regulators understanding what industry what what constraints industry face, for industry to also understand the challenges that regulators are um are facing into and their drivers.
▶ 1:35:11I think coming together for a for an open dialogue is what will will help that greater clarity, alignment, and also um provide um provide an opportunity um for regulation to be uh proportionate um and and perhaps dispense with some of those um gray areas that might exist.
▶ 1:35:32Okay, thank you, Ms. Thomas. And I'm going to ask for um Ms. uh Kaluli and also uh Parekh this question, if I could. Uh first, Ms. uh Kaluli, uh can you give us kind of some real-world examples of how fintech uh partnerships are helping some small businesses access credit and handle money management tools more effectively?
▶ 1:35:51Absolutely, and thank you so much for the question. I think one of the key principles is also the speed which with money moves, the velocity. As a small business that's often often using very slim margins, the need for cash in a very fast manner is very much power paramount to them right now.
▶ 1:36:09So, the introduction of FedNow, RTP, and even stablecoins as a payment rail allow small businesses and consumers who perhaps don't generally have access to these rails to access them in a compliant manner when the bank is offering those services in partnership with one of their FinTechs. I think we've also talked a lot about access to credit and also choice in credit.
▶ 1:36:30And this is where we see the non-traditional underwriting metrics that are often utilized in these sort of FinTech bank partnership relationships really accrete to a broader credit box that is still safe and sound by utilizing non-traditional met- metrics that really allow you to see the full health and wellness of a business rather than in real time versus as a trailing last month's bank statement sort of thing, which I think then allows for more products and services to be offered to the people that are in most in need of
▶ 1:37:00Uh thank you, Ms. Parekh, as well.
▶ 1:37:02I referenced a FinTech we work with with a a partner bank that um offers a 0% APR credit card. And and this is really a a segment of the population that has not traditionally had access to credit. And so, we've seen that is one of our fastest-growing FinTech. And um with the bank, they're grow- growing responsibly. We've also seen examples in kind of the B2B space where we have a bank partner working with a FinTech um trying to innovate on treasury management services.
▶ 1:37:29So, often times if you're a smaller bank, you don't necessarily have access to the same tools. And so, we've seen innovation in kind of the space of um neo banking and and treasury management. And then also, we have a a FinTech that's offering revolutionize the vent- venture capital experience.
▶ 1:37:48So, allowing access for kind of everyday Americans to participate in VC funding um through the way that the bank fintech um innovation has has
▶ 1:38:00Thank you. And Mr. Chairman, I'd just say I appreciate you holding this hearing today. I think it's so vital that the access to markets are so important in taking away some of the mystery from this new emerging industry. And I I'm I'm excited because again it's providing the opportunity for everyone to access this capital when in years past it was just such a barrier that could never get gain access to that capital. And that's the beauty of technology is eventually not only improving the speed as you just brought up, uh but also the eventually lowering the cost because this will build a more competitive marketplace.
▶ 1:38:29And and the best way to take care of consumers and knowing knowing that whoever they're doing business with that they don't provide the necessary services there's a bunch of competitors who willing to take up and and meet the needs of the consumer. And so, thanks for holding this meeting, Mr. Chairman, and uh this is very much necessary information as we tackle this new technology.
▶ 1:38:47Gentlemen, yield back. The gentleman from South Carolina, Representative Timmons, is recognized for 5 minutes.
▶ 1:38:52Thank you, Mr. Chairman. And thank you to the witnesses for joining us today. As this subcommittee continues to examine how emerging technologies are becoming more integrated into everyday finance, innovative partnerships between banks and fintech firms are helping make financial services more efficient and more accessible for consumers and small businesses. These partnerships are modernizing payments, expanding access to financial tools, and helping community banks in a rapidly changing economy.
▶ 1:39:18They also give consumers faster and more convenient ways to manage their finances in an increasingly digital world. At the same time, banks must continue to uphold strong standards for consumer protection, data security, and financial integrity. This hearing provides an important opportunity to discuss how Congress and regulators can support responsible innovation while maintaining trust in our financial Uh Uh, Ms. Barrage, uh, you have served both at the FDIC and in the private sector advising institutions navigating the current supervisory environment.
▶ 1:39:49Uh, from your perspective, how has the regulatory approach to bank fintech partnerships evolved across recent administrations and what impact has that had on innovation and on supervisory expectations for banks seeking to partner with fintech firms?
▶ 1:40:04Thank you for the question. I would say at a very high level, uh, just over the past 5 years we've seen tremendous growth in some of these partnerships going back to 2021, 2022, uh, we saw in many ways a reckoning, uh, sort of that middle period where there was a lot more regulatory scrutiny and frankly there were banks and technology companies that were doing this irresponsibly. Um, you know, we've seen somewhat of a maturation in this process.
▶ 1:40:31Uh, I think that the supervisory issues are probably are are very much still there. They might not be as public. Um, but we have more sophisticated banks and we have more sophisticated technology companies continuing to engage. In fact, we have some of these technology companies, uh, seeking to become banks themselves. That's how big they've scaled and how much they've learned from their sponsor bank So, it's been a really interesting trajectory. Um, in terms of where we are in the future, uh, appreciate your comments.
▶ 1:41:01I think we need to double down on engagement and education with private And we need to let banks, um, in a safe way describe to their fintech partnerships or to their fintech partners where there are issues and how we can remediate those to promote safety and soundness. So, that's where I hope our our future's heading.
▶ 1:41:20Thank you for that. During the Biden administration, many institutions argued that regulators increasingly relied on informal pressure and enforcement actions rather than clear guidance. How did that uncertainty affect banks' willingness to innovate or work with newer technology providers?
▶ 1:41:36Well, I think part of the issue just generally with uh public consent orders is as you're trying to read them and divine what the actual issues were, it it can be very difficult. And so, there definitely was a view that more specificity would be helpful. At the same time, we have confidential supervisory information to safeguard.
▶ 1:41:55So, it was difficult, I think, to really get at what those issues were and kind of reverse engineer how we might do things Um you know, I am I am hopeful that we have, as an industry, learned the lessons from the not too distant past. Um and I think that additional guidance to banks and and technology companies, uh as well as upskilling on the examination side, will hopefully support
▶ 1:42:21Thank you for that. Uh Ms. Cleary, you mentioned that digital partnerships can reduce customer acquisition costs from $100 to $200 down to as little as $5 to $35. Help me understand what that means in practice for consumers, especially individuals and small businesses and communities that large banks have often chosen not to serve, and what kinds of products and services are firms like Lead providing today that were not widely available 5 years ago?
▶ 1:42:48Thank you so much for the question. I think that right now what we're seeing is that these communities are banking deserts, as I would call them, are being served because these products can now be sourced online in a digital manner. That reduces the acquisition cost materially, which then allows us to still open the account for a a gig economy worker or somebody who didn't have a minimum that they could hold as a balance, such that a larger institution may not be willing to take that on because it isn't an economically viable solution.
▶ 1:43:18These fintech bank partnerships have worked in tandem to create the products and services as a suite to not only increase the access to the product, but also the choice that small businesses and consumers have. Some of the things that we've seen are access to faster payment rails, being able to get your money into your bank account sooner, being able to access credit in a new way, being able to manage your treasury function in a more technologically creative manner and manage your money so that you're earning maximum yield on it.
▶ 1:43:46These are all things that these small businesses and consumers that were traditionally left out never had access to. And these partnerships now allow them to be
▶ 1:43:56Thank you for that. I'm out of time. I I yield back.
▶ 1:43:58The gentleman yields back. The chair recognizes the gentleman from Montana, Representative Doudna, for 5 minutes.
▶ 1:44:04Thank you, Mr. Chairman, and thank you to the witnesses for being here. It's been a very interesting hearing. And I'm happy we're having this this hearing. Uh you know, bank fintech partnerships have the ability to make it easier for constituents in very rural areas to access banking services and uh Montana second district is very rural. Uh we have more cows than people. it's incumbent upon Congress and our regulators to ensure our laws foster modernization and innovation.
▶ 1:44:33And I'm going to start uh with uh Ms. Khalili. So, I represent Montana second congressional district, which is one of the most rural in the country. And several of my counties have fewer than 500 people. Rural rural. So, how are you seeing these bank fintech partnerships expand banking access to rural communities?
▶ 1:44:52Thank you so much for the question. Again, these are areas where there isn't a local community bank to serve them. Where there is a community bank such as where we are in Kansas City, we service the local agricultural community, small businesses. But with the digital partnerships, we now have an online solution, so we can serve customers not just in the Kansas City metro area, but throughout the country. These products and services can be accessed broadly and efficiently. And I think that's a lot of where innovation drives from. I like to use the example of my father.
▶ 1:45:22Um before the pandemic, I think remote deposit capture and peer-to-peer payments were things he would have never thought of using, despite the fact I've spent 20 years in the payments industry. These are things that now have become mainstream, and so folks in your districts and your community can then access them online and have an equal playing field with those in New York City or somewhere else that have 12 banks on their street to serve them.
▶ 1:45:46Right. Thank you. I'm going to turn to the role of states. Um you know, as a former regulator, we dealt with a lot of, you know, regulatory sandboxes, a lot lot lot of fintech, insurtech issues. And it was interesting as a regulator because I'd have a lot of people come into my office with great ideas that came from the innovation side, but it never built anything in a regulated industry. And these sandboxes that to some extent gave them that ability to do that. And And obviously the role of the state regulators is is important.
▶ 1:46:16So I'm going to move to Ms. Barrage. Uh can you discuss the roles that state regulators and state chartered institutions play in fostering responsible innovation through bank fintech partnerships?
▶ 1:46:28Thank you for the question. I mean, I think both states and state chartered banks play a very critical role. Going back to the DIDMCA discussion, I think there is a really important issue that's currently being litigated um that would involve potentially a lot of these state chartered banks wanting to become nationally chartered banks because um some states are taking the view that loans made in their state are where their borrowers are located. And as we just heard, that's that's really not how loans are made, especially online.
▶ 1:46:58So if we can get smarter on that, and we um avoid a situation where state chartered banks no longer want to lend into certain states,
▶ 1:47:08um I think that would be really important again in trying to serve the purposes of DIDMCA and to preserve our dual banking system. I'm concerned that if we don't get that right, we'll see a lot fewer state chartered banks.
▶ 1:47:21Right. Thank you. I'm going to move back to Ms. Khaleeli. One complaint that I hear frequently from community banks in Montana is how burdensome compliance with banks with the Bank Secrecy Act and anti-money laundering laws are. And these laws play a role in combating illicit finance, but have not been substantially updated since first passed in Congress in 1970. So, how can bank partnerships with fintech companies reduce the burden of complying with these laws?
▶ 1:47:51Well, first and foremost, let me state that it's always the bank's obligation to comply with it. No matter how the bank fintech partnership is structured, that should never be changing. That being said, I think that these partnerships also allow banks of all sizes to utilize a more technology-driven approach to compliance. Money is moving at a much faster velocity, and the way that the Bank Secrecy Act was initially drafted hasn't kept pace with the changes in technology.
▶ 1:48:18But we as banks that want to be good partners to law enforcement must keep pace with the technology as it evolves. A lot of our fintech partners have real-time data being fed into lead where we can actually see anomalous patterns in real time, not only stop fraudulent actors, but also immediately report to law enforcement to stop the bad actors.
▶ 1:48:38I think we are very much in favor of modernization, but right now I think where we are focused is how technology can unblock compliance and really turn compliance with the Bank Secrecy Act into a feature, not a bug.
▶ 1:48:52Right. In my last few seconds, in 2023, the OCC, FDIC, Federal Reserve issued joint guidance titled Third-Party Relationships Risk Management, which created the new challenges regarding BSA and AML compliance. Can you very briefly in our last few seconds, can you discuss what those challenges are?
▶ 1:49:10Again, I think
▶ 1:49:10ask the witness to to provide that answer for the record.
▶ 1:49:14Thank you, Mr. Chair. Yield.
▶ 1:49:16The gentleman yields back. Uh, I'd like to thank all of our witnesses for for their testimony today. Um, without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response. Witnesses will please respond no later than June 24. Uh, appreciate everyone's testimony today, productive dialogue. Uh, the hearing is