HOUSE FINANCIAL SERVICES COMMITTEE
SUBCOMMITTEE HEARING
For questions on the note below, please contact the Delta Strategy Group team.
On May 20, the House Committee on Financial Services Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence held a hearing entitled “Partnering for Innovation: How Bank-Fintech Collaborations Enhance Financial Infrastructure.” The witnesses in the hearing were:
- Alexandra Steinberg Barrage, Partner, Morrison Foerster
- Henrietta Thomas, Executive General Manager for Advocacy, Risk & Compliance, Xero
- Sheetal Parikh, General Counsel & Chief Compliance Officer, Treasury Prime
- Erica Khalili, Co-founder, Chief Legal & Risk Officer, Lead Bank
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways from opening statements and discussion.
Key Takeaways
- Digital asset and crypto discussions centered on the growing integration of digital asset custody, on-chain activities, and crypto exchange partnerships into bank-fintech arrangements, highlighting that the legal framework has not kept pace with the products and services now being offered through these partnerships.
- Examiner training gaps and overbroad regulatory responses were identified as critical barriers to responsible innovation in bank-fintech partnerships, with private sector collaboration highlighted as essential to closing the knowledge gap between regulators and industry, and the chilling effect of consent orders cited as having significantly reduced community bank participation in the space.
- Modernization of the regulatory framework governing bank-fintech partnerships was identified as a central priority, with current standards characterized as having not kept pace with the speed of technological change and clearer, more proportionate rules identified as essential to fostering responsible innovation.
SUMMARY & DISCUSSION
Digital Assets & Crypto
- Chairman Steil (R-WI) asked what legal structure is best aligned with fintechs based on their products and size. Thomas stated that licensing approaches are driven by the products and services offered and the need to serve customers effectively.
- Representative Davidson (R-OH) raised peer-to-peer payments and self-hosted wallets, asking how custody by the individual differs from cash and what obligations banks have in that context.
- Representative Davidson discussed skinny master accounts and access to payment rails for fintechs, noting that Custodia Bank complied with the law under the Federal Reserve’s (Fed) standards yet was still not issued an account, and asked how the status quo can be changed to better meet consumer demand.
- Representative Liccardo (D-CA) discussed the Payments Access and Consumer Efficiency (PACE) Act, noting it would provide fintechs federal access to payment rails and that the bill addresses banking industry concerns by including know-your-customer (KYC) and anti-money laundering (AML) requirements and prohibiting maturity transformation, with funds subject to a one-to-one reserve requirement still sitting in a depository institution.
- Steinberg Barrage noted that bank-fintech arrangements are increasingly focused on digital asset custody, on-chain activities, tokenized deposits, and crypto exchange partnerships, allowing customers to buy, sell, and hold crypto, and stated that these types of arrangements will continue to grow.
- Khalili noted that the introduction of FedNow, real-time payments (RTP), and stablecoins as payment rails has allowed small businesses and consumers who do not generally have access to these rails to access them in a compliant manner through bank-fintech partnerships.
Innovation & Bank-FinTech Partnerships
- Chairman Steil discussed how bank-fintech partnerships are beneficial to both entities, combining the speed and technological expertise of software developers with the consumer protections, compliance, and trust of regulated banks, and raised the trend toward digital assets and AI in bank-fintech arrangements. He highlighted the role of these partnerships in cementing the U.S. as the global leader in financial innovation.
- Representative Huizenga (R-MI) raised the Government Accountability Office (GAO) 2023 report flagging the need for examiner upskilling in fintech, IT, and digital assets. He expressed concern that regulations and regulators are not keeping pace with the speed of business change, describing it as happening in hyperdrive.
- Representative Haridopolos (R-FL) raised the goal of taking the mystery and fear out of handling new technology to make it more accessible to everyone. Thomas stated that better alignment, clarity, and guidance are what will better serve participants in the industry.
- Representative Timmons (R-SC) raised how the Biden administration’s reliance on informal pressure and enforcement actions rather than clear guidance affected banks’ willingness to innovate and work with newer technology providers. Steinberg Barrage responded that public consent orders were difficult to reverse-engineer for lessons and that additional guidance and examiner upskilling will hopefully support better outcomes going forward.
- Steinberg Barrage called for private sector collaboration with supervisory teams to address examiner knowledge gaps, including more experimentation by staff with actual technologies and formal training sessions focused on anonymized case studies, characterizing this as a two-way street where industry also needs to better understand what supervisory teams are looking for.
- Representative Davidson pointed to the Tenth Circuit’s decision in National Association of Industrial Bankers versus Weiser, asking whether Congress needs to clarify federal preemption to prevent states like Colorado from applying their usury limits to out-of-state-chartered banks. Khalili expressed support for the American Lending Fairness Act introduced to help resolve that uncertainty.
- Ranking Member Lynch (D-MA) noted concerns about the culture of technology companies prioritizing speed of innovation over regulatory compliance, noting that banking regulation has historically been a chronology of market failures and cautioning that the power and influence of technology companies is only increasing.