Would you share the complete record of your personal banking transactions and purchases if this turned out to be the best way to get a new loan?
Utah is home to a host of emerging financial tech or fintech startups that are creating a host of new options for consumer and business financial services that were once the exclusive purview of the traditional banking system.
But the same data access that has helped boost the fintech industry and led to new options for, say, consumers who need to borrow money but don’t have a credit history. or small business owners who don’t meet the usual banking requirements, has a side too.
These questions, and many more, were explored at the University of Utah’s inaugural Fintech Summit on Friday.
Utah Senator Mitt Romney joined Taylor Randall, the new President of the United States and former Dean of the David Eccles School of Business in the United States, for a conversation to open the hybrid event live /diffusion.
Romney spent years in the private equity world before leaving in 1999 to oversee the 2002 Winter Olympics in Salt Lake City. He noted how different today’s financial industry is and that high-risk companies, like tech startups, that once struggled to find access to capital were playing by a new set of rules.
“The money for early stage, high risk businesses was not available,” Romney said. “Now the funds available far outweigh the opportunities to apply these funds in a meaningful way.”
And new “fintechs” are finding ways to connect their clients to these funding sources through avenues that traditional institutions simply couldn’t or wouldn’t want to follow.
A little-known principle of the ten-year-old Dodd Frank Wall Street Reform and Consumer Protection Act, a massive piece of legislation developed to help address vulnerabilities exposed by the Great Recession, gave American consumers the right to access their financial and banking information in a machine-readable format.
Consumers can now grant access to their personal account to potential “fintech” lenders, who typically use an algorithmic approach to assess history of deposits, spending, savings, and more. of the applicant to determine the creditworthiness of the loan. Everything happens through a smartphone app and can be accomplished in a matter of minutes.
Supporters say it’s a boon for those who don’t have access to traditional banking institutions, are members of marginalized communities, or simply don’t have a sufficient credit history to qualify under traditional banking requirements. And it’s an approach that works like a meritocracy in helping to elevate inclusion and reduce the racial / ethnic and socio-economic biases that have been exposed in some traditional banking practices.
But University of Utah law professor Chris Peterson, who attended a summit roundtable on FinTech regulatory issues, said all data can also be used as a weapon against people. even who are looking for alternatives to traditional banks because of their situation.
“I’m really concerned that alternative data is being used not only to determine who has access to credit, but how to market to people… when they’re most vulnerable,” Peterson said. “Some of these loans I’m really concerned about that aren’t that good for people, and you have some sort of alternative data that determines when they’re most vulnerable, when they’re most likely to make a bad decision. . “
Peterson said a bad fintech player could, through authorized access to a client’s account data, determine when that person is typically in the most financial trouble, such as right before their regular paycheck, and target them. with an online ad or e-mail offer that may come with an exorbitant interest rate or imbalanced repayment terms.
Utah Bankers Association President Howard Headlee noted that federal lawmakers and regulators have been working on ways to eradicate prejudice and inequalities in banking practices through efforts such as the Credit Act for equal opportunities and the law on community reinvestment. The challenge now is to apply these regulatory guidelines to the world of big data, machine learning and fintech artificial intelligence.
Even as regulators scramble to catch up with innovations emerging from the FinTech sector, these startups are proliferating and, in many ways, creating greater access to credit and capital for individuals and businesses and, by default, pushing forward traditional financial institutions to do their own innovation.
A panel of fintech industry representatives at the top included Kristy Kim, co-founder and CEO of Tomo Credit.
Kim said she was inspired to start her own business when she ran into problems as a young professional who, although she worked as an investment banker in San Francisco, was unable to get a car loan because of a limited credit history.
“I had bank accounts and income. However, I didn’t have a credit score, ”Kim said.
Tomo, Kim said, uses access to applicant account data to determine creditworthiness and doesn’t bother pulling FICO credit scores. And, she says, applicants can be approved for credit limits of up to $ 10,000 in a process that typically takes about two minutes.
Square is a fintech company 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 payment systems, market products and services, and manage employee payroll. It also provides financial services to its participating businesses, including issuing business loans through a financial services subsidiary.
Square Financial Services CEO Lou Goodwin said his company’s average loan size is around $ 6,000 to $ 7,000, and the funds are typically used by small business owners to solve problems. immediate and real, such as repairing or updating equipment or resolving short-term funding 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 managed by scientists and engineers and is independent of the underlying company or person applying for the loan. .
He noted that this is also a method which, by structure, leads to more equitable results for its clients.
“It’s all about economic empowerment,” Goodwin said. “Bringing underserved, neglected or just plain unprofitable people into the banking world” for the traditional banking sector.
And to put the influence of emerging fintechs into perspective, the Economic Times recently reported that Square was worth $ 113 billion, more than Europe’s most valuable bank, HSBC, currently valued at around $ 105 billion.