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

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.