Plaid Policy Pulse: it takes a village

Partnership will be a critical feature of the fintech ecosystem for the foreseeable future.

Welcome to the Plaid Policy Pulse. In this quarterly series, we provide our perspective on public policy developments impacting consumers' access to their data.

The big idea 💡

Partnership will be a critical feature of the fintech ecosystem for the foreseeable future.

Since the early days of fintech, banks and fintech companies have found creative ways to partner to deliver solutions. While recent opportunities have come up for fintechs to branch off on their own, all signs point to partnership remaining integral to the success of the ecosystem.

Three developments over the past quarter drew our attention, so we’re sharing our take on how we can shape this future together.

  • The OCC’s Fintech charter faced a significant hurdle 🤼
  • Federal regulators stepped in to clear up Madden v. Midland 💸
  • The Clearing House released a model data sharing agreement that leaves out consumers 📝

OCC Fintech Charter in Flux 🤼

The drive toward a federal fintech charter sees yet another challenge.

In July 2018, the Office of the Comptroller of the Currency (OCC) announced it would begin accepting applications for federal banking charters from non-depository fintechs who engage in banking activities. Just over a year later, that plan is on life support.

Under the OCC’s proposal, fintechs could be granted special-purpose national bank charters and see relief from the complexity of navigating state-by-state regulations for products like mortgages and personal loans.

To many this was an appealing proposition - fintechs relying on partnerships could explore a new world all on their own. Google and PayPal mulled over the opportunity, and Avant, Varo, and Robin Hood publicly stated their interest in applying. But in the end, the states who license fintechs argued that the OCC overstepped its authority under the National Bank Act, and won out in court to put a halt to this initiative.

The OCC can still appeal the latest court ruling. But after a year of legal battles and false start-applications, it’s understandable that fintechs might see their resources better directed toward partnership opportunities - see: Google/Citi and Apple/Goldman Sachs - that leverage the best of banks and fintechs under the current regulatory regime.

⭐️ Our takeaway: In the absence of federal charters, fintechs will continue to build relationships across the 10,000 financial institutions in the U.S. These relationships can inform how federal regulators bring structure to a growing ecosystem.

Whose Loan Is It Anyway? 💸

Federal regulators are taking steps to clear up a legal issue clouding the lending ecosystem.

In 2015, Madden v. Midland introduced uncertainty into the credit landscape when it ruled that a loan made by a nationally chartered bank in one state could become invalid when sold to a non-nationally chartered bank in another state with different interest rate laws.

In recent weeks, the OCC and the Federal Deposit Insurance Corporation (FDIC) have each announced proposed fixes to the Madden issue.

Both proposals would reaffirm the “valid-when-made” principle, which ensures that a loan valid at the time of issuance remains so over its life cycle. The key difference comes down to which banks would be covered - the FDIC’s version covers all state and national banks, while the OCC would apply to all national banks but only state savings associations.

The OCC and FDIC are both soliciting comments on their proposals over the next 60 days. These solutions could help clarify rules of the road for fintechs and banks looking to partner to deliver or securitize loans.

⭐️ Our takeaway: There is already some speculation that the difference in approach between OCC and FDIC may make some banks more appealing partners than others, and resolving any inconsistencies that could impact existing partnerships should be a priority for companies considering a comment. We encourage partners who’ve dealt with Madden challenges to submit comments.

TCH Model Data Sharing Agreement Falls Short 📝

A leading financial industry group puts out a substandard template for data sharing.

The Clearing House, an entity owned by the largest banks in the US, released a model data sharing agreement to help banks and third parties streamline negotiations. Unfortunately, their model agreement falls short when it comes to putting consumers at the center of the financial services ecosystem.

Under TCH’s model contract, banks would get to choose which fintech products their customers could use and which data their customers could share with those fintechs, and banks could cut off access to any fintech at any time.

From Plaid's perspective, this model contract would quash innovation and consumer choice, leading to a world where banks pick and choose their favorite apps and leave the rest behind. We think that consumers and the ecosystem deserve better.

The good news is that groups across the industry support simple and uniform rules for data sharing. Banks and third parties like Plaid currently partner to reach bespoke data sharing agreements that work in consumers’ interest. In the absence of a model agreement that centers consumers, it’s likely that such one-off agreements will continue to rule the day.

⭐️ Our takeaway: A model data sharing agreement would be useful, but only if it prioritizes consumer choice. TCH requested feedback with their release, and we encourage partners to let TCH know that consumers deserve the right to choose products that work for them.

Update: Federal Regulators issue joint statement on use of alternative data in credit underwriting ✅

In our last edition, we highlighted Plaid’s engagement with policymakers to press for the use of alternative data in credit underwriting. Last week, in a major breakthrough, Federal regulators released joint guidance on the matter.

The five regulators noted the benefits of alternative data and encouraged "responsible use of such data.” This is a major victory for fintechs who have worked hard to prove that alternative data can extend credit to underserved populations.

Ben White works on Policy R&D at Plaid. He's passionate about building a financial services system that benefits everyone.

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