The May 14 seminar, “Potential Fintech Regulatory Changes and Their Likely Effects on Credit Unions,” sponsored by Filene Centers of Excellence [https://filene.org/incubator/i4], provided insights for credit unions into the emerging trends and technologies that will impact their businesses. The Wisconsin-based Filene Research Institute is a credit union and consumer finance think tank.
Conference speakers also discussed how credit unions could use technologies to align themselves with the needs and desires of consumers, and highlighted some of the ethical issues created by emerging predictive technologies. DLT Education President Robert Schwentker described how blockchain database and distributed ledger technology enable cryptocurrencies such as bitcoin. “Everybody should own some of this crazy currency,” Schwentker said. “Give it to your kids. Experiment with these things. Or try notarizing documents with blockchain by signing up with stamp.io.” Schwentker recounted that one colleague used blockchain to raise $17 million for his venture in half an hour.
Based on a system of trust, blockchain permits direct transfer of information between parties with no intermediary. Various consortiums are developing blockchain applications, such as the Enterprise Ethereum Alliance [https://entethalliance.org/]; the Hyperledger Project [hyperledger.org], a cross-industry group led by the Linux Foundation; and R3 [http://r3members.com], a financial consortium. It is still too early to tell how applications of blockchain will enhance financial well-being. “You have to be ready for government-backed cryptocurrencies,” Schwentker commented. According to Schwentker, fraud is still an issue as exchanges have been hacked, but blockchain enables tracking transactions accurately.
David Min, assistant professor at UCI School of Law, discussed the shifting regulatory landscape surrounding fintech and virtual currencies. Currently, virtual currency businesses are treated as currency transmitters, but state guidance is unclear. The Financial Crimes Enforcement Network (FinCEN) has tried to provide guidance. Virtual currency businesses are currently regulated by the Office of the Comptroller of the Currency (OCC). However, unresolved tensions exist between federal and state regulator of emerging fintech technologies and bitcoin. The U.S. Commodity Futures Trading Commission (CFTC) has set up an office to regulate fintech. Min suggested that there may be competition between the CFTC, OCC, states, and the federal government to supervise fintech. “What does the federal landscape look like going forward?” Min said. “That is the 6.4 trillion dollar question. There is a transition at the OCC. The new guy coming in has history in defending Dodd-Frank (financial regulations). But the House Republicans, who control a majority of Congress, have open hostility to the OCC fintech charter. They are clearly taking a more skeptical view of federal regulation of fintech,” Min notes. “But what I find interesting is that credit unions, when polled, favor fintech. We are likely to see a slowdown or halt of the OCC fintech charter.”
The afternoon panel was moderated by Richard Swart, Filene Fellow at the UCI Institute for Money, Technology & Financial Inclusion; Sujit Bob Chakravorti, finTech advisor/financial services strategist at Chakra Advisors; Jeff Sippel, chief technical officer at Acorns; and Carey Ransom, chief innovation officer/chief product officer at Experian Consumer Services.
“We work by helping people feel smart,” commented Sippel, who described Acorns’ mission of providing millennials with positive, practical advice to help them make sound financial choices. According to Carey Ransom, Experian tries to learn from its 10 to 20 million consumers. He advised credit unions to differentiate themselves from banks by focusing more on the customer journey and humanizing financial services interactions as much as possible. Ransom discussed how credit unions can align their interests with those of their customers. He cited companies that really learn from and address customer concerns at various life stages, such as Learnvest, which offers advisory services, including financial education and planning for millennial women. “Focus on a group of people at a certain point in life to meet them earlier in their journeys,” said Ransom. “It is not just your financial allocation – it’s the life you want to live.”
According to Ransom, credit reporting was a business mainstay of credit bureaus, but now companies like Credit Karma give away access to credit information. Banks and institutions make money charging excess fees, but online lending companies like Lend UP have created better products, providing loans and credit cards, as well as financial education, access to credit reporting, and gamification for responsible lending behavior. “Machine learning and artificial intelligence are where people can now be [market] segments of one.” said Ransom. “Guess who wants that? Your members. We all want to be treated like individual people.”
According to Ransom, Experian created a financial personality assessment that demonstrates how to speak to people differently. Ransom thinks credit unions should focus on the customer journey and experience, and use alignment and personalization to build a relationship with the customer.
‘People manage finance just like they manage everything else,” said Zaydoon Munir, founder and CEO of Revolution Credit. “We use behavioral science to change the conversation. Especially in collections.”
“How are you reaching out to low income consumers who may have been left behind by the credit system?” Swart asked. “Do you need to partner with fintech companies?”
Chakravorti sees some technology adoption as premature. “There are different applications that are out there that improve the signaling of how good or bad these credit risks are.” Chakravorti said. “It is not clear if you are going to bitcoin just yet.”
Next, Stephen Coggeshall, Ph.D., chief analytics and science officer at ID Analytics, which provides credit and fraud scores, discussed the morality of prediction. “It is not about algorithms,” Coggeshall said. “It is about how well you can predict. It is about data. We are awash in our lives with sensors. Devices collecting where we are, who we communicate with; we continue to move into wearable computers. There are cameras everywhere around us. There is data collected about us and our behavior.”
According to Coggeshall, two-thirds of people polled want targeted advertising. “Is it creepy or convenient?” Coggeshall asked. “What are the differences? One is demographics. Younger people tend to be more open and given to these customized interactions. There is more awareness. It depends on content. It can depend on if there is permission. When you walk down the street, what is your expectation of privacy? You have no expectations of privacy when you are in the wild. Drones, Internet of Things, sensors, laptops, PCs, and cell phones can be turned on remotely. Siri, Amazon Echo, and Alexa monitor conversations for keywords. There are devices that look through walls by electromagnetic radiation.”
According to Coggeshall, privacy and convenience are a tradeoff. In what is termed ‘the privacy paradox,’ what consumers say they want is not what they actually do. He described a performance artist who made cookies and traded them for personal information, like the last four digits of social security numbers. She had people sign a form that she could use the information anywhere she wanted. 100 people traded their personal privacy for a literal cookie.
“Are people rational?” Coggeshall asked. “There is a continuum of rationality. We can predict credit scores, but people are less rational in buying and making decisions. We exploit these decisions.” Coggeshall asked if it is right to punish someone for doing something you predict they will do. “Credit scores are punishing them.” Coggeshall said. He described how technology is changing – or not changing our ideas of crime and punishment. Predictive policing technology promoted by Mayor Giuliani in New York deploys forces where problems are predicted. Now, PredPol, a program using an algorithm derived from the propagation of seismic effects, uses statistics to predict where bad things will happen. Some argue that statistics show that this program reduces crime. Others say this is the equivalent of redlining.
Marketing products are less regulated than risk management by organizations such as the Federal Trade Commission, Consumer Financial Protection Bureau, Fair Credit Reporting Act, and the Gramm-Leach-Bliley Act, a federal law which controls how financial institutions deal with the private information of individuals. Risk management is regulated by what and how data is used, how that data is gathered and stored.
“Even with all this consumer protection, we still use predictions to punish,” Coggeshall said. “The conversation should not be about what we can predict, but how well we can predict. It depends on the data we collect as we will be able to predict irrational behavior with greater accuracy.” Coggeshall believes the conversation is less about what data is collected and about how data is used. “There will have to be oversight.” said Coggeshall. “Oversight comes from regulatory bodies and from consumers. It lowers the ‘creepiness factor’ if you know your data is collected and you are getting something of value for them. Every model we build today is subjective.”
In his talk, “The Art of Fintech Decision Making,” Swart asked, “How can credit unions effectively leverage their data to work with fintech?” Applications include: mobile payments, blockchain, alternative credit, contextual commerce, faster payments, and identity verification. According to Swart, there are certain questions an organization should ask investing in fintech applications:
- What is your goal–to save money, promote efficiency, or drive revenue? Pick one, and go from there. Be customer-focused.
- Think about one or two areas where you can develop fintech. Don’t start with your core functions.
- Cost concerns–If there was a shock to your institution and you had to refocus your priorities, where would you start? You may think of ways to fix your core systems and get more efficiencies.
- Attracting new customers could also attract more mobile payments as well. Those core values embedded in the relationships with your members are going to drive your business decisions.
- Determine your response strategy–it may not be adopting fintech. This is a time of huge disruption. There are 9000 fintech companies out there; about 1000 are serious customers.
- Set a fintech budget. Figure out how to play with the technology. Identify partnerships–think outside your regional hub of friendly credit unions and accept uncertainty.
Swart advised the credit unions that their fintech strategy should involve rapid testing and failing fast. He asserted that traditional sources of authority and trust are on the decline, saying that consumers listen to voices that come from the community. Regulators can encourage or discourage customer financial behavior. “The first takeaway is to forget fintech if you are not managing the data you already have,” Swart said. “Another issue is biometrics–who owns your data and how will it be used?” Swartz advised the credit unions to position themselves as the trusted uncle, not Big Brother.”