Fintech

6 Ways the CFPB Wants to Keep an Eye on Fintech Brokers

Published

9 months ago

17 July, 2024

6 Ways the CFPB Wants to Keep an Eye on Fintech Brokers

Fintech firms continue to face scrutiny as regulators work to ensure that tech intermediaries do not subject consumers to high fees, transaction surveillance, and anti-competitive activities.

Speaking in Washington to a Semafor Event Last week, Consumer Financial Protection Bureau Director Rohit Chopra said the activities of fintech intermediaries, particularly those with data-driven business models, will continue to be subject to rigorous oversight.

“We’re looking for people who want to be gatekeepers and charge tolls across the system,” he said. “We want to see who’s exploiting, misusing, abusing data. And we also want people who are building companies on something real, not just regulatory arbitrage.”

The CFPB is looking at companies that are “trying to insert themselves in the middle as a must-have resource for everyone, and then completely over-pricing,” Chopra said, adding that the phenomenon is widespread. He cited the example of credit scoring and reporting companies that exploit consumers’ need for credit reporting information and scores, operating with minimal competition.

Here are six insights from Chopra’s observations:

1. Greater oversight and guidance for fintechs

The rules under which fintechs operate need to be simpler and shouldn’t just benefit incumbents, Chopra argued. Clearer guidance means companies avoid a “lawyers’ brawl” as they struggle to navigate uncertainty.

“We inherit laws that are written by Congress,” Chopra said. “They’re often written sometimes for very specific circumstances; sometimes they’re written very, very broadly, and we have to deal with that.”

The CFPB, he said, has long had a problem with rent-a-bank partnership models.

“A lot of banks are promoting themselves as the bank of choice for fintechs, and sometimes that leads to situations where there’s a kind of ‘move fast and break things’ mentality, or things aren’t really buttoned up,” he said. Citing the fallout from the recent Fintech broker Synapse collapses Chopra, for example, has argued that poorly managed partnerships between banks and fintechs can cause significant harm to consumers.

“When you have certain companies that don’t even know how the books are kept, I mean, that causes really catastrophic and monstrous harm to people,” he said. “We’re certainly looking … even before this fiasco, for ways to safeguard it.”

He declined to comment on whether enforcement action would be taken in the Synapse case, but said it represented a serious error in judgment.

2. Enable open banking

The CFPB will finalize its open bank rule by October, Chopra said, adding that he hopes its launch will increase competition for consumers. The CFPB is accepting applications for Standards Bodies.

The first rule will cover transaction accounts, deposit accounts, digital wallets and other products. The agency will also launch additional rules “to address different types of problems,” he said. For example, the CFPB is considering a rule that could launch next year on actions mortgage lenders can take that could allow the mortgage market to serve more people.

“What you see in mortgage lending is a lot of very powerful gatekeepers and technology companies that are essentially charging a toll for every single mortgage transaction,” he said. Mortgage lenders have to “pay someone to do an employment verification,” he said.

“They have to pay a lot of money to FICO and credit reports over and over again, so we’re trying to figure out what [are] ways we can lower costs for lenders and ultimately help consumers,” Chopra said.

The agency is also evaluating ways for consumers to give third parties permission to access their salary information, he added.

3. “Buy Now, Pay Later” Guardrail

In May, the CFPB issued an interpretative rule that confirmed lenders that buy now, pay later They are credit card providers and therefore must guarantee consumers protection similar to that of credit cards.

Chopra said the CFPB issued the rule to provide transparency into how the agency interprets the law and to spare companies from having to continually seek legal counsel on the matter.

“We’re interested in making sure it’s clear that we see this as an important competitive offering for credit cards and other things … but we don’t want to rely on some legal arbitrage,” he said. The agency wants to confirm “that there are some laws that apply to this and we’re trying to make that clear.”

4. Counteract the control of big tech companies over payment instruments

Calling out Meta’s ill-fated attempt to throw Libra digital currency In 2019 “A total nightmareChopra argued that excessive control of payment transactions by big tech companies could limit competition and blur the lines between commerce and banking.

“We continue to worry that big tech companies will use the power of their existing platform to mint their own currency and vertically integrate in ways that will completely eliminate a lot of innovation,” he said.

The agency is also examining the underlying business models, including whether these platforms will be involved in surveillance on payments as a means to implement personalized pricing or undertake other business activities based on insights gleaned from the data.

“We are watching closely the convergence between payments and commerce and the extent to which a large player could leverage it to break down the wall between banking and commerce,” he said.

5. Filling gaps in privacy and surveillance laws

Consumer financial privacy protections are typically covered by state privacy laws, which can lead to compliance gaps.

“You can have all these state privacy laws that apply to some parts of the financial world, but then the largest banks in the country sometimes don’t have to comply, so we need real updates to financial privacy and anti-surveillance laws,” Chopra said.

Consumer trust is at stake, and without updated privacy and surveillance laws, it could be a slide toward a WeChat or Alipay-style business model, where “two companies control all payments and have complete information about all of us,” he added.

6. There is likely to be an increase in regulatory litigation

The Supreme Court has recently inverted the decades-old Chevron doctrine, which since 1984 has required courts to defer to the statutory interpretation of statutes.

In the financial services sector, the withdrawal of Chevron deference is unlikely to be a positive for new market entrants, but it could benefit incumbents that have a business model and may want to “lobby around liability,” Chopra said.

According to him, this could generate uncertainty about the rules, with an increase in disputes.

“You’re going to see a lot more things being argued in court,” he said. “There’s going to be more divided opinion and less definitiveness about what the rules of the road are.”

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

9 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

9 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

9 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

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Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

9 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”