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Shaping Pragmatic Regulations for FinTech Innovation · Leaders in Lending

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You are listening to Leaders in Lending from Upstart, a podcast dedicated to helping
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consumer lenders grow their programs and improve their product offerings. Each week, here
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decision makers in the finance industry offer insights into the future of the lending industry,
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best practices around digital transformation, and more. Let's get into the show.
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Hi everyone, This is Lyndsader Bill of Upstart, and welcome to the
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Leaders in Lending podcast. I will be joined today by Phil Goldfetter, who
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is the CEO of the American Fintech Council, which is the industry association at
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the intersection of technology and financial services. Phil has a fascinating background working in
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politics and banking, so I'm very excited to have him join us today and
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talk all things AI regulation and working in fintech innovation. Let's get started,
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all right, Hi Phil, and welcome to the Leaders in Lending. Hey
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really really such a pleasure to be here. Great. Well, you know,
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I think you've got a really interesting background and having worked in Congress becoming
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a legislator yourself. Can you just tell me about your path and how you
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made your way through government to leading the AFC that it's a great question I
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hope we have a couple of hours at a sign for set aside for the
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conversation. I'm actually I spent the vast majority of my career this far in
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public service. I came up in New York City politics and the City Council.
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I had a very unique privilege of working for what are you, probably
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one of the most unique mayors of New York City ever had, in Mike
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Bloomer, and spent a number of their number of years working in the city
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administration before taking a job with Senator Chuck Schumer, who is now significantly more,
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significantly more popular across the country that he was back into the night.
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But interesting time because when I was working for the Senator it was at the
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same time that the President Obama had taken office in the earlier part of two
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thousand and nine, so really unique insight into so many different things happening in
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the federal government. And after spending three years working with the Senator, I
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actually ran for state elected office here in New York and served in the state
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legislature for five years. And sort of the challenge with with public service is
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there's sort of the question is whether you know for me, there was a
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political movement, right. You know, as things evolve, as people coming
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to office leave office, there's opportunities to sort of move around. And I
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was very, very lucky in sort of my time from the council to mayor
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working for the Senator. And the question for me after running for office was
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what's next? Right do we stay in public service? I will say that
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I loved every moment that I had in service, serving my community and serving
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the Great Republic. I mean the challenge is it takes its soul on your
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family and your life and on so many other things. And so the question
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was what was next for me? The opportunity presented itself to work at a
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fintech focused bank bank called Cross River, and I fought long and hard about
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what the next step was going to be. Now. During my time in
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office, I represented neighborhoods that were devastated during a hurricane Sandy, so Southern
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Queens Rockaway, our community is about a year into my first term or devastated
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during the hurricane, and I learned very very quickly the challenges not just of
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the insurance industry, but also of the banking industry. And the next four
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years that I spent in office were steeped in legislation regulation specifically related to financial
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services, as many people who I represented it were struggling to get access to
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financial services because all of our bank branches were destroyed during the during the hurricane.
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You know, how do you get your insurance checks signed by your bank?
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Right? There were so many issues that arose during the hurricane, and
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when the opportunity presented itself to work at cross River, sort of the idea
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of you know, what is next and what can I sort of continue?
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Where can I go in private industry? That sort of lend to my continuation
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of public service, and Cross River was exactly that answer right as far as
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as my fault was very very simply that as I continue my path in public
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service, it tried to find ways to help folks. Fintech seem like the
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real natural answer, and so the work that I did at over over six
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years sort of led to the continuation of the public service and finding ways to
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make financial services more accessible to families who have been unfortunately left out of the
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traditional financial services industry. After six years at cross River, it's sort of
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the question was how can I do more right? How can I sort of
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make even a larger impact, and being here at the American Fintech Council enables
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me not just to report in one company, but to speak on behalf of
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seventy five or eighty companies who were all focused singularly of creating access to finance
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person So it's sort of a long road, but I'm really excited to be
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here. Continued who I work. Sure, Now, it's interesting you mentioned
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Hurricane Sandy. So prior to joining Upstart, I worked for a major bank
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that is also headquartered in New York and one of the downtown buildings was unavailable
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for several years, and I think people people took their laptops home thinking they'd
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be able to get back in, and in some cases it did not even
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take them home, and due to the water damage, that building was not
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operational for several years. So I can only imagine from a consumer level of
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people who live in those areas how impactful that was on even just accessing really
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any sort of basic service. So you've described the American Fintech Council as a
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collection of responsible innovators. What is that mean to you? So that's a
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great question, and I say that that that Upstarts the perfect example, right,
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you know, when you think about innovation, right, it's not just
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innovation innovation's sake the purpose of building your business. We think about members of
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the American Fintech Council. These are responsible innovators who are looking to create access
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to financial services and utilize innovation, but do it a responsible way. And
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so I often talk about the American Fintech Council, I say that we're probably
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one of the only standards based trade associations in that regulatory desk flop forward first.
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And so the goal is not just you know, come one, come
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all for fintech innovators, it's really about your commitment to standards and I,
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you know, I think about again, you know, sort of one of
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our founding members is up Start, as you know, and the idea of
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using alternative data or AI underwriting decisioning is something that Upstart was a pioneer at
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many many years ago. But it wasn't just let's, you know, sort
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of open up this new innovation and see what happens. It was carefully thought
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out and slowly rolled out and sort of sort of walked through the challenges,
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the issues and worked it through to a point where when we're offering a product,
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we can ensure that we are not compromising on consumer safety in any way,
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shape or form. And so we're essentially creating the access to financial services
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without compromising on any regulatory compliance. And that's not what the American Fintech Council
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is today, where we're just shy of eighty members who are changing the future
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of finance, but doing it with a focus on standards and on compliance.
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And that's the way you want it to be, right, I mean,
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when you think about building out, when you think about traditional financial services,
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you know, I joke about this all the time. We see the big
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pillars outside of traditional old school banks, and there was a reason for that.
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It was a you know, whether it was marketing or whatever the suit
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wherever it came about the idea of showing stable pillars in front of a bank
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assure consumers that this was a tough structure. Right, my money is going
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to be safe when I put it in. And I believe that AFC members
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are creating the exact same thing in the fintech world and innovative world by creating
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a strong set of standards and so that consumers know when they engage with AFC
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members like Upstart, you're getting the exact same tections and regulatory sort of guard
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rails that you would get in traditional financial institutions. And the difference is fintech
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is meeting consumers where they are, and that's sort of the evolution of whereas
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traditional banks have exited most communities, that's kind of where you know, new
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innovative, responsible fintech companies have stepped in to fill that gap, and they've
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done it remarkably well well. I can certainly say is as a guest at
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the policy summit last fall, fairness, access to service, is fair lending
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and all of the really risk and regulatory concerns were a big, big focus
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of the attendees there. So you know, certainly an interesting time generative AI
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making waves, bank failures last year, which I don't think any of us
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had on our bingo card, and really everyone wanting to get into the business
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of regulating how these new new products and tools were used. And I think
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is you know, certainly your background is a state legislator. You know,
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lending regulation has always been on the radar of states, but I think we're
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seeing more state legislatures kind of increasing their focus on things like fees, interest
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rates, other consumer protections, and passing legislation that impacts how how banks can
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either import or export rates. So how do you see this impacting FinTechs and
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banks who offer products and services that span the entire country. So that's a
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great question. I think there's a sort of a lot of different directions.
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Number one, first influence almost in the accent. In the absence of federal
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guidance, structure, rules, and regulation, you find that a lot of
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states tend to step in to try and fill that void. That sells good
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on its face. And I say that as a as a former member of
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a legislature. I mean there's a number of bills in my background that these
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are bills and laws that I that I was the author and altimately passed.
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But you know, every one of them was meant to solve a problem.
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And that's what you're seeing today as it relates to fintech, right, solving
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problems on the state level in the absence of federal regulatory structure. Now again
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it seems great on the serpents, right, that's what we want. As
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I mentioned earlier, AFC believes in regulatory structure. The challenge that we have
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is not in the regulatory structure. The challenge we have is a patchwork of
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regulatory structures and that every state operates independently. And I can tell you that
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laws that I passed here in New York were very different than the laws and
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the structures that were passed in New Jersey and in Connecticut and in Hell of
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Forna, and in states all across the country. And so in theory,
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we're all doing the best we can to protect our constituents. But I want
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to what I want people to think about is how are companies having to operate
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within that regulatory structure. And so, as a company that is nationally based
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right that is serving consumers from California to Mean and everywhere in between, the
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idea that they have to look at a patchwork state regulatory structures, systems,
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interest rates, how they monitor and jud bank fintech partnerships, how they think
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about so many of the different things that innovative FinTechs have to deal with.
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Now, all of a sudden, while it was done with the best of
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intentions, laws are passed with the bench of best of attentions, you're actually
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you're actually doing the opposite of what you're intended to do. And what I
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mean by that is every state steps in and says it's our job and it's
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our responsibility to serve and protect our consumers. But when you're doing that,
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you're inherently actually making it more difficult for innovative, responsible companies to operate.
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And so what happens is as companies say, forget it, it's too complicated
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to operate in this state or in that state, and so we're actually going
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to take our hands off and not offer our services at those states anymore.
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And so think about what you're actually doing. You're taking away access to financial
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services in the name of protecting consumers. And I'll give you a perfect example
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of that. You know, last April in the state of Colorado, they
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made a pretty significant change to state banking regulations. And I don't want to
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board the audience with the nuances and the details, but ultimately that law,
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if it is to take effect in this coming July of twenty four, most
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responsible innovative online lenders will exit the state of Colorado. And so, in
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the interest of consumer protection, the legislature passed this law. But ultimately what's
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going to happen is that it's going to significantly decrease access to credit and responsible
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options for Colorado family. And so I think two things. Number one is
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I bring my unique experience to try and work with legislators all across the country
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as it relates to online lending, bank fintech partnerships, innovative products like earned
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wage access or buy now, pay later, as we talked about, as
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you mentioned AI, alternative data, and underwriting. And so we try to
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sort of take what all of our companies are offering and work with state legislators
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to make them understand kind of the nuances of the various product offerings and make
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sure that they recognize sort of the unintended consequences. I used to say this
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all the time, and we were in Albany, New York every single year,
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and you pick a subject, but every single year we would pass historic
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legislative reforms every year. And when you think about that, you can't have
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historic legislative reforms every year in the same subject. NATA. Yeah, that's
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true. It's not historic if it happens annually. So's annual annual changes exactly
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exactly right. And yet every legislator, everyone will say this is historic changes
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for education reform, for this reform for that reform, and unfortunately, again
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in the interest of again what I call reactionary legislating, you sometimes in your
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in your drive to create that reform, you don't necessarily recognize the unattended consequences.
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I think, as you know, well, Upstart is doing things visit
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uncharted territory. Right, we're doing things today in financial services that I was
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about to say fifteen years ago, two years ago, we would never have
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imagined. I mean, you see what's happening with AI today right like no
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one would have imagined it. And you're you know, thankfully, you're seeing
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the federal government act. The Senate created a working group, the House just
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announced a working group. Right, you're seeing that action, but it's slow
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on the federal level. And so at the same time in federal action,
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you're now seeing state actions and so that you know, while usually I'm I
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feel good, like I said, as a standards based organization, we'd love
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to see regulatory engagement. At the same time, we want it to be
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responsible and we want it to be thoughtful. I mean want regulators, attorneys
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general, state legislators are going to respond understand what we're trying to do.
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Understand the process before they implement historic change. And that's kind of what we
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try to do and some of the challenges we face day in and day out.
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And I'll just end with one thing we have, you know again,
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companies like Upstart who spend a lot of time educating right, I mean,
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Upstart work with the CFPB and work with other federal regulators. Before it was
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cool to do it right, before all the cool kids wanted to do it,
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Upstart was sort of on the front lines of that. Federal regulators also
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need to do a good job in engaging right. It's not just about the
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innovator's job to engage with regulators. And one of the big themes for AFC
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is regulatory modernization. The regulatory structures need to evolve at the same pace as
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the innovators, and unfortunately today we're just not seeing that sure and I think
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we you know, we certainly work with many banks of various sizes, We
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work with many credit unions, and so that kind of patchwork of legislation,
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whether it's their federal crudential regulators, the NCUA, the FDA, c or
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we're talking about maybe state financial services or UH organizations that don't have a lot
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of expertise in this area, How are they really evaluating the business that those
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lenders are doing with us as it relates to looking at our pricing and our
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models and really help we make decisions. So it obviously has been in the
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news a lot recently that the FDAC has made some changes as it relates to
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their innovation and tech offices. And I know that you and the team work
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closely both of the regulators and the House Financial Services Committee on efforts to improve
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access to fair financial services. Can you talk about what changes the FDIC has
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recently made and some of the statements that the various members of the housemaid that
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they're actually moving innovation backwards with most changes. Yeah, that's a great question.
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As I mentioned, in the absence of federal regulatory structure, states tend
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to step in. That doesn't limit our work at the federal level as well,
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and sort of we as I mentioned earlier, it's just as important for
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the regulators to commit to working with fintech companies as it is for the fintech
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companies to commit to working with the regulations. So, as I mentioned,
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you know, all AFC members are standards based and are fully committed to regulatory
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best practice, but that only works when you're getting clear guidance from the regulators,
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right. Unfortunately, you know a lot of agencies have really stepped in
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to try and solve for that. I think, you know, sort of
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chasm, right, They've tried to bridge the gap, and you've seen the
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FED Federal Reserve come out with what they call it Novel Activity Supervisory Program,
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right, which is great, Right, It's sort of the concept is we're
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going to sort of really steep ourselves some of the banks that are offering BASS
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programs, BASS work innovative program who are doing innovative partnerships, so we can
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learn the systems, we can understand what they're doing, we can understand the
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way in which they're engaging with the financial services ecosystem, so we can actually
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best regulate them. Right, And that's what we want. I think that's
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what the fintech companies want, that's what the innovative banks want, and that's
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what the regulators want. We saw the same thing at the OCC and their
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Office of Innovation. A tremendous credit to the team there they I would argue
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probably the OCC was you know, was probably way ahead of the pack many
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many years ago. I remember my earliest days at Kors River, going back
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to twenty sixteen, twenty seventeen, you've had you know, we were taking
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meetings with people at the OCC about some of the work we were doing.
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It's on our innovation. The FDI C about three years ago maybe four created
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what they call the FDI Tech Office, which again was essentially the same concept,
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which is we're going to engage with fintech. None of these innovation offices
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created a free pass for anybody. I want to be very clear about that
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because oftentimes there's this confusion that you know, it was a you know,
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a free pass for companies doing what they wanted to do. It was quite
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the opposite. It was really it was a tool for everybody to learn about
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the other side. Meaning again I think about a company like upstart that engages
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right. This was a great opportunity, an open door where we can go
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meet with the OCC. There was an office and an entity within the OCC
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or within the FED, within the FDIIC Treasury where we can go and have
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a on you know, whether off the record, on the record, but
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it was an honest conversation about what you're doing, how you're doing it,
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how you think about regulatory structure. I think there's a there's a good kind
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of upstart origin story early on that I'm sure you've heard Jeff and others tell,
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where as the company was being founded and this idea to start working with
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more banks outside of kind of a primary sponsor bank, they just walked into
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the office in San Francisco and introduced themselves and wanted to have a conversation and
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a little bit maybe early for that at the regulators. That certainly the idea,
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yeah, and that I mean again you give again. It sort of
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talks about the forward leaning in terms of fintech companies that are not hiding behind
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sort of some shroud of you know, sort of algorithms, right Like,
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obviously they're innovating, but they they're eager, I say, they're aggressive in
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their transparency, right like they're putting their story out, their ideas out long
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before the regulators are coming in. Unfortunately, the FDI C over the last
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couple of years, UH has really withdrawn from that and that they've they they've
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turned off the spigot in that they're they're not taking those meetings. They're not
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the FDI Tech Office, which showed so much promise about engagement and understanding what's
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happening with regulated banking institutions. They've basically shut it down. And what we're
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seeing the the what's happening because of that is that no one understands what the
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rules of the road are, right. You know, innovative companies who want
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to be responsible don't understand or appreciate what the reight, you know, sort
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of what they need to do or how they need to do it. And
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so when you think about newcomers to this ecosystem, you know, how they're
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learning about it is they're learning about it by looking how other banks published.
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Right. It's what we call regulation by enforcement, right, And so all
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of a sudden, the FDI says, well, we're going to we're going
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to raise enforcements because we don't like the way this bank ran x Y or
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Z program. They didn't communicate with that bank before they got in trouble.
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The nature of the engagement didn't exist with the financial institutions before they got in
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trouble. The bank found out after the fact. And so now how do
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other banks learn about the process or what they should do. They look sort
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of where the other guys went wrong or where at least publicly they went wrong,
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and they try to do it that way and work that way. It's
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not the way you know, regulation should work. Right. When you mix
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pragmatic regulators with responsible innovators, you can actually create a system that is going
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to serve consumers, create the access to financial services without compromising on consumer protection.
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But that requires a pragmatic, forward thinking, engaging regulator, and unfortunately
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recently from the FDIIC we're just not seeing that. And so we for you
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know, sort of our services at the American Think Tech Council in sort of
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trying to convene that. You know, what we'd like to think is either
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a working group or some sort of listening session where I think sometimes you know,
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you need the opportunity for reasonable people on either side of the table to
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converse with each other, yell at each other, engage with each other,
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meaning if we're doing it wrong, if responsible innovative companies are doing it wrong,
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tell us right. The beauty of a responsible innovative bank is they understand
23:30
regulatory structures right. Banks inherently are charged with protecting the integrity of the financial
23:37
institution, as we learned just a year ago. Right, sometimes the regulators
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are just not keeping pace, and unfortunately, we see the consequences of that.
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And so you would think that regulators would have learned from some of those
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mistakes, said let's lean in and learn what banks are doing, how they're
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doing it, so we've better understand it. And I credit where credit is
24:00
due, because I'll say this about the CFPB and about the Federal Reserve and
24:06
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24:56
Sure, sure, And I think your point earlier about sometimes that regulation has
25:03
has the best of intentions but then consequences on consumers who cannot access traditional financial
25:11
services and then also see limited kind of novel financial services they can they can
25:17
access. I know there's been a lot of conversation about the sponsor banks or
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banking is a service and additional focus from the regulators, but not really a
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lot of clear guidance about what that means and where they fit within the overall
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structure, and then where the FinTechs fits. So what are your what are
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your thoughts about how a banking is a service or sponsor bank can navigate in
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this really uncertain period with what the rules are for their their businesses. So
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that's a great question and also sort of a key differentiator for the American Fintech
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Council because I speak a lot about our standards base, you know, us
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being a standard based trade association. We're also one of the very few organizations,
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if not the only trade association that counts innovative fintech companies as members,
26:07
but also the leading bass banks across the country. So in addition to Upstart
26:14
and all of our fintech partners, we also count you know, Cross River
26:18
and Customers and Coastal and so many other leading BASS banks as our members.
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And the beauty of that is is that it creates a very wide shared ecosystem
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of information about best practice, about sort of rules of the road, about
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the best ways to think about third party risk management, and hopefully create kind
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of you know, in the absence of federal rules or regulatory rules of the
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road from regulators, it creates rules of the road for you know, industry
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participants. And so it's that diverse membership that enables us to create the standards
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that we fake ultimately will best serve consumers. And I think sadly, very
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single day we're learning more, mostly by you know, because we're the enforcements
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are starting to come more and more. And it's unfortunate. It's unfortunate because
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there's so many industry participants who you know, we say this as members of
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the American Fintech Council, we never say that, No Kurgan and not you
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know, we're not saying we're never going to get in trouble, right or
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someone's not going to make a mistake. No one is perfect. I want
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to be very clear about that. No, fintech, I don't care how
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responsible and how great you are. No one is perfect, and you're gonna
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make mistakes. That's not wrong. Look, I have three kids at home,
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right, like, we expect them to spill milk on the floor,
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right, I'm not gonna forever prohibit them from drinking milk a yet, right
27:47
like that, as long as you just don't want them to intentionally spill milk
27:49
on the floor if they accidentally spell it is different than opening the fridge.
27:53
And I also have three kids, so although only only one lives at home
27:57
now, two are out for you know, minor are still little, but
28:03
mine are still very very little. And so, but but that happened,
28:06
right, you open the fridge and the milk spills, right, we don't
28:08
prohibit them from drinking milking yet. Now what you said is exactly right.
28:11
If they took the milk out of the fridge just because they're in a bad
28:15
mood or and they spilled it on the floor, right like, then there's
28:18
a different there's a different level of consequence to that. I would use that
28:22
same analogy here, right, And This is quite the opposite talking them out
28:26
sort of fully mature companies. Right Upstart is not a you know, they're
28:30
in emerging industries. But this is a company that's been around for a bit,
28:33
right, and who has dedicated a significant amount of resources to compliance.
28:40
I'd be remiss if I didn't talk about my partner, and this is Nad
28:42
Boots, who runs your public policy obviously who it probably works harder than we
28:48
do in terms of engagement. That level engagement should be rewarded, not with
28:52
the free paths. That level of engagement should be rewarded with engagement and worturn.
28:57
Right. And when you said about what I'm saying, it's not asking
29:02
for very much, right, I'm not asking for anything more than tell me
29:06
what I need to be doing. Crowd should be thinking about it. Crowd
29:08
should be thinking about my innovation. Same thing you do with your kids when
29:11
the milk spills, right, you help them clean it up, Right,
29:15
You fix up the problem, and then you talk to them. We have
29:18
to be a bit more careful when you open the fridge that you know,
29:21
you have to make sure that nothing is leaning on the edge that creates,
29:25
you know, a future for everybody, right, unfortunately again. And I
29:29
you know, I hate to be negative so much, right, I think
29:32
the challenge is is that, you know, there's this what I talked about
29:36
earlier, reactionary legislating right, instead of further engagement post the Silicon Valley debacle
29:42
from regulators, I think the reaction the reactionary legislating right or regulating in that
29:48
like, oh my gosh, we have to stop everything because we don't want
29:52
to get up with our pants down like we did the first time. And
29:56
that's just the wrong approach because it goes back to what I said earlier.
30:00
Perfect way to tie it all together is in the interest of protecting consumers,
30:04
you're actually hurting consumers because you're removing financial you know, reasonable responsible financial options
30:11
from the table. And when you think about then, you know, think
30:15
about the partners of upstart right, the banks that you're helping, the credit
30:19
unions that you're helping, not just you know, you think about your partners,
30:23
and it's easy to forget that those partners are servicing thousands of consumers in
30:30
a reasonable, responsible, you know, affordable way. All of a sudden
30:37
you call into questions some of the practices and you're pulling that you know sort
30:41
of that that that sheet out from under that consumer and you're taking it off.
30:45
So where does that consumer go? Right when you remove responsible options?
30:49
And I talked for a moment earlier about Colorado. Responsible actors are going to
30:55
comply, meaning responsible actors who are going to as I said, and all
31:00
of our AFC members who are looking for are are looking always for the regulatory
31:04
gold standard. If the law changes it prohibits them from operating, they will
31:10
walk away from any state right, They'll stop operating because the state laws have
31:14
made it more difficult. You know, who's not going to stop operating than
31:18
a farious actors, right, like those folks who are looking to skirt the
31:22
rules to take advantage of consumers. We talked about Hurricane Sandy before there was
31:26
a lot of affarious actors who came to my neighborhood and to all neighborhoods impacted,
31:33
who look to take advantage of consumers at their worst. I would say
31:37
that the paycheck Protection program very similar. You know, great idea, best
31:41
of intentions, but the execution of it led to a significant amount of fraud
31:47
and the expanded unemployments benefit same thing. A lot of fraudulent actors who saw
31:52
opportunity in a very bad situation for the country. Yeah, and so it
31:56
comes back to and I talk about this a lot. Not all fintech is
32:00
created equal, right, Like AFC members are responsible innovators who are doing you
32:06
know, are doing the best they can to follow regulatory structure to provide that
32:08
consumer access. And then there's a whole other segment of fintech companies who are
32:14
not. Here's the challenge. You change the law and the responsible companies will
32:19
walk the way, right, the responsible companies, I look, it's too
32:22
hard for me to offer my products in that state, are in that way.
32:24
Then if faeries actors will still be there. And so I think about
32:29
Colorado and I say, okay, all the good responsible bank fintech partnerships and
32:32
online lenders are going to walk away. Who's left the payday lenders, the
32:37
the you know sort of the triple digits digit lenders, those people who will
32:43
and where does think about the consumer? The consumer who was utilizing an upstart
32:47
product literally has nowhere to go. Up start, you know, sort of
32:51
walks away from a state like Colorado or any state, you know. Use
32:53
that as an example that consumer has nowhere else to go, and so he
32:59
instead he goes to the pown shop, right, and he goes to the
33:01
page lender. And so now in the interest of reaction, they're legislating who
33:07
did we actually protect? Right? And again I say this as someone who
33:12
spent an entire career on the public service side. Right. I worked in
33:15
the US Senate, I worked in the state legislature, I serve, and
33:20
I, by the way, I'll say this about myself, I'll be the
33:22
first to admit it. I made mistakes in the legislature where I passed laws
33:25
and realized, you know what, I may have made done more damage,
33:29
and we went back to fix it and figure out what the unattended consequences are
33:34
if we can. The American FINTA Council is trying to prevent that before it
33:37
happens. But we do that by educating and by speaking a lot about the
33:42
nuances of responsible innovation versus not a responsible innovation. And I think that's a
33:46
big part of what we do for the ecosystem. Absolutely. So, you
33:51
know, one of the things we've done over really the past year and a
33:54
half and put an extensive focus on is is what we call our regular readiness
34:00
for our bank partners and credit union partners, and so my team worked with
34:06
our risking compliance partners internally, worked with Nat Hoops of course on the work
34:09
that he's been doing with the OCC and the MDI, various programs that he
34:15
works with, and we're really outlining best practices for our lenders of how to
34:21
oversee a third party in a fintech, how to build your oversight program,
34:27
how to document your diligence, how to make sure that you have the tools
34:30
to really understand how you're partnering with us, so that when you do get
34:34
into that regulatory exam, you're equipped to support it. And I think we're
34:37
definitely seeing from a variety of regulators that the questions vary of what they want
34:43
to know and certainly their expertise in understanding and evaluating a fintech relationship. Are
34:51
you seeing anything from the other fintech members of the AFC where they're feeling similar
34:57
to us, that we feel like we have a responsibility to help our our
35:00
banks and credit unions support themselves through regulatory exams. Yeah, I mean that's
35:06
that. I mean we talk about that a lot as a sort of one
35:08
of the value propositions for being a part of the AFC. So two things.
35:12
So we're one. As I have mentioned a number of times, and
35:15
I say a lot, right is our commitment to regulatory deest practice and standards
35:19
based. But I think what we do is we try to use the network
35:22
effects and that the shared ecosystem to best educate each other and the wider world
35:30
about the best ways to do it. Now, I'll start with our bank
35:34
membership. Our bank membership sort of is comprised of some of the biggest banks
35:39
in the fintech ecosystem who have you know, sort of large asset sizes,
35:45
right north of twenty billion in assets. We also have bank members who are
35:50
in the past space who are less than one hundred million in assets, right.
35:52
And when you think about that, you say, well, how is
35:55
it possible that a trade association is servicing an answering the needs of the biggest
36:00
banks and the smallest right And the answer is is that they're both helping each
36:05
other, right like that The value prop is that they're both together. Why
36:09
because the biggest banks get to understand some of the newer questions from the smaller
36:14
banks of the way the smaller banks thinking about things. Because sometimes you know
36:17
when you're you know, look, I say this about different you know,
36:22
me and my brothers, right, like you have different levels of when you
36:23
reach a certain age think about the world a different way, and sometimes younger
36:29
perspective is helpful even though you're older, right. And so same thing with
36:32
banks in that the younger the smaller banks more nascent in terms of their engagement
36:39
in the bass and the thin tech ecosystem provides additional clarity where the bigger banks
36:45
sometimes like, oh, they don't think about these things anymore because they're so
36:47
long past it. I think it kind of keeps them humble and sort of
36:51
asking those questions. And in that conversation, on the flip side, the
36:54
younger, the smaller banks get to learn from the bigger banks, right,
36:59
And so we really created a shared ecosystem that works, and most importantly,
37:04
they're sharing their their compliance now and what that standard looks like. It So,
37:08
as an example of that, as soon as there was a in June
37:13
of twenty three, there was a joint guidance from the regulators about third party
37:19
risk oversight, and immediately we brought all of our members together to think about,
37:22
Okay, what does that mean and how does that change what we do,
37:25
and not just in a macro sense. We had general counsels like,
37:29
hey, are you changing up your contracts based on that? Like how are
37:31
you looking at the nature of the partnerships, like what needs change and how
37:36
do we need to change it? And so that's how we think about it.
37:38
On the bank side, as I talked a bit earlier about how putting
37:43
the banks and the fintech companies in the same ecosystem inherently creates kind of like
37:47
sort of who is doing what in the nature of that relationship and helping everybody
37:52
get better. And then the fintech companies, right, and I similar to
37:57
the banks the smallest companies, right, those who have not even raised money,
38:00
to those who are in Serie C or D right like those who are
38:05
are larger, and I run the gamut of those companies who literally are whether
38:10
it's part of our working groups where we're talking about a specific issue. And
38:14
so we got working groups related to you know, banks and dick partnerships to
38:17
data privacy, to open banking and things of that nature where you're finding everybody
38:23
come together to think through some of the challenges they're facing, to vocalize some
38:30
of the challenges they're facing and work together. Again, you have to remember
38:35
we're still competitors on some level, right, mean that in a capitalist society
38:39
where folks are trying to build successful businesses. But I think they recognize that
38:44
in the AFC ecosystem, there's a natural benefit. We're all you know,
38:47
as they say, a rising tide raises all ships, and I think,
38:51
you know, up starts a perfect example of that is that we're going to
38:54
commit ourselves, our time, and our resources, whether it's you know,
38:59
financially or with the expertise of a guy like Oopsie. Again, the expertise
39:05
is just as important, right Your your sweat equity is just as important,
39:07
is as as zero as the real equity. And so sort of building those
39:13
sharing ecosystems, you know, enables everybody to understand the challenges and then solve
39:17
them long before their challenge is for them. And like I said, there's
39:21
this pay it forward where we're continuously building out this ecosystem. I say,
39:25
I say this a lot where we're not just the biggest sort of fintech you
39:30
know, trade association where probably the fastest growing because folks see that we're doing
39:35
it in a I joke about this a lot in a warm and fuzzy way,
39:39
right, like where you know, we try to bring to our trade
39:43
a mechanism of comfort, right, similar the way we talk about traditional banks.
39:46
Right, there's a level of comfort that we could talk about innovation,
39:50
we could talk about things like AI, we can talk about things like data
39:53
sharing, but in a non threatening, non competitive way, so we can
39:58
actually all walk away with best practice and then go change the future of finance.
40:02
Sure, And I definitely think some of the points you made about the
40:07
team, the different companies working together, and what the smaller organizations can learn
40:13
from the bigger, more mature ones, And certainly it is a resource challenge.
40:17
I think for many of those smaller organizations, whether they're a community bank
40:22
or a smaller credit union, or whether they're a startup fintech entering the space,
40:28
the cost burden of having enough risk and compliance professionals that can effectively navigate
40:36
all of the things that are changing is pretty large, and I think definitely
40:39
gives an advantage in some ways to the bigger players that can hire and pay
40:45
for all of the talent to do those things. So we use the interagency
40:50
guidance as a part of the guidebook to our regulatory playbook, to work with
40:53
our partners to help them understand that and where we can lean in with our
40:58
with our resources. The certainly last year the Executive Order on ai came out
41:05
as well, and it feels like there's just a proliferation of orders and guidance
41:10
and statements made by a variety of organizations. But there was some thought that
41:15
that was potentially in the way that it was written, was also maybe opening
41:19
the door for the CFPB two more directly oversee non bank fintech companies. What
41:25
are your thoughts on there? I know that I think the AFC, of
41:29
course, as you said, is standards base and really almost like a self
41:31
regulatory organization like a FINRA or similar. But what are your thoughts about the
41:38
future if you had to look out five ten years, do you think that
41:42
there is a world where the you know, certainly there are state exams already,
41:46
there are FTC and other audits and exams of FinTechs, but more kind
41:52
of direct regulation from the national regulators. So it's a great question, and
41:58
I you know, what I'll say is that I'll go as far as five
42:02
years. In five years, we're no longer. It's not going to be
42:07
a question of banks and FinTechs. Fintech is going to be banking. Meaning
42:12
the concept that there is this divide or differentiation is is, you know,
42:16
the lines are quickly getting blurred. Not in a bad way, right,
42:20
somebody will hear that and say like, oh, you're blurring the lines.
42:22
No, quite the opposite. Responsible fintech companies are embracing the regulatory structure.
42:29
I mean, everything you just talked about in terms of your you know,
42:31
upstart is educating the banks on third party risk management and think about what you're
42:37
creating through the larger ecosystem. Every time that bank now partners with another company
42:40
or talks to another bank, they're using kind of that model to sort of
42:45
pass it on, right, and creating a wider ecosystem. In five years
42:47
from now, we're not going to call it fintech. We're just gonna call
42:51
it banking. And those people and those entities who embrace the regulatory structure today
42:59
will be the ones who are offering the services in five years. And I
43:04
I, I, you know, I, you know, I could not
43:06
say that any more emphatically in that it's sort of like it's always hard to
43:12
turn a battleship right, and so the idea that you do it organically and
43:15
slowly and you sort of evolved over time sort of makes for a much stronger
43:21
foundation. And I think that's where companies like Upstart come in and all of
43:24
I would say, all of AFC members, where we're building a strong foundation
43:30
built on the structure of regulatory compliance, so that in five years we talk
43:36
about who is going to be the trusted entities, it's going to be the
43:38
upstarts of the world who are going to be poised to, you know,
43:44
sort of displace kind of some of those traditional banks who have basically abandoned communities
43:47
all across the country because they just they can't be bothered with it. Whereas
43:52
think about what your business model is, your business model is, I'm going
43:54
to lean into the credit unions. I'm going to lean into the the community
43:59
banks, and the community banks that are able to embrace that accepted, that
44:01
provide those services are the ones that are to survive along with you to create
44:07
the future financial services. And so I think, you know, again,
44:10
everything I say about fintech, as I've mentioned, needs to be the same
44:15
on the government side, and huge credit to the bide administrations. I think
44:19
the Executive Order kind of laid out very you know, sometimes they're lofty goals,
44:23
right, but like you know, shoot for the moon and hope to
44:27
get to a couple of stars, right, And I think that's kind of
44:29
where we're going, you know, tremendous credit. You know, oftentimes government
44:32
tends to lag behind the industry. I think they recognize. I think government
44:37
today is recognizing the challenges of AI, and not just in financial services obviously,
44:42
but in multiple ways across the world and across society. And so I
44:46
think financial service is just one aspect of that, and you're seeing more and
44:52
more government agencies engaged to try and understand it. There was recently an announcement
44:58
from the White House that Elizabeth Kelly, who is a senior advisor at the
45:02
NEC, is going to lead a new program and you know, specifically focused
45:08
on AI and regulatory structures. And I think that you know, there is
45:13
a significant more learning to do as relates specifically to AI, But like I
45:19
said, it's the folks who embrace it early, right. Unfortunately, you're
45:23
gonna find and let you see it every single day. They're gonna be companies
45:28
we're gonna put their head in the sand, right, like, we don't
45:30
know from it, we don't want to hear from it. And by the
45:31
way, there'll be regulatory agencies that will do the same thing. We don't
45:36
want it, we don't need it. It doesn't help, it doesn't Ultimately,
45:39
it doesn't work to put your head in the sand. If you're an
45:42
agency and you're a regulator, it doesn't work to put your head in the
45:45
sand. If you're a you know, sort of a company, a fintech
45:49
company or an innovative company, if you engage responsibly, organically and slowly,
45:54
you're able to implement certain things. And again, upstarts just a great example
45:59
of that, where I would argue, like AI is not something that is
46:04
new to Upstart, right, the concept of alternative data and how do we
46:07
sort of reach more and more consumers who have been traditionally left out is not
46:12
new to Upstart and to your partners. But I would argue to thousands of
46:16
community banks across the country, they're still putting their head in the sand.
46:19
Right. They don't want to hear from it, they don't want to know
46:21
from it. They want to do it the same way they did it sixty
46:23
years ago, they want to do it today. And the interest think about
46:28
this and the interest of well, because we don't want to hurt the system
46:30
or upset the system. So who loses? The consumers lose, right,
46:36
because you're basically denying them their right to get bank accounts, to get access
46:40
to credit, to get access to financial services. And so responsible innovation breeds
46:45
access, bridges the gap to democratizes financial services, and really is preparing us
46:52
for the next stages. And I think burying your head in the sand,
46:57
whether your government or whether your fintech companies just the long move. Well,
47:01
great, well, I think that's a fantastic one to end on. I
47:06
was going to maybe ask about any other other hot takes, but I think
47:09
that one is a great way to close it out. So Phil, very
47:14
much appreciate you being on the show today. Glad to have you here,
47:17
great insights as usual, Glad to see your your on location. I know
47:21
you're you move around a lot and traverse the country in many states, talking
47:27
to to AFC members and to regulators and various groups. So appreciate you taking
47:34
the time for this and uh looking forward to this episode getting out there.
47:38
Yeah, no, thank you, and more importantly, not just for today,
47:42
but for all the work than Upstart does and their dedication to not just
47:45
you know again, not just growing their business, but to growing the entire
47:50
ecosystem and lending their expertise and their capital to that. So it'sreminouschool rats,
47:53
and thank you to you and the entire up Star can you love Start partners
47:58
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