Protocol | Fintech

Fintech’s first trade association tackles a rule-making wave

The Financial Technology Association's new CEO says its members are ready: "They want to be regulated."

Penny Lee, the CEO of the new Financial Technology Association

Penny Lee, the CEO of the new Financial Technology Association, wants to take out some of D.C.'s fear of the unknown.

Photo: Financial Technology Association

Penny Lee, the CEO of the newly created Financial Technology Association, reacted with bemusement to the progress of the infrastructure bill through the Capitol — which might finally put to rest a long-running Washington joke.

"How many years have we had 'Infrastructure Week?'" Lee, a D.C. veteran who once served as a senior adviser to former Senate Majority Leader Harry Reid, quipped, referring to the yearly failed bid for a bipartisan agreement to fix the nation's roads, bridges and broadband networks.

The buzz over this year's bill — which, though moving faster and drawing more bipartisan support than past versions, became unexpectedly entangled with financial technologies — led her to reflect on the role she took on in July. Lee, who has worked in D.C. for more than 25 years, now represents young companies whose technologies have been rapidly upending financial services — and who now want to be heard by politicians not exactly known for their tech savvy.

"After five years of 'Infrastructure Week,' we're finally getting to that place," she told Protocol. "Meanwhile, these companies are already building, innovating, grabbing huge amounts of market share and iterating in the marketplace. It's really interesting to me to remind people that some of these companies are four or five years old."

Some FTA members are older, but most of them — including trailblazing startups like Brex, Carta, Plaid, Karna and Marqeta — emerged after the 2008-2009 financial crisis, which unleashed a wave of fintech innovation.

Now they want to be heard, with the help of some Washington veterans. The FTA launched in March at a time when its members' products and technologies were already facing heightened scrutiny from legislators and regulators. And there have also been skirmishes with the old guard of the financial services industry, which have well-oiled lobbying machines.

One challenge for Lee will be how to navigate that relationship, which is at times contentious: JPMorgan Chase CEO Jamie Dimon said in January that his fellow bankers should be "scared shitless" of fintech.

"We want to work with banking partners," she said, echoing how many of her members view established banks, which are often investors, partners or customers of fintech startups.

But in some as-yet-undrawn areas of regulation, rules could be tilted to favor the old guard or the new.

Banks and fintechs have clashed over a number of issues, including access to consumers' financial data and giving fintechs the ability to apply for bank charters. There's also a growing push to come up with new regulations and tweak old ones created for a time when banking was just a brick-and-mortar industry.

"In a lot of places, there's commonality," said FTA board member Ashley Harris, general counsel at Figure, a blockchain financial services company. But, she added, "there is a bit of a protectionist current from the larger banks where we will disagree." (Harris should know: Before Figure, she served as an assistant general counsel at JPMorgan Chase.)

Fintech wants to be part of that conversation, Lee said. "They're not asking for deregulation," she said. "They want to be regulated."

This can be challenging when new products that don't fit into existing regulatory frameworks. One example is "buy now, pay later," the financing model of FTA members Klarna, Quadpay and Afterpay (which is being acquired by Square). It's a fast-growing payments option, but "current regulations put it into more of a payday-lending status, which is not what they are," Lee said.

Banking is another important arena, Lee said. The FTA has come out in support of a proposed House bill that would require banking regulators to study the challenges faced by companies applying for bank charters.

But more could be done, Lee suggested. "A national federal charter would be nice versus having to be compliant with 50 different state rules," she said. "We would advocate for a little bit more harmonization so that there can be clarity."

The quest for clarity is coming from regulators themselves. Key federal agencies, including the Federal Reserve, the CFPB, the FDIC and the Office of the Comptroller of the Currency have been soliciting comments on pressing issues, including the handling of consumer data and the use of AI in financial services.

The inquiries explain why it made sense to launch the FTA, said Daniel Gorfine, a senior policy adviser at the FTA and another Washington veteran who once served as chief innovation officer of the U.S. Commodity Futures Trading Commission.

"It kind of goes back to your question of: Why now?" he told Protocol. "Well, that's why now. The number of requests for information that have been issued by regulators just this year substantiates why the group thought that this was the right time for the FTA."

Harris, the FTA board member, was part of the team that started the organization. She said her "enthusiasm" for launching the FTA was based on her experience working for a major financial institution like JPMorgan Chase in an industry that has long benefited from being represented by established trade groups.

That's not the case at her current company and in fintech in general, she said: "There's just a kind of a vacuum."

This has become a problem at a time when there's not just a lack of information, but also a lot of "misinformation" about fintech, Harris said: "There's just a lot of concern that fintech is associated with something dangerous or negative for consumers. A lot of people think fintech companies want to charge more than 36% interest rates or want to charge surprise fees to customers, or something like that."

But in a way, the FTA's timing is also complicated. The trade group is setting up shop in Washington at a time when the spotlight is on the most earth-shaking trend in financial technology: crypto and blockchain.

One of the major skirmishes in the push for infrastructure bill has been over the bid to tax crypto miners and node operators. But the FTA is staying away from that fight. "We are not taking on crypto as an issue," Lee said. "That we will leave to the other trade associations. There's so much in that space that we felt it needs to be kind of separated."

It's clearly a tricky position since some FTA members have formed partnerships with crypto companies and the rapid growth of the sector within fintech. Harris said that "if we have a member who said 'I want to do a deep comment letter on a crypto aspect,' we probably would say this isn't the right trade association for it."

Lee said that there are simply many other issues "that we felt really needed to be lifted before the regulatory and legislative bodies."

Then there's the broader problem. The FTA is seeking to be heard at a time when the tech industry has become increasingly controversial — particularly Big Tech.

Behemoths like Facebook, Google and Amazon, already under fire for the way they handle data, privacy and the welfare of their employees, have also drawn attention for their efforts to expand into financial services.

This has led to the view that there's "a Big Tech takeover of financial services," said Bruce Johnson, the FTA's board chair and assistant general counsel at Brex.

"That certainly isn't true when you have companies that develop from a core interest in providing financial services," he said. "This isn't the same as a company that might have been a social media company that is now looking at ways that it can engage in new banking-like relationships with its customers … Those concerns get blended into the conversation about financial services providers."

The FTA is also looking to join the conversation in Washington in a time of intense political polarization. Johnson saw this up close on Jan. 6 when he was still deputy chief oversight counsel of the House Financial Services Committee led by Congresswoman Maxine Waters.

He was working from home when the Capitol was attacked by pro-Trump rioters. But he kept in touch with colleagues "in real time" as they were "forced to hide in closets, under desks, barricading their offices because they felt rightfully that they were being targeted." One of them was Waters.

A few months later, he gave notice and told Waters he was joining Brex which subsequently led to his senior post at the FTA. "It was a bittersweet goodbye," Johnson, who grew up in Waters' district in the Los Angeles area, said. "She's a hero for me. I've long admired her efforts in Congress. I just look at this new opportunity as a new way that we'll be working together in the future — as soon as my lobbying ban expires." (As a former congressional staffer, Johnson is barred from engaging in lobbying activities for a year after leaving his position.)

The environment in Washington is challenging, he said, but "I do think that there's common ground about supporting small businesses and expanding options for consumers," he added.

The FTA has work to do, Lee said, to demonstrate "the responsibility of the industry, how they are protecting the consumer, how they're actually advancing the kind of the services that have been lost to them, telling that narrative better, telling that narrative in a way that is not trying to run away from regulation, but to show that we want to be responsible players in this marketplace."

"The key will be to take the fear out of some of the unknown," she said.

Protocol | Fintech

Crypto has a payment for order flow problem, too

The SEC is concerned about payment for order flow in stocks and options. But crypto, which it is struggling to regulate, is a "Wild West."

What are you paying for your bitcoin?

Illustration: Jeremy Bezanger / Unsplash

Two of the SEC's major concerns are payment for order flow, the potentially conflict-ridden system where retail brokers get paid by market makers for sending them orders, and cryptocurrencies, the largely unregulated digital tokens that are generating a booming market in speculative trading.

What if you put them together?

Keep Reading Show less
Tomio Geron

Tomio Geron ( @tomiogeron) is a San Francisco-based reporter covering fintech. He was previously a reporter and editor at The Wall Street Journal, covering venture capital and startups. Before that, he worked as a staff writer at Forbes, covering social media and venture capital, and also edited the Midas List of top tech investors. He has also worked at newspapers covering crime, courts, health and other topics. He can be reached at tgeron@protocol.com or tgeron@protonmail.com.

While it's easy to get lost in the operational and technical side of a transaction, it's important to remember the third component of a payment. That is, the human behind the screen.

Over the last two years, many retailers have seen the benefit of investing in new, flexible payments. Ones that reflect the changing lifestyles of younger spenders, who are increasingly holding onto their cash — despite reports to the contrary. This means it's more important than ever for merchants to take note of the latest payment innovations so they can tap into the savings of the COVID-19 generation.

Keep Reading Show less
Antoine Nougue,Checkout.com

Antoine Nougue is Head of Europe at Checkout.com. He works with ambitious enterprise businesses to help them scale and grow their operations through payment processing services. He is responsible for leading the European sales, customer success, engineering & implementation teams and is based out of London, U.K.

People

Theranos machines often failed tests, ex-employee testifies

The testimony from lab-worker-turned-whistleblower Erika Cheung could form a crucial piece of government prosecutors' fraud case against former Theranos CEO Elizabeth Holmes.

The former Theranos headquarters in Palo Alto.

Photo: Andrej Sokolow via Getty Images

Did Theranos' blood-testing technology work? That was the key question prosecutors hammered away at as the fraud trial of former CEO Elizabeth Holmes continued Wednesday in a San Jose courtroom.

The company's proprietary Edison machines routinely failed quality control tests to the point that former lab employee Erika Cheung said she sometimes refused to run patient samples on the devices, she testified in court.

Keep Reading Show less
Biz Carson

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

Protocol | Policy

Big Tech builds bit by bit. The FTC is challenging that.

The FTC on Wednesday unveiled the findings of a study on the small deals that helped Big Tech grow without regulatory scrutiny, and took steps to treat such acquisitions more skeptically.

The FTC is putting more scrutiny on the small deals that built Big Tech.

Photo: Ian Hutchinson/Unsplash

The Federal Trade Commission on Wednesday took a dive into the kinds of deals that make Big Tech, well, big.

The commission unveiled findings from an investigation into hundreds of small acquisitions that companies such as Facebook, Amazon and Google undertook with little government oversight, which helped those titanic businesses reach their current size and power. Some of those transactions evaded regulator scrutiny thanks to loopholes in the law, the report found.

Keep Reading Show less
Ben Brody

Ben Brody (@ BenBrodyDC) is a senior reporter at Protocol focusing on how Congress, courts and agencies affect the online world we live in. He formerly covered tech policy and lobbying (including antitrust, Section 230 and privacy) at Bloomberg News, where he previously reported on the influence industry, government ethics and the 2016 presidential election. Before that, Ben covered business news at CNNMoney and AdAge, and all manner of stories in and around New York. He still loves appearing on the New York news radio he grew up with.

Protocol | China

Tencent dominates digital donations in China. That’s the problem.

After building the only successful digital fundraising platform in China, Tencent's immense impact in the charity world raises questions about inequality, state censorship and platform responsibility.

Tencent's 99 Giving Day has grown into a behemoth, facilitating million of dollars' worth of donations on a yearly basis.

Image: Christopher T. Fong / Protocol

An hour before September 9, Eric, a nonprofit fundraising worker in southern China, was as frustrated as he'd been in months. It was way past his normal work hours, but he had just finished writing a few paragraphs he hoped to send to people tomorrow to ask for donations. He received his first blow from one friend, who commented that his plan felt "insincere;" and then, during a WeChat conversation with another friend, he casually brought up the project he was fundraising for and got the half-joking reply: "Don't do this to me." Eric's frustration was verging on anger.

For Eric, and countless nonprofit workers in China, this wasn't a normal day. Tomorrow would be the "99 Giving Day," an online donation bonanza that Tencent, one of China's most prominent tech companies, created in 2015 and has since grown into the most important event annually for charity workers. Every year for a few days leading up to Sept. 9, Tencent takes out tens of millions of dollars' worth of its own money to match the donations made on its Tencent Charity platform, a mini-app in WeChat where thousands of fundraising projects are listed. But to make the magic happen on these few days, nonprofit workers often start preparing months in advance, learning the platform's arcane rules, planning their strategies and mobilizing their giving communities. As the event grows bigger and the rules grow more complicated, the work is taking an emotional toll on people like Eric.

Keep Reading Show less
Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.
Latest Stories