Partnering for Innovation: How Bank-Fintech Collaborations Enhance Financial Infrastructure

The subcommittee on digital assets, financial technology, and artificial intelligence will come to order. Without objection, the chair is authorized to Today's hearing is titled " Partnering for Innovation: How Bank-Fintech Collaborations Enhance Financial Infrastructure." Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. I now recognize myself for four minutes for an opening statement. When we think of innovators, sometimes we picture scientists or engineers working by themselves, toiling away, in their labs or entrepreneurs uh building companies from a garage or a dorm room by themselves. And while we celebrate the achievements of individual innovators, some of the most important innovations in America are actually happening through really significant collaboration. The financial services sector is a prime example of that. In fact, across the country we see how collaboration in this sector has supercharged innovation increased consumer choice and broaden access to the financial services space. In our current financial system, innovation is increasingly driven by partnerships between banks and fintechs, working together to bring novel financial products and services to market, an expanding choice for all Americans. By combining the speed and technology and and technological ex- expertise of software developers with the consumer protections, compliance in trust of regulated banks, these partnerships are helping cement the United States as the global leader in financial innovation. Bank pinte- bank fintech partnerships are a win-win. Fintech firms gain a partner that can help them scale their business in a compliant way, while banks gain access to new technologies, consumer bases, and growth opportunities. And consumers can reap the benefits. It's no surprise that we see community and f- regional banks leading the way in partnering with fintechs. As fintechs innovate, they can give consumers and businesses of all sizes access to more efficient financial services. With adherence to prudent risk management and strong oversight, these relationships can better serve communities. This includes facilitating expanded opportunities an inclusion in the form of access to financial services to those who may be less likely to access financial services through traditional bank products. As we examine the benefits of these partnerships, bring cons- as we examine the benefits these partnerships bring consumers, we must remain cognizant of managing risk and ensuring strong due diligence, consumer protections, and compliance safeguards. At the same time, federal regulators and examiners should not stifle innovation simply because a product or technology is new or unfamiliar. I look forward to exploring recent developments in this space and hearing from our expert witnesses on what we can do to foster innovation through bank, bank fintech partnerships. Also, on a on on a on a separate note, uh, moments ago I was, uh, informed, uh, of the passing of the former chairman of this committee, Barney Frank. Uh, he had a thirty-two year career in the United States House of Representatives, uh, and was one of the most impactful chairs of this committee, why his, uh, portrait sits to my right. Uh, obviously, uh, Dodd-Frank, uh, being one of the most transformative bills that he was engaged in, uh, in affordable housing, uh, was a topic, uh, that he spent a lot of time working on, uh, maybe all the more appropriate uh that today the house will vote on a uh strong bipartisan uh housing package. Uh and so with his loss I think we all reflect on the service and commitment he had uh to improving not only the financial services and housing space in this committee, uh but to his commitment uh in work on behalf of all of us here in the United States House of Representatives uh so I request we all take a moment of silence uh in uh in in following his passing. I now recognize the ranking member of the subcommittee, Mister Lynch, for four minutes for an opening statement.

Uh, thank you, thank you, Mister Chairman. Let me just say, uh, when I first came to this committee, when I was a freshman, uh, Bonnie Frank was the top Democrat and and welcomed me, actually persuaded me to come onto this committee because of what he thought we could do together, uh, Democrats and Republicans on issues like housing and consumer protections, investor protections. Uh, many people remember Bonnie Frank, uh, and and and view his legacy of the work that he did as a champion on behalf of LGBTQ plus individuals in this country, and that is rightly so. But having sat next to him for for many of those thirty-two years that Barney was here, uh, he was he was equally a champion of working people. Uh, Barney was a I I remember when I was president of the iron workers, he was our go-to person here. Uh, he and Joe Moakley, uh, in terms of protecting worker rights and and decent working conditions for Americans across this country. Uh, he also uh worked mightily on behalf of the fishermen uh in Massachusetts, from Gloucester to New Bedford and Fall River, uh and they were greatly appreciative of his his work on their behalf. His work on housing, uh ironically we we we'll pick up that bill today and the housing, that was a that was a an area of keen interest on behalf of Bonnie Frank, so uh he had so many so many accomplishments here during his thirty-two years, uh I I appreciate the moment of silence on his behalf. And uh, and a- as - as Mr. Chairman, you - you - you rightly note uh the Dodd-Frank Act, which uh continues to be part of his legacy from a legislative standpoint here, uh in Congress. That bill, when it passed, was meant to rescue our markets and - and rescue homeowners who were losing their homes after the collapse of - of markets in two thousand and eight. And every bit of it was meant to re-stabilize markets and and uh and stabilize our economy. And it and it worked, it worked. Uh, there were contentious parts of it, but uh in his in his, to his credit, uh he was he was the person who drove most of the the stabilizing influence within that bill. And uh we are grateful for for his service here. And and he he was an example to many of us here. Uh, a lot of people said Barney Frank was the smartest guy in the room. It wasn't from his natural ability. He worked at it. He was a voracious reader and and and consumed every bit of data and information he could get before he came to this podium. He was the best prepared uh person in the room, and that that was to his credit and to his work ethic. So uh my prayers go out to his partner Jim, who's tender care uh surrounded Barney in his his his uh his final days and and through throughout his sickness so uh my my prayers and and the prayers of the entire Congress go out to him and and to Barney's family. Thank you. I yield back.

The gentleman the the gentleman yields back. Um, today we welcome the testimony of Ms. Exa- Ms. Alexander Steinberg uh, Baraj, a partner at Morrison Foster, Ms. Henrietta Henrietta Thomas, the Executive General Manager for Advocacy, Risk and Compliance at Xero, uh, Ms. Shatul Parikh, the General Counsel and Chief Compliance Officer at Treasury Prime, and Ms. Erika Kalili, the Co-founder and Chief Legal Risk Officer at Lead Bank. We thank each of you for taking the time to be here. Uh, each of you will be recognized for five minutes to give an oral presentation of your testimony without objection. Uh, your written testimony will be made part of the record. Ms. Steinberg, uh, Barrage, you're now recognized for five minutes for your oral remarks.

Thank you. Uh, subcommittee chairman Stile, subcommittee ranking member Lynch, members of the subcommittee, I'm honored to be testifying before you today. And I appreciate

I'm sorry, may I ask you to just

Sure. If it's better. You're welcome. I'm honored to be testifying before you today, and I greatly appreciate your acknowledgement of the accomplishments of Barney Frank. I'm a partner in the financial services group of Morrison and Forster, and I advise a wide range of banks and technology companies on bank fintech partnerships. Um, my clients are building products at the forefront of payments and AI. And I am also a former FDIC executive, so I bring a former regulatory perspective to this discussion. The Bank FinTech Partnership Enhancement Act is an important way to ensure that we remain focused on US competitiveness, innovation, and of course, consumer protection. These partnerships are quite varied. They cover many different types of products, and as my written testimony notes, they're continually evolving. My testimony is gonna focus on a few common frictions that I've seen in my practice, uh across these very different types of partnerships, and I'm gonna suggest a few targeted ways I think reforms can help strengthen these arrangements, as we move to the future. So, first a brief history. Uh five years ago there was a significant growth in banking as a service partnerships. Uh we saw a tremendous scale, uh both at c- banks, largely community banks under ten billion, and an array of fintechs looking for bank partnerships to scale their products. Most of these products were lending uh deposit related products and card products. Um the truth is that at this time many fintechs and many banks uh were not ready to risk manage these arrangements. Uh they are they are operationally complex, they require a high degree of compliance, and regulators took notice, we saw a spate of public consent orders, civil money penalties, uh and a number of banks getting caught up in public enforcement actions. Um one middleware in particular failed pretty colossally uh at the grave cost to many consumers. So twenty twenty three, twenty twenty four was a real reckoning for this industry. Um some basic lessons uh from from this episode, uh know your product, know your partner, whether you're a fintech or a bank. Make sure you have the right subject matter expertise internally as a bank, including at the board level. Um, relentlessly focus on compliance, and especially record keeping. And of course, don't lose the money, right? So those were uh very important lessons that uh I think many banks and many uh fintechs today take to heart. The vast majority of these arrangements actually really work well. They're they're risk managed. They're not the ones that you typically hear about. And they haven't gone away. In fact, a lot of these products are just morphing. We're seeing more and more bank fintech arrangements. Now we're looking at digital asset use cases, uh, digital asset custody, tokenized deposits. So the flavor changes, but the underlying partnerships and the need for these different entities to come together really hasn't changed. I think there is real opportunity. to improve the way these partnerships are entered into and to uh and and how they're conducted. And my testimony focuses on two areas. The first is making sure our examiners, the folks in the field looking at these partnerships, overseeing the banks, have the right tools they need to understand and identify what those risks are, how to prioritize those risks. Uh the GAO report that's cited in my testimony notes that there's a real gap there. I think that there is an opportunity for thoughtful private sector collaboration, uh, with bank supervisory teams to help address these gaps. Um, some of that may involve more experimentation by staff with the actual technologies, um, but others may just be formal training sessions focused on anonymized case studies to level up. And it's not just the bank examiners that I think need the upskilling. I think it's the industry too. They need to understand what supervisory teams are looking for, so I do view this as a two-way street. The second is a rethinking of how we treat confidential supervisory information. There have been many examples in my practice and the practice of my colleagues, where banks um do not feel they can share important information with their fintech partners because of existing rules. Uh there are potential criminal penalties if information that's deemed confidential is is shared without authorization. And so this has in many ways uh hampered our ability to support safety and soundness at our banks. Um and so I think more uh focus on those areas would be very helpful. I'm happy to answer any questions.

Thank you very much. Uh, Miss Thomas, you're now recognized for five minutes to your opening remarks.

Thank you. Chairman Stile, Ranking Member Lynch, and distinguished members of the subcommittee, good morning and thank you for the opportunity to appear before you today. I'm Henrietta Thomas, the Executive General Manager of Advocacy, Risk and Compliance at Xero. I'm a lawyer with twenty five years' experience in financial services, including servicing serving as a regulator and specialising in financial crime, retail banking and payment systems. The subject of this hearing today is part of what I work on every day at Xero. What is Xero, you might ask? Well, Xero is a trusted financial operating system for small businesses. serving nearly five million customers in over a hundred and eighty countries for the last twenty years. Our purpose is simple, to make life better for small business owners, their advisers and communities around them. We serve a variety of businesses, restaurants, farmers, special- specialist manufacturers, technology companies and many more. What small business owners have in common is that they often do every job in the business. And every hour spent on financial administration is an hour not spent working on what they actually set out to do. Xero's mission is to give those businesses the financial visibility and control they need to f- to focus on growth. How we do that in partnership with banks and fintechs is what I wa- what I'm here to talk about today. Our Xero small business insights data, drawn from real transaction behaviour of tens of thousands of US businesses, not a self-met, not a self-reported survey, shows that in the first quarter of this year, American small businesses waited an average of nearly twenty-nine days to be paid on their invoices, with those invoices running nine days past the agreed due date. For a bu- for business operating on thin margins, this is not just an inconvenience, it constrains hiring, investment and growth. And our research shows it affects the s- the personal well-being of people running these businesses. Cash flow is the number one reason for small businesses' failure. And bank fintech collaboration is one of the most important, powerful tools we have to change that. As a global small business platform and a trusted financial operating system in the AI era, Xero is building around the jobs that matter most to small businesses' financial health, accounting, payment and payroll. And I want to focus today on the first two, because they are where that collaboration comes to life most directly. I'd like to give you a tangible example. Imagine a restaurant owner in Wisconsin or Boston who uses Xero to connect their bank account and their and the transaction data flows automatically into their ledger overnight. When a supplier invoice arrives, they approve it inside Xero and pay it, fund it from their bank account, delivered by ACH and reconciled automatically in their books. Their accountant sees the same real-time picture they do. That experience is made possible by a specific kind of collaboration. The bank holds the money, financial data networks carry transaction data securely to the platform, licensed payments infrastructure processes what moves in and out, the invoices getting paid, the supplier bills going out. Our recent acquisition of Melio, a US-based licensed payments Business means bill payments can now happen on the Xero platform for US customers, automatically reconciled with customers saving up to fifteen hours a month on accounts payable alone. And our data shows that customers who use our payments' capability end more months cash-positive than those who don't. Each of the parties in the scenario I just described perform a function that others cannot, and Xero serves as the foundation where they all seamlessly connect, the workflow, the visibility, and the reconciliation. Turning discrete financial services into a coherent ex- experience for small business owners. We find that this matters particularly in the United States, where nearly ten thousand banks and credit unions serve America's small business, including the community banks and credit unions that are central to the local economies across the country. The partnership model we've described is how small business in rural Wisconsin gets access to the same modern financial tools as one based in the city in the major city that reach across institutions of every size is what bank, fintech, p collaboration makes possible. In closing, when banks, fintechs and pa- and platforms each do what they do best for small businesses, get the visibility and control they need to tri- to thrive. What we have seen across every market we operate in is that clear proportionate frameworks which treat collaboration as the expected model, produce better outcomes for small businesses. The United States has a very, has every ingredient to build the best version of this, and we are here to support that work and welcome the discussion. Thank you.

Thank you very much. Uh, you're back. Uh, Miss Parikh, you're now recognized for five minutes.

Chairman style, Ranking Member Lynch, and distinguished members of the subcommittee. Thank you for the opportunity to appear before you today. My name is Sheetal Parikh. I am the General Counsel and Chief Over the course of my legal career, I've practiced both inside a large financial institution and at the leading edge of fintech advising both banks and technology companies alike. That dual lens, understanding traditional financial services, and the vantage point of those reimagining it, is precisely why I am here. Before I describe what Treasury Prime does, I want to offer a brief explanation of how bank fintech partnerships work in practice. Because the mechanics matter to the policy questions this subcommittee is examining. An API, an application programming interface, is essentially a standardized set of instructions that allow two different computer systems to communicate securely and in real time. The most intuitive analogy is an electrical outlet. The outlet in your home is a standardized interface. Any device with the right plug can connect to it and draw power without knowing anything about the underlying wiring. The utility company provides the electricity, and your device accesses it through that standardized connection. Treasury Prime's platform works the same way. We are the outlet. The bank is the utility, providing the regulated financial infrastructure, the deposit accounts, the payment rails, the FDIC insurance. The fintech is the appliance, the one with the innovative product and the customer experience. The API does not hold money or own data. It's a secure, real-time conduit, and the bank is integrated into every flow of funds at the transactional level. To understand why that architecture matters, it helps to understand the structural challenge that Treasury Prime was built to address. Community banks sit at the heart of American economic life, but the technology available to them has lagged far behind what customers now expect. That's the problem Treasury Prime was built to solve, to help community banks modernize in the world they're operating in today. Treasury Prime's bank operating system, the Bank OS platform, bridges that connection. a modular software layer that links a bank's existing core systems to fintech and enterprise partners synchronizing in real time. Bank fintech partnerships built on this kind of infrastructure are not a convenience for the financial system. They are how millions of Americans, particularly those who have been historically excluded by traditional channels access basic financial services today. Consider Atlas, a fintech company on our platform that offers a zero percent APR credit card, designed for consumers with no credit history. This is a population caught in a structural catch-twenty-two. You cannot build credit without access to credit, and you cannot access credit without a credit history. Academy Bank, a Treasury Prime bank partner, provides the infrastructure and the compliance backbone. The fintech provides the underwriting innovation and the customer reach. Together, they've served over a hundred thousand active members, with users building credit scores by an average of fifty points in the first year. Well-structured bank fintech partnerships do not dilute the bank's compliance obligations. They actually have the ability to strengthen the bank's ability to meet them. Our platform is built on the principle that the bank must own its data in real time, automated KYC, AML reporting, and reconciliation, all through a single control center that gives the bank complete visibility. That is the standard model this subcommittee should come to expect of every partnership operating at scale. The regulatory response to these partnerships has too often been over broad causing many community banks with the intent to modernize responsibly to pause their strategies altogether. And here's the reality of this dynamic. A regulatory posture that inadvertently discourages community banks from these partnerships does not inherently make banking safer. It makes community banks less competitive and ultimately drives customers outside the supervised perimeter entirely. Mm. regulated corners of the system is not consumer protection. It's risk transfer with no net gain. This subcommittee has an opportunity to provide the statutory clarity this ecosystem needs. Directing regulators to study the impact of bank fintech partnerships on innovation is a great first step. Beyond that, we need a framework that creates uniform standards and calibrates supervisory resources to promote the investment that durable innovation requires. time at the intersection of regulation and innovation to know, they are too often framed as opposing forces. As if safety requires slowness, and innovation happens in spite of regulatory oversight, rather than alongside it. Treasury Prime's experience, and the experience of the community banks on our platform, tells a different story. Banks that invest in strong governance infrastructure and genuine compliance capability are better positioned to inno- innovate, and move with confidence rather than Uncertainty. The framework this com subcommittee establishes should make both achievable at once, not as a compromise, but rather as a design principle. I believe that's possible and I'm grateful for the opportunity to contribute to that effort. I look forward to your questions.

Thank you very much. Thank you very much, Ms. Parikh, uh, Ms. Kalili, you're now recognized for five minutes.

Chairman Stile, Ranking Member Lynch, and members of the subcommittee. Thank you for the opportunity to testify today. My name is Erica Kalili and I am the Co-Founder and Chief Legal and Risk Officer of Lead Bank. Lead Bank is a community bank headquartered in Kansas City, Missouri, and I have spent my career building compliance infrastructure of financial institutions operating at the intersection of technology and banking. I say that Lead is a community bank, but we're also a partner bank. We work with innovative fintech and digital assets companies to offer products and services that expand access in a compliant technology-enabled manner. We have seen firsthand that strong compliance and sound technology enable fintech partners innovate in ways that strengthen the banking system and open new lines of business for community banks what distinguishes our model is a clear and deliberate allocation of responsibility LEAD owns every compliance stack and LEAD is accountable for the com consumer experience of each and every product and service that we offer fintech partnerships extend the reach of our services but in no way that do they displace our obligations this is a key component of responsible bank fintech partnership model Leeds' experience is consistent with broader data demonstrating that community banks that have built strong and sound partnerships have actually grown as a result that being said we have never lost sight of this business line we have never lost sight with the with the inclusion of this business line of our Kansas City lineage and serving the local community in the agricultural sector the risk management that's required to engage in a bank fintech partnership is technically demanding It requires fluency across bank regulation, best-in-class information security, software systems, data architecture, financial crimes compliance, and consumer part and consumer protection. Before a lead enters into any partnership, we conduct robust technical and regulatory due diligence on every prospective partner. But that's just one part of the process. Once engaged, the ongoing third-party relationship, our oversight framework includes governance, reporting obligations, contractual rights, and exit protocols sufficient to identify, escalate, and remediance compli- and remediate compliance issues. Understanding each partner's business model is central to our compliance practices and to maintaining productive coordination with our regulators. The importance of bank fintech partnerships to consumers is well documented. For consumers, the financial products made possible by responsible bank fintech partnerships represent a meaningful path to mainstream credit choice and access. These partnerships dramatically reduce the cost of reaching underserved sectors. Digital partnerships reduce customer acquisition costs from between one hundred and two hundred dollars per customer down to five to thirty-five, which is what makes it economically viable to serve populations that often larger institutions have concluded are not cost-effective to reach through traditional channels. Partnerships also support fintech underwriting tools that enable credit decisions based on a more complete picture of a borrower's financial condition. Individuals who depend on these responsible bank fintech partnerships for access to products and services to meet their financial needs, benefit from a well-calibrated regulatory framework that holds banks to rigorous standards while also enabling responsible innovation. With this in mind, Lead Bank appreciates the opportunity to offer the following policy recommendations. First, we support greater standardization of bank exam manuals across the prudential regulators, combined with investments in examiner training. The FDIC's emerging technologist team offers a useful model. By embedding specialized examiners alongside local exam teams, the FDIC has created a more iterative dialogue-driven process that clarifies regulatory expectations and sharpens the focus of exams on material risks. Second, Congress should affirm that the chartered bank is the true lender in a bona fide bank fintech partnership with clear preemption. This concentrates accountability where it belongs, with the bank. Third, Congress should address the uncertainty created by the ten circuits' decision in the National Association of Industrial Bankers versus WISER, which held that out of state chartered banks must comply with Colorado's usury limits when lending to Colorado residents. If replicated elsewhere, state chartered banks would face fragmented state-by-state compliance regime that constrains credit choice and availability and erodes competitive parity between state and national banks. This is exactly what DITMCA was designed to preserve. We support the American Lending Fairness Act, introduced by Representative Davidson and Senator Moreno, which aims to resolve this uncertainty. Bank fintech partnerships, when approached responsibly, expand access to financial products and services for consumers underserved by traditional banking channel channels and strengthen our com- community banks which are the lifeblood of America. I look forward to your questions.

Thank you very much. Uh, we'll now turn to member questions. I recognized myself for five minutes uh for questions. I'll start with you if I can, uh, Ms. Barrage. Um, I want you just to l- help me level set not only what the landscape looks like today, but what market trends you're seeing uh that are shaping these arrangements into the future. Um, I think we all look uh and think about the familiar, the, our familiarity with banking as a service. That's just one example. What market trends in, succinctly are you seeing in the bank fintech relationship?

I am seeing a tremendous amount of

Is your, can I just check your microphone if it's on?

Is this better? Thank you. Thank you for the question. Um, the types of arrangements that we're seeing are very focused on digital assets and AI, consistent with the uh mandate of this subcommittee. Uh, we are seeing banks looking to third parties to help them do digital asset custody, so on-chain activities. We are seeing banks, um, band together to figure out how they're going to, uh, do tokenized deposits with fintech parties. Um, we are also seeing some banks publicly, a partner with exchanges, to allow their customers to buy, sell and hold crypto. So there are a wide variety of these types of arrangements. Um, I think they will continue. And on the AI side, um, as my testimony describes, I feel like there's a lot of opportunity for upskilling in this area.

Are you also seeing uptake by smaller banks, community banks, in fintech? What's the what's the trend line you're observing there?

I think over the past five years, uh, we've seen, I personally have seen fewer community banks engaging in these partnerships. That may be a result of the twenty-three, twenty twenty twenty three twenty four events that i discussed earlier uh that said there are some that do these types of partnerships very effectively they're well risk managed they have experts at the bank um and i think some of the testimony uh today bears that out so it's a mixed bag

thank you thank you very much let me jump to you miss thomas if i can um is we're looking at all these new financial products that are coming to market they're often raising questions about how easily they fit under our existing financial services uh regulatory framework and under what legal legal structures such as uh bank charter money laundering uh or money transmitting licenses uh best aligns with fintech based on uh the product and on the size. Can you describe the factors that informed your firm's decision regarding which licenses uh in regulatory structures to pursue?

Absolutely. Thank you for the um the question, Chairman. Um our licensing approach is generally driven is generally driven by a desire to support small businesses. That's at the core of what we, um, at the core of our purpose. Um, and we provide them so that we can provide them with the best tools to effectively run their business. Um, our accounting platform, for example, itself does not require federal financial services, uh, federal financial licenses because we do not hold customer money or extend credit. Um, that said, we have found, um, that giving our customer, uh, our users and our customers the ability to process payments directly on the Xero platform, provides valuable time saving as I've discussed in my in my testimony. Um that has led us to look at ways in which we can provide those sort of services, um which led us to acquire payment services, a business recently that holds money money transmitting licenses that that allows our customers better access to payments. Um in addition to that, we also operate um as every other corporation under SOC two, um, ISO certifications and and, um, the applicable customer and data, um, protection, um, frameworks that apply.

Thank you very much. Uh, let me come to you, Ms. Parikh, if I can. I want to come back, uh, to what I was, what we were speaking about at the beginning with Mr. Ms. Baraj. Um, can you describe the interest you're seeing in fintech partnerships from smaller institutions and what change you're seeing uh in this space most recently?

Sure. And I think I cite to this research in the written testimony that unequivocally community banks are very interested in these partnerships, but if you look at the number of community banks that can actually convert, um there's definitely been a chilling effect, particularly in the post-twenty-twenty-four era where we saw a lot of consent orders, um disproportionately some would say against uh partner banks. So I think by Q one of twenty-twenty-four we saw almost thirty-five percent of all consent orders were directed at uh partner banks in this space, and so that has definitely had a trickle-down effect where community banks that need these partnerships to stay relevant are, um, very hesitant for that reason to get tender into them.

Thank you very much. I appreciate all of your testimony here today. I yield back. I now recognize, uh, the ranking member of our subcommittee on digital assets, Mister Lynch of Massachusetts, for five minutes.

Thank you, Mister Chairman, I want to thank all the witnesses, this is a really important, uh, uh, topic. Uh, and while we have benefited greatly, I think, in this country from technological innovations in the area of finance, uh, there there's no question about that, but from where I sit, most of that technological change has been in support of the traditional, uh, banking system with all the safeguards for depositors and and, uh, and, uh, people who take out loans and there's there's been, uh, a a reaffirming aspect of of all those fundamental protections that are put out there for consumers. If you if you look at the culture of these two industries, you know, banking in in our country and banking regulations have been the result of, you can actually if you read the banking regulations, it's almost like a chronology of this the the the market failures in this country. You go back to the Great Depression, we ended up with bank failures, so we put in the FDIC uh misperige. Um, you know, we had uh uh, you know, stock market crash, we put in you know, regulations around stock trading and and the use of uh leverage. Uh you you go forward where we had uh the stock market crash of of of nineteen eighty-seven uh we put in provisions that might prevent that from happening again. Uh we've got the savings and loan crisis, major major uh uh regulatory changes after that. We had the global financial crisis. If if you read all of that, all of that is in response to market failures. Now, and and and that was the culture because we learned from the disasters that we experienced. Now, we have fintech coming in, and and and and technology in general, and and the culture there is to move fast and break things. They they resi- so so this is the subcommittee on digital assets, financial technology, and artificial intelligence. So this is the crossroads of where all this happens. And and it's the same for fintech as it is for crypto, as it is for AI. They come here and they fight regulation like hell. They do not wanna be regulated. And they spend millions and millions of dollars trying to persuade members of Congress, uh, to to give light touch regulation or no regulation, or self-regulation to the industries. And I see that continually. It just it's just a drumbeat. And some of these countries, some of these companies are so big now, trillion dollar companies, uh, with market cap over a trillion dollars, that that their power is only increasing, and their influence is only increasing. And so, uh, how how do we resolve that, uh, mischalantly? How how how do we how do we protect, how do we maintain the the protections that we have afforded to depositors, uh, and to businesses, and and you know fair lending and and yet on board on board some of this technology that we we we agree is very important and transformative in many ways and may in fact uh help to bank the unbanked. So there's some good here, but we're trying to get the good and then hold back on the things that we we think will undermine the legitimacy and integrity of the financial system.

Thank you so much for the question, Congressman, and I think that's a great example of where the bank fintech partnership model is actually massively accretive. In this model, you have the fintechs who are able to manage the distribution channel and the product innovation side. But the best partners that make it onto Leads' platform are those that view this as a partnership partnership and not a vendor relationship.

Yeah, yeah.

Meaning that we have to understand the products and services that we're offering, and we remain responsible for ensuring that they ma- that they maintain and adhere to all bank regulatory standards, and we're sort of where the buck stops, so to speak. And so that is the internal check that you have for these technology companies, as they're iterating, and it keeps it grounded in the most important regulations that protect our consumers and also protect the general safety and soundness of the financial system. So I think this is a way where we ensure that the fair lending considerations are taken into account we make sure that the complaints are being monitored, we make all of these things remain regulatory compliant. And then we discuss them with our regulatory bodies on a regular basis, to ensure that there's never any surprises and that it's an iterative process, versus a quote unquote move fast and break things model.

Yeah, Miss Parikh, what do you think?

Yeah, I I don't see the two as binary, and I think what we see in our experience is uh, there is not a need for not having regulation, it's ensuring that the regulation is tailored to the the risks we're seeing. Um, and a lot of the fintech partners we're working with want to be compliant. They want engagement and there's a very healthy partnership with their banks, um, because they understand the space they're in.

I yield back. Thank you.

Chairman yields back. The chair recognizes this vice chairman of the full committee, Mister Huizenga of Michigan, for five minutes.

Uh, thank you, Mister Chairman. I'm gonna take uh a moment here, a personal privilege if that's okay, to uh to acknowledge uh the passing of Barney Frank as well. I um am on this subcommittee at least the only republican who had the opportunity to serve with him. I was a freshman, uh he was in his uh last term, uh and uh while uh I disagreed with him on many things, I did respect him and uh I I actually had a unique opportunity, he and I became cosponsors of a bill that uh that my predecessor had worked on with Mister Frank on regarding federal prison industries and what was Mr. Lynch is nodding his head. He remembers, remembers a number of those debates. Uh, Massachusetts had lost a lot of glove and uh textile uh industries. In Michigan we had lost a lot of uh office furniture opportunities to federal prison industries. And uh I had the unique opportunity to work with Barney Frank. Um, he also then provided me the opportunity to uh to to really test myself on the house floor. At one point I was, for some reason as a freshman, I was I was given the opportunity to um uh be the counter voice to him as the ranking member uh on a housing bill and it might be my background in housing uh might have had something to do with it and uh I uh I I I took a moment and I debated and I debated and I debated inside my head whether I should ask the gentleman to yield and I did. I finally did. And he looked at me much like a cheetah would look at a limping gazelle at the back of the herd. And, and very gladly said, I'd be happy to yield to the gentleman, knowing that he was ready to pounce at any moment. And uh, I, I got my point in so uh succinctly, and I think to the point that he pounded the lectern and demanded I re- um, I re- um, I, I re- uh, regain my time, I, I, I take my time back. And he started yelling into the microphone, and I knew I had arrived. uh that I could actually do this job here in Congress, that I could go and uh and battle back and forth with uh with Barney Frank while working with him on another piece of legislation. And I think that is just illustrative of uh of what Barney Frank was. Uh he was someone that uh that uh would be an amazing ally, but w- could also be a formidable foe uh all within the uh span of a very short period of time. So blessings to uh to to his family and and his memory. So I appreciate that opportunity to share that moment. Um, so moving on to our uh to our hearing here, uh uh uh Miss Steinberg, uh Barrage, I'd like uh to ask you, we've seen supervisory attention to bank fintech arrangements accelerate, particularly under the Biden administration, uh in my opinion, but uh several witnesses have noted material examiner expertise gaps. I think that's a polite way of saying was We've got regulators that aren't up to speed necessarily. In fact, a GAO had a two uh twenty twenty-three report uh which flagged the need for examiner upskilling that that was their term in fintech IT digital assets. And it seemed your your statements uh echoed this. Uh, I personally had a uh couple of weeks ago an opportunity to spend four days in Silicon Valley uh looking at tech looking at sort of innovation that's happening. And uh frankly I was struck by the speed of innovation, the speed of change in uh technology and uh I I I was uh I think it underscored my fear and that fear that many have is that regulations and regulators are not keeping up with the speed of change in business. That's that's not unusual, but we're seeing it in hyperdrive now here uh with uh uh with uh uh with uh this fintech uh side of things. So I I I'm curious, uh how can, and I assume you may believe that agencies should, but how how should and how can uh these agencies close these knowledge gaps and and and what i what impact is there if they don't do that?

Thank you for the question and for sharing those observations. I I have those same observations in my practice. I feel like I'm always on a learning curve, and I'm learning from our clients. Um, so I think technology moves in real time and our regulatory agencies do not, and they don't have time to pivot, and closing that gap is perhaps the wrong goal. Addressing that gap robustly and thoughtfully, I would say, is the goal, because it's going to be impossible to always close that, or any time close that gap. Um, what can we do? I think we need to find the examiners on the ground who need the expertise following the GA report. I think Miss Halili had a great example of how the FDIC is embedding subject matter experts on their exam teams.

Okay.

Um, to the extent the other agencies are doing that, I think it's a plus.

Are are they on loan or are they from other areas or are they uh from private sector coming in for a period of time or are they actually adding them to their staffing?

My understanding is that they are from the FDIC, um, but they're just being redeployed for different types of exams for different partnerships.

Okay.

So obviously I would support that. Um, I also think that we need to be willing to invite private sector collaboration without fear of um enforcement or something like that. We can do this in a way that is anonymized, that is addressing the gap, um that's also giving staff the ability to engage directly with the technology, which probably isn't happening as often as it should. So those are just some ways. I presh- OK. There're probably other ways too, but those are the ones that I'm Yep.

Appreciate that. uh, Miss Clealy, you were you were referenced in that if you wanna uh just be re- and I do have a question for you as well but if you wanna quickly just shed some light on the FDIC situation.

Yeah, so we have experience as a bank that is prominent in the bank partnership sector as well as digital assets. We have seen our exam teams now comprised with subject matter expertise from the DC office that comes specifically with respect to those novel activities that we engage in. We find that to be incredibly accretive during a bank examination because there's more of an open dialogue and there's more depth in the understanding which then leads to a better evaluation of the material risks associated with the activities. Think one other thing that I see as a big need is both industry and the banking community need to increase their transparency. At LEAD we meet with our regulators at least quarterly so that they know exactly what we're doing and we answer questions in a collaborative manner because we do recognize especially for our region Specifically with respect to our banking as a service and our digital assets partnerships, this is something that we're the only bank doing.

Ca- uh can you can you explain a little bit about the pre-launch? Uh and what what might be happening there? Um yeah what's what's gonna happen if consumers uh h- how would they how would they potentially lose out if policymakers made it harder for bank and fintechs to work together?

Think with the fintech innovation that we're seeing, we're seeing things like credit that's opening the aperture of those that responsible credit can be extended to. And that's something that's incredibly important. I think Miss Parikh mentioned a credit card that was targeted to people with low credits at a zero percent APR that assists them to build. That is something that from the customer acquisition cost, a traditional bank would never be able to offer and needs the digital distribution and the innovation of their fintech partners to be able to do, in a cost-effective and a creative manner. And so, this is one example where you see customers being protected and actually great products and services that they desire being offered to them.

Thank you. I yield back.

Gentleman yields back. Representative Garcia of Texas is recognized for five minutes.

Thank you, Mister Chairman, and thank you to all the witnesses today who were h here with us. Um, there is no debating that as an industry the financial system should continue to innovate and leverage new technology. I chose to become a member of this subcommittee to make sure that as we discuss the adoption of financial technology, we keep underserved communities in mind. Too often, they're left behind. I represent a district that has been historically excluded from the traditional banking system. Unfortunately, we're not able to hear from the Democratic witness, Mrs. Foster, today. However, in her written testimony she wrote about the wide spectrum of bank fintech partnerships with the arrangements with the arrangements as one end, generally expanding access and arrangements at the other end, evading consumer protection rules. Ms. Baraj, given your experience of working in the bank fintech space, what have you seen more of, arrangements that increase access or arrangements that put consumers further at risk?

I would say across the board, the arrangements that I have worked on are not really falling into either one of those I think that the arrangements that I work on, either from the technology side or the bank side are very well risk-managed arrangements. Some of them do touch consumers and others are B to B products. For the ones that have addressed um more of the consumer side, uh I think that there has been uh a real understanding through some of the models and some of the credit decisioning that fintechs often use. that um better approaches and expands access to more consumers on the credit side.

Well you said in your testimony, however, that one of the challenges was managing risk.

Mm-hmm.

Yet you don't think it that alone would put it in one of the the the risk bucket?

I think managing risk is always an important thing for both the bank and the technology company to do. That doesn't change across any partnership. Um, but I do think that there is an important lesson to be taken from the twenty twenty two, twenty twenty three, set of his um uh of um sorry uh the twenty twenty two, twenty twenty three set of consent orders. If you look at those consent orders, um some of them touched on fair credit, some of them touched on BSA, AML, in fact mon- many of them did. Uh, so it it really depends on the type of partnership I think that we should learn from the lessons of that period and make sure we don't repeat those lessons. And part of that is going to involve a really um a really important focus on understanding and describing the products to consumers so that they understand

No, my concern uh is simply um if we're expanding and and embarking on new partnerships, we should do it for access and convenience for not only for the customers that you have, but but to reach the unbanked and the underbanked. Uh, Miss Foster, um, also qualified in her written testimony that the partnership should expand access that are safe and affordable. And I completely agree. Access is great, but the quality of access is even more important. Miss Thomas, you also mentioned the importance of safety a few times in your testimony. Can you discuss why simply increasing access is not enough? And we need to make sure that it's safe and affordable, especially as we keep in mind the communities that unbanked and underbanked. And I think, um, Mr. Kalila, you put in your testimony, you have the um, you noted that um, four point two percent in twenty twenty-three were unbanked and an additional fourteen point two percent were underbanked. So can we make sure that these communities are kept in mind? No, the question was for you, Miss uh Miss Thomas.

Oh, thank you.

No, I just referenced that she put the she's talked about it too, but she she put the the stats in in her written testimony.

Absolutely. Thank you very much. Um Absolutely, those communities should be kept in mind. I think the the balance is ensuring that there's safety in the way regulation is administered but also accessibility to those communities. And I think Um, as Miss Barrage uh mentioned, having, uh looking at the commiserate risk of um of the way you um of of the way those systems work is going to be quite important in ensuring that those commutators are also taken into account.

Well, it it it also in her testimony she noted that a recent study showed that sixty-eight percent of black Gen Z respondents aspire to own businesses, fifty-five percent of Hispanic Gen Cs share that aspiration. We certainly have to make sure that there is safe and affordable access for them so they can grow their wealth and that is a deep concern of mine, and thank you and I hear the gavel, so I need to wrap it up. Thank you, I yield back.

Gentleman yields back, uh the gentleman from Arkansas, the Chairman of the full committee, Chairman Hill is recognized for five minutes.

I appreciate the Chairman and thank our panel for being with us today, we're grateful to have your expertise. Uh as somebody who spent really the better part of their career in the intersection of finance and technology, I've seen firsthand throughout my experience that financial institutions' embrace of technology can really enhance consumer choice and improve Americans' financial lives, uh, in so many different ways, and also improve the operation of the institution from a compliance point of view, and documentation point of view. But we also have to recognize, and the purpose of this hearing today is to think about the regulatory framework. Is our bank our bank supervisors and examiners uh, you know, got the training that they need or they're properly accounting for these relationships. And in the last year, you know, we've seen some issues, uh, we've seen, uh, right over the last two years, I'd say the last twenty-four months we've seen some FinTech pow- uh, partnerships that, uh, didn't work out so well, where it wasn't clear in the due diligence responsibilities of the financial institution and of the FinTech partner that i- they were in - in sync. uh which is a fundamental business obligation, it wouldn't make any difference, you know, no matter what industry we're in. So, uh Miss Barrage, let me start with you, what updates, if any, to that regulatory framework such as the third-party risk management approach uh do you think needs to be amended to better foster these partnerships and make sure there's more certainty that they're being conducted in the right way?

Thank you, Chairman Hill, for the question. Um. First I think we need to think about what should be regulated and and what shouldn't. Maybe there's a role for standard setting that helps fill some of those gaps. And the reason I mention it at is because these partnerships are so varied, and they cover so many different products and so many different types of banks.

Yeah.

Um, so we should give the th we should give some thought to what we regulate and why. Uh, the guidance that has come out is purposely general. It doesn't apply to any one type of partnership. So where could we do better? I think across the board to your earlier point uh we would all here agree that examiner training is top of mind, feels like low hanging fruit, there's gotta be a way we can collaborate with the private sector to get better and smarter especially with these new types of technologies and new partnerships coming on.

Thanks. And and that's why Senator Rounds and I have approached you know uh the AI sandbox issue, and I don't want to AI as a catch-all, but I I believe strongly in the fintech sandbox issues too, I saw that in practice in Little Rock. when FIS had their sandbox as a core processor for all the community banks to come participate, and all the examiners from the regional offices of the OCC and the FDIC came and actively participated in that, and I think that kind of give and take is important. And I take for granted all safeguards in a sandbox should be met. So, uh, time frame, exact features, full approval. So, uh, I recognize that, but I am concerned that maybe we don't have people trained well enough to look at novel risks. And as a bank CEO, I also believe that it is the board of directors and the due diligence, the board of directors and the management team, in any partnership at the bank, any vendor of the bank. But what's a little different here is the operational integration of the fintech and the bank. That's a deeper, quote, vendor type relationship. It really is a partnership in their things can go wrong and when they go wrong go wrong badly as we saw uh summer before last. Um so um Miss Parikh, could you describe how Treasury Prime solutions offer due diligence and risk management tools for both banks and FED uh and Fintechs to use?

Yeah, absolutely. And it's interesting you mentioned FIS because we see ourselves very much akin to those core technology providers. And so the way we see our technology is we're actually enabling risk management by building it in directly into the tech so for example you look at um fintech onboarding our banks have tools to actually be able to identify from whether that's a funding perspective or whether it's a business continuity um really being able to isolate specific risks and then making sure that the fintechs they're partnering with have risk mitigation strategies in place so you could automate that through the tech itself. Um, and it's no different than how Baincourt technology companies, like the FISs and the FICerbs are doing it today.

I think it's important, I think uh, just having this template in place will help examine our training, but it will also help those boards ask the right questions on something as fundamental as a really significant business relationship. I thank the Chairman, I yield back.

Gentleman yields back, uh the gentleman from California, Mister Licato is recognized for five minutes.

Thank you, Mister Chair, and I wanna thank uh our other chair uh for his comments this morning. Uh, I recall uh there were some statements that Chairman Hill made uh about uh the importance of having hearings on the topic which we look forward to, on payments processing uh and uh the imperative for or at least an interest in nationwide payments licensing regime, which is certainly something I strongly support. uh, rather than being reliant on on state-by-state uh, regulation. Um, I wanted to ask a a question to Miss Thomas, because I know you have responsibility over regulatory compliance and risk mitigation for prominent um, you know, company, fintech. And partnership between fintechs and banks uh, certainly uh, they're subject to the hearing, they're helpful certainly, but there's also competition in some sub-markets. Uh, and when it comes to protecting consumers and reducing fees, that competition can be pretty important. Um, I I think you're aware that uh Congresswoman Kim and I have introduced a bipartisan bill the PACE Act to help reduce fees and accelerate payments processing for millions of Americans uh by offering fintechs an opportunity to get access uh to the federal payment rails ACH and others, uh with a federal license. Um, now I know that there is some disagreement within the financial services industry, uh so I hear, and I think federal government uh Governor Waller uh expressed uh he was hearing uh quite a bit uh from all sides. And and what I'm hearing certainly from the banking industry is concerns about whether or not these companies will be appropriately regulated with KYC and anti-monitoring anti anti-money laundering regulations. Uh, and I'm also hearing concerns about deposit flight, uh, that diverting deposits away from insured banks will reduce capital available for lending. Um, so, uh, Congressman Kim and I attempted to address these concerns in the text of the PACE Act

Mm.

by ensuring that fintechs that participate that get the federal license would have know your customer and anti-money laundering requirements, that would be federal, and, um, that there would be no ability for companies, uh, to engage in maturity transformation as taking deposits, engaging, and lending So f- funds with a one-to-one reserve requirement would still be sitting likely at a depository institution. Um, so I'd like to think that we might get the benefit of competition, that is, removing a cost a costly layer in this process that we know is imposing uh many, many millions of dollars in fees on Americans who need payments processing for everything from being able to make their down payment on a on a on a home to being able to provide remittances to families who critically need them at home. Um, so, is it accurate to say that an approach like this could actually enhance the partnership between banks and fintechs to allow each entity, and so each institution do what it does best, which is allow banks to focus on lending and deposits, allow fintechs to accelerate our financial system to the betterment of consumers who would pay much less.

Um, thank you for the question, Congressman. Um, the short answer would be yes. I think it, you know, any type of collaboration in that way and clear definition of roles and, um, and some clear guidelines on, uh, on how to ensure that the industry remains regulated and, and also to your point, to your earlier point, ensuring that consumers there is protection for consumers from a KYC, KY um, an AML pr- uh perspective is important. I think the policy objectives of ensuring that there is better access to payments for consumers and for small businesses is something that we would support. I'm happy to have a further conversation about that.

Thank you. I appreciate that, and I I hope that, uh, we'll obviously continue the conversation, not just with our fintech partners but also folks in the banking industry, because I think that a lot of work has been done to ensure that this license is one that does not uh intrude on uh or impose too much on on uh their key competency around uh deposits and lending. Um I uh I I realize that I'm uh just about out of time, so I'll yield at this time. Thank you.

Gentleman yields back. Uh the gentleman uh from Ohio, the chair of the subcommittee on national security, Mister Davidson is recognized for five minutes.

Uh thank you, Chairman. To our witnesses, thank you for being here today and your preparation, your written testimony. You're really Appreciate it in uh helping us clarify bank fintech partnerships here. And uh, you know, Mister, or sorry, Miss, Miss Parikh, I wanted to uh talk with you about the Bank Secrecy Act. And just looking at it, as we apply to bank fintech partnerships, you know, one of the most basic things is who's bound by their obligations under the Bank Secrecy Act is there any shift of responsibility and what kind of compliance things should we give attention to in an era where bank fintech Partnerships are incredibly important, and maybe particularly with respect to payments.

That's a great question. Thanks for the question. I think what's interesting in our model is these are still bank accounts. So the bank still has all of its regulatory obligations, particularly under the BSA AML regime. And so so that doesn't change. I think what we do see change, and where tech is actually enhancing our ability to detect risk, is we see the changing um anomalies in the risk patterns. So for example, in a traditional deposit account you see something like structuring, which is cash coming in and cash coming out. That's not necessarily a risk you see with digital payments or or payments in general, in in the digital world. It's more money moving quickly between payment rails like ACH. So we've actually been able to use with reg tech and specified tools to actually identify risks that are um endemic to electronic payments. And so it's evolving how we calibrate risk and the types of risks and the patterns and the anomalies that we're looking at.

Is there anything that changes there? Because traditionally with account-based relationships, kind of there's you know, daily or over the weekend netting versus, you know, going to blockchain-based real-time payments, uh, you have a clear chain of custody, um, but it's real-time and twenty-four seven, uh, in theory.

Sure.

So, uh, compliance and oversight for that, how does that change?

Yeah, I mean, the way we've dealt with it is we adhere to the bank's um you know, the banks a- already, for example, for ACH we look at the windows that already exist and then look at the type of risk, to see if you need any additional coverage, but it's no less than what already exists today. And then obviously with with digital channels, that has to be twenty-four seven with with risk.

Yeah, and just to confirm, under the law, all the obligations that a bank would have to c- uh, account-based customers, people who have uh, you know, accounts with financial institutions, uh whether they're using a a payment card or other things, regardless of how the bank does the back-end fintech partnership, they're still obligated to provide kind of the risk mitigation that you do, uh you know, say on a Visa, MasterCard kind of payment. Did, was there fraud? Was there payment? Can the account be done? Those are still the law, right?

Absolutely, those are those are absolutely still true and I think what changes is sometimes

Yep.

the banks can lean on the fintechs who often are the face of the applications, to get additional c- context. to determine, but the bank still has that responsibility. Um, and the, and the fintechs respect that, in our opinion.

Yeah, I'm intrigued by Mr. Liccardo's uh reference to the PACE Act. I haven't cosponsored it yet, but when you look at the the skinny master accounts, fintechs aren't really included in that. And, you know, Custodia Bank, for example, uh, complied with a letter of the law under the Fed's uh statement, and " if you do these things then shall issue" is the standard. Of course, they were not issued an account. Uh, a- and now, you know, they're leaning on language that basically says, well, you're not really one of us. Uh, so, yeah, how do you change the status quo there and facilitate what the consumer demand is in payments?

Yeah, and, and I think we've focused a lot of the accessibility question to consumer accessibility but I think it would be the um important part of that question, is bank accessibility. So you look at payment rails like RTP and, and FedNow, those are rails that are not often available to smaller community banks. And so, To your point, this issue of um creating better access and having innovative technology fill that gap, is I think going to make sure community banks have the same access as well.

Yeah, you think about uh, you know, payments for example, and you mentioned smaller community banks, a lot of them are state chartered banks, and we're dealing with a a a fix to DEMICA where Colorado and other states are trying to basically regulate uh banks as if you know, an Ohio bank's based in Colorado. Well, they're regulated in Ohio, a- and they're supposed to be federal preemption so you can bank customers, including people from Colorado, uh, but they wanna apply Colorado's laws to them. Uh, do we need a fix here in Congress to clarify what I think the plain meaning of words are but Colorado and other states have done? Would that help if we had a a law that clarified that?

I I think there's a need for a lot of clarity in general with the regulatory regime and how how it applies to evolving technologies.

Right, last thing, peer-to-peer payments, you know, digital cash, things like that, uh, if the custodian is the individual, uh, How's that different than cash? Do the banks have any other obligation in the sense that same kind of things that they would have in a cash payment if they moved it to a self-hosted wallet and they had custody of their own resources? Uh, you can respond in writing or any of our witnesses to that kind of open-ended question. Uh, thanks, Chairman, for this hearing, and I yield back.

The gentleman yields back. Uh, the representative of Florida. Mister Herodopolis is recognized for five minutes.

Thank you, Mr. Chairman. I've appreciate the opportunity, I appreciate the candor of the witnesses as well. Uh, Miss Thomas, this ques first question's for you, if you don't mind. In in general, one of the goals I think we should always have is to try to take the mystery or or fear out of handling new technology. And and with that, uh especially the advancements we're trying to make to make it more accessible to everyone, and that it'll fear that something nefarious might happen. So, uh getting into the regulatory environment, what gray areas are making it more difficult for fintech companies to serve, not only businesses, but most importantly the consumers?

Thank you for the question, Congressman. It's a good question. Um, I think I would, I would look at it more from the perspective of education, rather than grey areas. I think what, what we find is that better alignment, clarity and guidance, um, will, will better serve, um, the participants in the industry. I think having regulators that, um, that have that shared understanding and, uh, knowledge of, uh, the constraints that industry faces, and much like um regulators understanding what industry what what constraints industry face for industry to also understand the challenges that regulators uh um are facing into and their drivers I think coming together for a for an open dialogue is what will help um will help that greater clarity alignment and also um provide um a a provide an opportunity um for regulation to be uh uh proportionate um and and perhaps dispense with some of those

um gray areas that might exist.

Okay, thank you, Miss Thomas. And I'm gonna ask for um Miss uh Kalili and also uh Parikh this question if I could. Uh first Miss uh Kalili, uh can you give us kind of some real world examples of how fintech uh partnerships are helping some small businesses access credit and handle money management tools more effectively?

Absolutely, and thank you so much for the question. I think one of the key principles is also the speed with which money moves, the velocity. As a small business it's oft n often using very slim margins, the need for cash in a very fast manner is very much power paramount to them right now. So the introduction of FedNow, RTP, and even stable coins as a payment rail allow small businesses and consumers who perhaps don't generally have access to these rails to access them in a compliant manner when the bank is offering those services in partnership with one of their fintechs. Think we've also talked a lot about access to credit and also choice in credit. And this is where we see the non-traditional underwriting metrics that are often utilized in these sort of fintech bank partnership relationships really accrete to a broader credit box that is still safe and sound by utilizing non-traditional met metrics that really allow you to see the full health and wellness of a business rather than in real time versus as a trailing last month's bank statement sort of thing. which I think then allows for more products and services to be offered to the people that are most in need of them.

Uh, thank you, Miss Parikh, as well.

I referenced a fintech we work with, with a a partner bank that um offers a zero percent APR credit card, and and this is really a a segment of the population that has not traditionally had access to credit. And so we've seen that is one of our fastest growing fintech, and um with the bank they're gl- growing responsibly. We've also seen examples kind of the B to B space where we have a bank partner working with a fintech, um, trying to innovate on treasury management services. So oftentimes, if you're a smaller bank, you don't necessarily have access to the same tools. And so we've seen innovation in kind of this space of um neo-banking and and treasury management. And then also we have a a fintech that's offering revolutionize the ventur- venture capital experience, so allowing access for kind of everyday Americans to participate in VC funding, um, through the way that the bank fintech, um, innovation has has grown.

Thank you. And, Mr. Chairman, I just uh, I appreciate you ha- holding this hearing today. I think it's so vital that the access to markets are so important in taking away some of the mystery from this new emerging industry. And I I'm I'm excited because again it's prov- providing the opportunity for everyone to access capital when in years past it was just such a barrier, they could never get gain access to that capital. And that's the beauty of technology, is eventually not only improving the speed as you just brought up, uh but also the they're eventually lowering the cost because this will build a more competitive marketplace. And and the best way to take care of consumers is knowing knowing that whoever they're doing business with if they don't provide the necessary services a bunch of competitors who will not take up and and meet the needs of the consumer and so thanks for holding this meeting Mister Chairman and uh this is very much necessary information as we tackle this new technology.

Gentleman yields back.

And you're back.

The gentleman from South Carolina, Representative Timmins, is recognized for five minutes.

Thank you, Mr. Chairman, and thank you to the witnesses for joining us today. As this subcommittee continues to examine how emerging technologies are becoming more integrated into everyday finance innovative partnerships between banks and fintech firms are helping make financial services more efficient and more accessible t for consumers and small businesses. Uh, these partnerships are modernizing payments, expanding access to financial tools, and helping community banks compete in a rapidly changing economy. They also give consumers faster and more convenient ways to manage their finances, in an increasingly digital world. At the same time, banks must continue to uphold strong standards for consumer protection, data security, and financial integrity. This hearing provides an important opportunity to discuss how Congress and regulators can support responsible innovation while maintaining trust in our financial system. Uh, Miss Barash, uh, you have served both the FDIC and in the private sector advising institutions navigating the current supervisory environment. Uh from your perspective, how has the regulatory approach to bank fintech partnerships evolved across recent administrations? And what impact has that had on innovation and on supervisory expectations for banks seeking to partner with fintech firms?

Thank you for the question. I would say at a very high level, uh just over the past five years we've seen tremendous growth. in some of these partnerships going back to twenty twenty one, twenty twenty two, uh we saw in many ways a reckoning, uh sort of that middle period where there was a lot more regulatory scrutiny, and frankly there were banks and technology companies that were doing this irresponsibly. Um, i- you know we've seen somewhat of a maturation in this process, uh I think that the supervisory issues are probably, are, are very much still there, they might not be as public. Um, but we have more sophisticated banks, and we have more sophisticated technology companies continuing to engage. In fact, we have some of these technology companies, uh, seeking to become banks themselves. That's how big they've scaled and how much they've learned from their sponsored bank experiences. So it's been a really interesting trajectory. Um, in terms of where we are in the future, uh, appreciate your comments. I think we need to double down on engagement and education with private sector. And we need to let banks, um, in a safe way, describe to their fintech partnerships, or to their fintech partners, where there are issues and how we can remediate those to promote safety and soundness. So that's where I hope our our feature's heading.

Thank you for that. Uh, during the Biden administration, many institutions argued that regulators increasingly relied on informal pressure and enforcement actions rather than clear guidance. How did that uncertainty affect the bank's willingness to innovate or work with newer technology providers?

Well I think part of the issue just generally with uh public consent orders is as you're trying to read them and define what the actual issues were it it can be very difficult. And so there definitely was a view that more specificity would be helpful. At the same time we have confidential supervisory information to safeguard. So it was difficult I think to really get at what those issues were and kind of reverse engineer how we might do things better. Um you know I am I am hopeful that we have, as an industry, learned the lessons from the not too distant past. Um, and I think that additional guidance to banks and and technology companies, uh, as well as upskilling on the examination side will hopefully support that.

Thank you for that. Uh, Miss Clealy, you mentioned that digital partnerships can reduce customer acquisition costs from one hundred to two hundred dollars down to as little as five to thirty-five dollars. Help me understand what that means in practice for consumers, especially individuals in small businesses and communities that large banks have often chosen not to serve and what kinds of products and services are firms like Lead providing today that were not widely available five years ago?

Thank you so much for the question. I think that right now what we're seeing is that these communities, or banking deserts as I would call them, are being served because these products can now be sourced online in a digital manner. That reduces the acquisition cost materially, which then allows us to still open the account for a a gig economy worker, or somebody who didn't have a minimum that they could hold as a balance, such that a larger institution may not be willing to take that on, because it isn't an economically viable solution. These fintech bank partnerships have worked in tandem to create the products and services as a suite to not only increase the access to the product, but also the choice that small businesses and consumers have. Some of the things that we've seen are access to faster payment rails, being able to get your money into your bank account sooner, being able to access credit in a new way, being able to manage your treasury function in a more technologically accretive manner and manage your money so that you're earning maximum yield on it. These are all things that these small businesses and consumers that were traditionally left out never had access to. And these partnerships now allow them to be reached.

Thank you for that. I'm out of time. I I yield back.

The gentleman yields back. The chair recognizes the gentleman from Montana, Representative Downing, for five minutes.

Thank you, Mister Chairman, and thank you to the witnesses for being here. It's been a very interesting hearing. And I'm happy we're having this this hearing. Uh, you know, Bank Fintech partnerships have the ability to make it easier for constituents in very rural areas to access banking services. And uh, Montana's second district is very rural. Uh, we have more cows than people. Um, it's incumbent upon Congress and our regulators to ensure our laws foster modernization and innovation. And I'm gonna start uh with uh Ms. Khalili. So I represent Montana's second congressional district, which is one of the most rural in the country, and several of my counties have fewer than five hundred people, rural rural. So how are you seeing these bank fintech partnerships expand banking access to rural communities?

Thank you so much for the question. Again, these are areas where there isn't a local community bank to serve them. Where there is a community bank, such as where we are in Kansas City, we're servicing the local agricultural community, small businesses. But with the digital partnerships, we now have an on-line solution, so we can serve customers not just in the Kansas City metro area, but throughout the country. These products and services can be accessed broadly and efficiently. And I think that's a lot of where innovation drives from. I like to use the example of my father. Um, before the pandemic, I think remote deposit capture and peer-to-peer payments were things he would have never thought of using, despite the fact I've spent twenty years in the payments industry. These are things that now have become mainstream, and so folks in your districts and your community can then access them online and have an equal playing field with those in New York City or somewhere else that have twelve banks on their street to serve them.

Right. Thank you. Uh, I'm gonna turn to the role of states. Um, you know, as a former regulator we dealt with a lot of, you know, uh regulatory sandboxes, a lot of uh fintech and sure tech issues. And uh it was interesting as a regulator because I'd have a lot of people come into my office with great ideas that came from the innovation side, but had never built anything in a regulated industry. And these sandboxes to some extent gave them that ability to do that. And and obviously the role of the state regulators is is important. So I I'm gonna move to uh Ms. Barrage. Uh, can you discuss the roles that state regulators and state chartered institutions play in fostering responsible innovation through bank fintech partnerships?

Thank you for the question. I mean, I think both states and state chartered banks play a very critical role. Going back to the DITMCA discussion, I think there is a really important issue that's currently being litigated, um, that would involve potentially a lot of these state chartered banks wanting to become nationally chartered banks because Um, some states are taking the view that loans made in their state are where their borrowers are located and as we just heard that's that's really not how loans are made, especially online. So if we could get smarter on that and we can um avoid a situation

Right.

where state charter banks no longer want to lend into some certain states,

Mm-hmm.

um I think that would be really important again in trying to serve the purposes of DIMICA and to preserve our dual banking system I'm concerned But if we don't get that right, we'll see a lot fewer state charter banks.

Right. Thank you. Uh, I'm gonna move back to Ms. Khalili. One complaint that I hear f- frequently from community banks in Montana is how burdensome compliance with banks with the Bank Secrecy Act and anti-money laundering laws are and these laws play a role in combating illicit finance, but have not been substantially updated since first passed in Congress in nineteen seventy. So how can bank partnerships with FinTech

Well, first and foremost, let me state that it's always the bank's obligation to comply with, and no matter how the bank fintech partnership is structured, that should never be changing. That being said, I think that these partnerships also allow banks of all sizes to utilize a more technology-driven approach to compliance. Money is moving at a much faster velocity, and the way that the Bank Secrecy Act was initially drafted hasn't kept pace with the changes in technology. But we as banks that wanna be good partners to law enforcement, must keep pace with the technology as it evolves. A lot of our fintech partners have real-time data being fed into lead where we can actually see anomalous patterns in real time, not only stop fraudulent actors, but also immediately report to law enforcement to stop the bad actors. I think we are very much in favor of modernization, but right now I think where we are focused is how technology can unblock compliance and really turn compliance with the Bank Secrecy Act into a feature, not a bug.

Right. In my last few seconds, uh, in twenty twenty-three the OCC, FDIC, Federal Reserve issued joint guidance tit- uh, titled third-party relationships risk management, which created the new challenges regarding BSA and AML compliance. Can you very briefly in our last few seconds, can you discuss what those challenges are?

Again, I think that

We we may ask the witness to to provide that. answer for the record.

Thank you, s- uh, Mister Chair, I yield.

The gentleman yields back. Uh, I'd like to thank all of our witnesses for their testimony today. Um, without objection, all members will have five legislative days to submit additional written questions uh for the witnesses, to the chair. The questions will be forwarded to the witnesses for their response. Witnesses will please respond a little later than June twenty-four. Uh, we appreciate everyone's testimony today, productive dialogue. Uh, the hearing is adjourned.