Would you share the full record of your personal banking transactions and purchases if it turned out it was the best way to secure a new loan?
Utah is home to a bevy of emerging financial technology or “fintech” startups that are creating a slew of new options for consumer and business financial services that were once under the exclusive purview of the traditional banking system.
But the same data access that has helped turbocharge the fintech sector and led to new options for, say, consumers who need to borrow money but have no credit history or small-business owners who don’t qualify under typical bank requirements, has a dark side as well.
These issues, and more, were explored at the University of Utah’s inaugural Fintech Summit on Friday.
Utah Sen. Mitt Romney joined Taylor Randall, the U.’s new president and former dean of the U.’s David Eccles School of Business, for a chat to open the hybrid live/streaming event.
Romney spent years in the world of private equity investment before leaving in 1999 to oversee the 2002 Winter Olympic Games in Salt Lake City. He noted how different the current finance sector looks and that high-risk ventures, like technology startups, that once struggled to find access to capital were playing under a new set of rules.
“Money for early-stage, high-risk ventures wasn’t available,” Romney said. “Now, the funds available far exceeds the opportunities to apply those funds in a meaningful way.”
And, new “fintechs” are finding ways to connect their customers with those funding sources via pathways that traditional institutions just could not, or would not, pursue.
A little-known tenet of the decade-old Dodd Frank Wall Street Reform and Consumer Protection Act, a massive piece of legislation constructed to help patch vulnerabilities exposed by the Great Recession, gave U.S. consumers the right to access their financial and banking information in a machine-readable format.
Consumers can now grant personal account access to potential “fintech” lenders, which typically use an algorithmic approach to assess the applicant’s history of deposits, spending, savings, etc. to determine borrowing worthiness. It all happens via a smartphone app and can be accomplished in a matter of minutes.
Proponents say it’s a boon for those who lack access to traditional banking institutions, are members of marginalized communities or simply lack sufficient credit history to qualify under traditional banking requirements. And, it’s an approach that functions like a meritocracy in helping to elevate inclusion and reduce racial/ethnic and socioeconomic biases that have been exposed in some legacy banking practices.
But University of Utah law professor Chris Peterson, who participated in a summit panel discussion on fintech regulation issues, said all that data can also be weaponized against the very people who are seeking alternatives to traditional banks because of their circumstances.
“I really worry about the alternative data being used not just to determine who gets access to credit but how to market to people … when they are most vulnerable,” Peterson said. “Some of those loans I really worry about, that aren’t such a great deal for people, and you have some sort of alternative data that figures out when they’re most vulnerable, when they’re most likely to make a bad decision.”
Peterson said a bad fintech actor could, via permissioned access to a customer’s account data, determine when that individual is typically in the most dire financial straits, like right before their usual payday, and target them with an online ad or email offer that may come with an exorbitant interest rate or lopsided payback terms.
Utah Bankers Association President Howard Headlee noted federal legislators and regulators have worked on ways to eradicate bias and inequity in banking practices through efforts like the Equal Opportunity Credit Act and Community Reinvestment Act. Now, the challenge is to apply these regulatory guidelines to fintech’s world of big data, machine learning and artificial intelligence.
Even as regulators scramble to catch up with the innovations coming out of the financial technology sector, those startups are proliferating and, in many ways, creating broader access to credit and capital for individuals and businesses and, by default, pushing legacy financial institutions to do their own innovating.
A panel of fintech industry representatives at the summit included Kristy Kim, co-founder and CEO of Tomo Credit.
Kim said she was inspired to start her own company when she ran into issues as a young professional who, although she had a job as an investment banker in San Francisco, was unable to secure a car loan due to a limited credit history.
“I had bank accounts and an income. However, I didn’t have a credit score,” Kim said.
Tomo, Kim said, uses access to applicant account data to make a determination of credit worthiness and doesn’t bother pulling FICO credit scores. And, she says applicants can be approved for credit limits up to $10,000 in a process that typically takes about two minutes.
Square is a fintech business that launched in 2009 to, according to the company, help small businesses participate in the economy. It offers a range of services that include helping customers launch websites and process online payments, manage in-person checkout systems, market products and services, and manage employee payrolls. It also provides financial services for its participant companies, including issuing business loans via a financial services subsidiary.
Square Financial Services CEO Lou Goodwin said his company’s average loan size is about $6,000 to $7,000, and the funds are typically used by small-business owners to solve immediate, real-world problems like fixing or updating equipment or addressing short-term financing issues.
His company assesses credit applicants based on their business transactional data. The process, Goodwin said, is accomplished using machine learning and artificial intelligence tools run by scientists and engineers and is one that is agnostic to the underlying business or person applying for the loan.
He noted it is also a method that, by structure, leads to more equitable outcomes for its customers.
“It’s all about economic empowerment,” Goodwin said. “Bringing people into the banking world that have been underserved, overlooked or just not profitable” for the traditional banking sector.
And to put the influence of emerging fintechs into perspective, the Economic Times recently reported Square was worth $113 billion, more than Europe’s most valuable bank, HSBC, currently valued at around $105 billion.