[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL INSTITUTION-FINTECH
PARTNERSHIPS: LEVERAGING THIRD-PARTY
RELATIONSHIPS TO INCREASE ACCESS
TO FINANCIAL SERVICES
=======================================================================
FIELD HEARING
before the
SUBCOMMITTEE ON FINANCIAL
INSTITUTIONS AND MONETARY POLICY
of the
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
JULY 12, 2024
__________
Serial No. 118-103
Printed for the use of the Committee on Financial Services
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
56-908 PDF WASHINGTON : 2026
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRENCH HILL, Arkansas, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
TOM EMMER, Minnesota EMANUEL CLEAVER, Missouri
BARRY LOUDERMILK, Georgia JAMES A. HIMES, Connecticut
ALEXANDER X. MOONEY, West Virginia BILL FOSTER, Illinois
WARREN DAVIDSON, Ohio JOYCE BEATTY, Ohio
JOHN W. ROSE, Tennessee JUAN VARGAS, California
BRYAN STEIL, Wisconsin JOSH GOTTHEIMER, New Jersey
WILLIAM R. TIMMONS, IV, South VICENTE GONZALEZ, Texas
Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DANIEL MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW R. GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MICHAEL LAWLER, New York
ZACHARY NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDREW OGLES, Tennessee
Matthew Hoffmann, Staff Director
------
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND MONETARY POLICY
ANDY BARR, Kentucky, Chairman
BARRY LOUDERMILK, Georgia, Vice BILL FOSTER, Illinois, Ranking
Chairman Member
BILL POSEY, Florida AYANNA PRESSLEY, Massachusetts,
BLAINE LUETKEMEYER, Missouri Vice Ranking Member
ROGER WILLIAMS, Texas NYDIA M. VELAZQUEZ, New York
JOHN W. ROSE, Tennessee BRAD SHERMAN, California,
WILLIAM R. TIMMONS, IV, South GREGORY W. MEEKS, New York
Carolina DAVID SCOTT, Georgia
RALPH NORMAN, South Carolina AL GREEN, Texas
SCOTT FITZGERALD, Wisconsin JOYCE BEATTY, Ohio
YOUNG KIM, California JUAN VARGAS, California
BYRON DONALDS, Florida SEAN CASTEN, Illinois
MONICA DE LA CRUZ, Texas
ANDREW OGLES, Tennessee
C O N T E N T S
----------
Friday, July 12, 2024
OPENING STATEMENTS
Page
Hon. Andy Barr, Chairman of the Subcommittee on Financial
Institutions and Monetary Policy, a U.S. Representative from
Kentucky....................................................... 1
WITNESSES
Mr. Kirk Chartier, Chief Strategy Officer, Enova................. 4
Prepared Statement........................................... 6
Mr. Steve Trager, Executive Chair, Republic Bank and Trust
Company........................................................ 13
Prepared Statement........................................... 15
Mr. Mike de Vere, Chief Executive Officer, Zest AI............... 20
Prepared Statement........................................... 22
Ms. Karen Harbin, President and Chief Executive Officer,
Commonwealth Credit Union...................................... 32
Prepared Statement........................................... 34
Ms. Amy Roberti, Global Head of Public Policy, Stripe............ 39
Prepared Statement........................................... 41
FINANCIAL INSTITUTION-FINTECH
PARTNERSHIPS: LEVERAGING THIRD-PARTY
RELATIONSHIPS TO INCREASE ACCESS
TO FINANCIAL SERVICES
----------
Friday, July 12, 2024
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Monetary Policy,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., at
401 Cross Street, Lexington, Kentucky, Hon. Andy Barr, Chairman
of the Subcommittee, presiding.
Present: Representatives Barr, Rose, and Fitzgerald.
Also present: Representatives Sessions and Flood.
Chairman Barr. The committee will come to order. Without
objection, the chair is authorized to declare a recess of the
committee at any time.
This hearing is titled, ``Financial Institution-Fintech
Partnerships: Leveraging Third-Party Relationships to Increase
Access to Financial Services.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the chair for
inclusion in the record.
I now recognize myself to give an opening statement.
OPENING STATEMENT OF HON. ANDY BARR, CHAIRMAN OF THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND MONETARY POLICY, A
U.S. REPRESENTATIVE FROM KENTUCKY
Welcome. Welcome to all to Kentucky's Sixth Congressional
District. I want to thank all of our witnesses here today, and
my colleagues who were able to make today's hearing in central
Kentucky, the great Commonwealth of Kentucky.
I want to thank in particular my colleagues Congressman
Sessions from Texas, Congressman Rose from Tennessee,
Congressman Fitzgerald from Wisconsin, and Congressman Flood
from Nebraska, all great patriots and friends and colleagues.
It is great to see all of you as well, numerous friends and
neighbors, especially the financial services industry right
here in the Commonwealth of Kentucky. I see many friends from
the banking and the credit union industry here in Kentucky.
Thank you. Welcome to all of you for participating today.
I want to especially thank at the outset Deirdre Lyons and
Mark Lyons. Mark had to be in Brazil today for the company but
to Alltech and all of the leadership at Alltech. Brad, thank
you for helping to organize as well, Brad Harris, the general
counsel.
Deirdre Lyons, I just want to say at the outset, this is
her beautiful facility, part of the Alltech family of
businesses, the Lexington Distilling and Brewing Company. For
those of you who do not know, it is altogether appropriate that
this is the venue, Alltech is the venue for a hearing where we
are exploring cutting edge innovation, because there is no
company in Kentucky, my congressional district, I would argue
in the country and in the world that is as innovative as
Alltech has been over these last 40 years.
Dr. Pearse Lyons and his wife Deirdre immigrated to the
United States from Ireland with an entrepreneurial spirit, and
they are literally the epitome of the American dream, having
built this animal nutrition, brewery, distilling business
empire. We are just so grateful, Deirdre, for your hospitality
and for welcoming us here in this wonderful facility. We are
very proud of our bourbon heritage here in central Kentucky,
and so thank you for all you do for our community.
In this subcommittee, I have been honored to have great
colleagues on both sides of the aisle, including Ranking Member
Bill Foster from Illinois, who unfortunately cannot be with us
today, but sends his regards. This journey that we are on in
financial inclusion has been a bipartisan enterprise and we
appreciate Dr. Foster for his collaboration.
On both sides of the aisle, there has been keen interest in
fostering the prosperity of community banks and credit unions
and the businesses that they serve. It is fair to say that
there is joint concern that our banking system has been losing
some of its dynamism and breadth. We do not want to end up with
a barbell banking system, with a lot of too-big-to-fail banks,
big Wall Street banks, money center banks on one end, and a
scattering of small institutions on the other, and not much in
between.
The strength of our financial system in the United States
is its diversity, and that is what we are here to talk about
today. This hearing is about bank and community financial
institutions, credit unions' partnerships with financial
organizations that provide so much innovation and community
banks and credit unions partnering with these organizations
that engage in business activities with them often are referred
to as third-party vendors.
Such partnerships which increasingly involve vendors that
employ innovative technologies can allow more efficient
provision of financial services to consumers and businesses of
all sizes. With adherence to prudent risk management of these
relationships, financial institutions can better serve
communities, including facilitating expanded opportunities and
inclusion in the form of access to financial services to those
who may be less likely to access financial services through
traditional bank products.
Efficiencies include servicing clients in a timelier
manner, improved compliance with legal and regulatory
requirements, better management of operational risk, lower cost
transactions, reduced friction in payments, and enhanced data
protection.
As innovation in the provision of financial services
accelerates, it remains important that a proper balance be
struck between fostering innovation and attention to due
diligence to ensure safety, soundness, stability, and consumer
protection. At the same time, Federal and State regulators of
banks and credit unions must not reflexively and unnecessarily
stifle innovation, especially if motivated by politicized
interests. Unfortunately, that has been what is occurring far
too often recently.
For example, in June 2023, the Office of the Comptroller of
the Currency, the Federal Deposit Insurance Corporation, and
the Federal Reserve issued final joint guidance establishing
principles for all banks under Federal supervision to consider
when entering into third-party relationships. One Federal
Reserve Governor argued that the guidance is yet another part
of a concerning pattern by regulators of deviating from a risk-
based and tailored approach to supervision and regulation of
banks.
Furthermore, an Federal Deposit Insurance Corporation
(FDIC) director argued that elements of the guidance will
create more ambiguity for banks rather than more clarity, which
guidance should be intended to provide. Opaque guidance and
rules create more ambiguity for banks. Ambiguity equates to
higher prices and less options for consumers. These outcomes
are not beneficial for our financial system or for American
households and businesses.
Following the release of the Joint Agency Guidance in 2023,
community banks expressed concerns that it does not provide
bright line assurances that certain activity would or would not
be permitted and was not prescriptive enough to explicitly
prohibit certain activity. The guidance was too vague to
provide an executable roadmap discerning what activities
regulators would find acceptable or not.
Such opacity leads to unnecessary uncertainty, which can
impede adoption of some services and innovation, and could lead
to regulation by enforcement. Unprincipled regulatory agencies
can and unfortunately do in some instances use regulation by
enforcement to execute agendas outside of their mandates,
therefore evading the intent of Congress. Unelected bureaucrats
need to provide clear rules and be responsive to the actions
they take that impact the banking system.
I look forward to hearing about the experiences of today's
witnesses, along with your views and suggestions for improving
the financial landscape throughout the Commonwealth of Kentucky
and the United States.
These field hearings, I will say in conclusion, these field
hearings are not common, but I think are extremely useful,
where Congress actually comes to you, the American people, in
the heartland of our country to get a real world view of what
is possible in the area of financial innovation. I think that
is very refreshing, instead of just relying on experts inside
the Beltway.
With that we welcome today the testimony of: Kirk Chartier.
Mr. Chartier is the chief strategy officer of Enova; Mike de
Vere, Mr. de Vere is the chief executive officer of Zest AI;
Karen Harbin, Ms. Harbin is president and chief executive
officer of Commonwealth Credit Union right here in Kentucky;
Amy Roberti, Ms. Roberti is global head of public policy for
Stripe and Steve Trager and; Steve Trager is the executive
chair of Republic Bank and Trust Company also located here in
the Commonwealth.
We thank each of you for taking time to be here. Each of
you will be recognized for 5 minutes to give an oral
presentation of your testimony. Without objection, each of your
written statements will be made part of the record.
We will go in order down the line. We will start with Mr.
Chartier. You are now recognized for 5 minutes to give your
oral remarks.
STATEMENT OF KIRK CHARTIER, CHIEF STRATEGY OFFICER, ENOVA
Mr. Chartier. Thank you very much. Good afternoon, Chairman
Barr, and members of the Subcommittee on Financial Institutions
and Monetary Policy. My name is Kirk Chartier. I serve as the
chief strategy officer at Enova International, headquartered in
Chicago, Illinois. I have worked in financial services and
technology for over 30 years, including Charles Schwab, Dell
Technologies, and Safeco Insurance.
Enova is a leading financial services company utilizing
machine learning and world-class analytics to offer loan and
line of credit products for consumers and small businesses in
the U.S., as well as offering services and technologies to
banks to help them serve those same customers. I am grateful
for the opportunity to discuss the role Enova plays, and its
more than 1,650 employees in increasing financial inclusion in
America.
Since our founding 20 years ago, Enova has been committed
to helping hardworking people gain access to fast, trustworthy
credit to meet their financial responsibilities. To date, we
have served over 10 million customers, originated or serviced
$55 billion in loans, and have been recognized as a best place
to work in IT for over a dozen years.
Enova is a $4.6 billion balance sheet company operating
some of the best known brands in consumer and small business
lending including NetCredit and OnDeck. My company is both a
direct lender and a service provider to community banks who
seek to expand the population they can offer loans to.
Smaller banks leverage the investments companies like Enova
makes in their marketing, data and analytics, servicing,
compliance, and capital markets capabilities so that they can
compete with those large money center banks.
The reality today for Americans is stark. Many are
struggling with financial instability. A recent Federal Reserve
report highlighted that nearly 40 percent of Americans could
not meet an emergency expense of $400 from their savings. For
people with credit scores below 680, it is even worse. Fifty-
two percent of them report being turned down for loans in 2023.
They do not have the savings and they cannot get the loans.
These challenges are not unique to consumers. Another
Federal Reserve study showed that 52 percent of medium to high-
risk small businesses were also turned down by banks for loans
last year.
Enova serves this critical need by offering products
designed to provide pathways to better financial health for
consumers and small businesses that often do not qualify for
traditional bank products. By serving such underserved groups,
we believe we are contributing significantly to financial
inclusion, providing many with the means to navigate unexpected
financial challenges or to grow their businesses.
Additionally, using an online model means most people can
get convenient access to credit through their electronic
devices when and where they choose. Enova can do this because
it has developed proprietary technologies that harness the
power of data analytics and supervised machine learning. These
technologies not only ensure efficient and fair credit
assessment, but they also safeguard consumer data through
rigorous security measures.
However, the landscape of digital finance is evolving
rapidly and our ability to continue innovating is challenged by
a complex patchwork of State regulations. These laws have not
kept pace with technological advancements in data and
analytics, the essential tools that enable us to customize our
products.
Activists are driving changes in State laws regarding
lending practices and banking that can pose real challenges.
There are novel theories out there of true lender tests
specifically targeted to banks working with third-party service
providers, and some are advocating for states to opt out of
national banking laws like the Depository Institutions
Deregulation Monetary Control Act of 1980, called DIDMCA by
most. That opt out would undermine our dual banking system.
Ultimately, this all leads to less competition and fewer
options for those seeking credit.
We believe that Congress can play a significant role in
bringing more clarity and certainty to this market, which in
turn would result in more innovations and a greater number of
banks being able to serve more customers. While prudential
regulators have a valid, well-made rule in place, there is a
need for a uniform true lender rule to go with it, one like the
Office of the Comptroller of the Currency's (OCC's) 2020 rule
that was straightforward and clear for the bank, regulator, and
borrower. We would also suggest clarifying DIDMCA opt out
authority and strengthening Congress's oversight authority on
Federal regulators.
Recent Supreme Court rulings have stated that the executive
branch administrative agencies must have clear directives from
Congress to function properly. These actions would increase the
number of banks lending to people and businesses that need it
most by reducing uncertainty about the risks and liabilities of
those programs.
Thank you for the opportunity to share our perspective
today. I look forward to addressing any questions you have.
[The prepared statement of Mr. Chartier follows:]
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Chairman Barr. Thank you.
Now, Steve Trager, you are recognized for 5 minutes.
STATEMENT OF STEVE TRAGER, EXECUTIVE CHAIR, REPUBLIC BANK AND
TRUST COMPANY
Mr. Trager. Good morning. As mentioned, I am Steve Trager,
executive chair of Republic Bank. Good morning and welcome to
Congressman Barr and our distinguished congressional panel, as
well as all the other folks of interest out there.
I wanted to spend a little time and tell you about Republic
Bank and what we are about and then some of the products that
we offer and some of the divisions that we have in order to
better serve our communities in a broad community.
Republic Bank, as mentioned, is a Kentucky-based financial
institution. We are one of the 5 percent largest banks in the
country, at about $6-and-a-half billion in assets, which are
spread and served among our 47 locations in five states,
Kentucky, Indiana, Ohio, Florida, and Tennessee. This branch
network is a very traditional branch network and we offer
traditional bank products for the communities we serve,
mortgage loans, commercial loans, lines of credit, various
deposit products again throughout the communities we serve. We
serve about 120,000 customers throughout those communities.
In addition to that, kind of our icing on the cake in our
desire to be more than just a traditional community bank are
nontraditional bank products that we offer through a division
that we label as Republic Processing Group. Republic Processing
Group, I will talk a bit about that in a minute, but basically
that is composed of tax refund solutions, Republic Processing
Systems, and also Republic Credit Solutions.
Before I get into that, let me proudly talk a little bit
more about what we do at Republic Bank. I am proud to say that
we have been recognized as one of the top performing banks in
the country and like most banks in our industry, we are
extraordinarily transparent, we are most accountable to
regulators, our customers, shareholders, and the communities we
serve. I know of no other industry that is more accountable and
transparent in that regard.
I am also proud to say that we have received high marks for
customer service, philanthropy, and community engagement,
including most recently our recognition in 2024 as a best
places to work in Kentucky, best partners in philanthropy
honoree, and also our recent outstanding Community Reinvestment
Act rating.
In addition, as far as philanthropy is concerned, we are
proud to have our name and be the primary funder of the
Republic Bank Foundation Young Men's Christian Association
(YMCA), which is a new YMCA in an underserved part of our
community in Louisville. Also we were the lead bank for the
Louisville Urban League Sports and Learning Center. Then we
have a $6 million commitment in the form of our community loan
fund, which we make funds available to businesses in
underserved parts of the community. In addition, we have an
investment of more than 73 million in low income housing
projects in the communities we serve over the last 2 years.
Now, I mentioned Republic Processing Group, which is
another component of Republic Bank that is a bit nontraditional
and enables us to serve several million consumers throughout
the country with the aid of our partnerships such as Enova and
other financial technology (fintech) partnerships.
Predominantly, again, I mentioned TRS, which is tax. We are in
the tax business. We process over two and a half million tax
refunds electronically for consumers around the country and
Republic Payment Solutions, we have about a million prepaid
cards outstanding, where we serve folks throughout our--
throughout the country.
I guess my discussion focus today is Republic Credit
Solutions that enables us to bring small dollar credit products
to an underserved part of our country through partnerships with
two fintechs, one of which is Enova here today.
These partnerships we take very seriously. You really want
banks to be engaged in these partnerships because I would like
to think we bring an accountability, a transparency, a risk
component because we are at risk for these partnerships. The
fact of the matter is, through our legacy systems, we would be
unable to serve this large community without the help of folks
like Enova.
Again, you want banks in this--engaged in this and you want
to make sure that there is not such an excessive regulatory
deterrence to engagement to make sure that we are held
accountable but appropriately accountable for protecting
consumers, holding our partners accountable, et cetera, et
cetera. I think we also serve as a form of oversight and
accountability ourselves because that is a big component of the
life cycle that we have with these folks.
I can tell you there are some very responsible fintechs out
there. I am proud to say that the two we work with, Enova being
one, fall into that category but not every fintech is like that
and of every ten that approach us, we turn down nine of them.
So we have that level of accountability. If I had to categorize
my ask, it would be let us not totally discourage banks from
doing these things and partnering, because again we bring a
good accountability to it. Thank you.
[The prepared statement of Mr. Trager follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Great. Thank you very much, and I am being
light with the gavel. We have some great testimony, so I am
letting folks go a little bit over.
Mike de Vere with Zest AI. I met Mike, a California fintech
who educated me right up front he works with Kentucky credit
unions. So, Mike, you are recognized for 5 minutes.
STATEMENT OF MIKE DE VERE, CHIEF EXECUTIVE OFFICER, ZEST AI
Mr. de Vere. Thank you, Congressman Barr. Thank you for
inviting Zest AI to take part in this field hearing, to share
how we have seen AI, artificial intelligence, and specifically
our technology, make a positive impact on credit union clients,
credit union clients like Commonwealth.
A little fun fact for everybody here. We actually have one
of the leading innovators in the adoption of AI in underwriting
sitting right next to me, and from Kentucky. So--right? So when
we now look at, from a Zest AI perspective, some of our largest
customers like Citibank, all the way to Molokai Credit Union,
we are processing over a trillion dollars in loans. That is one
in five credit union members across the U.S. That is one in
five credit union members here in the great State of Kentucky.
So I cannot thank you enough for this opportunity to present
with you, Karen, and thank you for your leadership in this
space.
What I am here to share with members today is how Zest AI
has done the work, hired the right people, and built the
technology that is capable of building a robust, inclusive, and
compliant banking infrastructure for lenders like Commonwealth
Credit Union. By building this better, fairer system, we remove
a barrier that has existed for millions of creditworthy people
who live in the U.S. We are talking about over 40 million
Americans who are either unscorable or not scorable and do not
have access to opportunity, which is credit.
At Zest AI, we are thinking constantly about the inequity
and status quo of credit score system, the status quo system.
That is a code, right? The industry score that we all wonder
about the explainability associated with that, that has been in
place for over 40 years, but lacks transparency and is held to
a different standard than other fintechs like ourselves.
You know, the level of transparency that we have to live up
to goes to everything from model explainability to generating
adverse action codes and things like that. This is a goliath
and labyrinth of regulations we have to run through. Yet there
are other monopolies out there that do not have to follow the
same rigor.
For model transparency, our models are accompanied with
reports, analysis to track and explain outcomes for consumers.
These insights into the data variables contributions are key to
transparency, explainability, and compliance. Lenders that use
our models can actually see what data inputs went to the score.
This is not the Terminator, it is not self-learning. This is
supervised machine learning that we are using, and everything
is explainable.
AI models are all required to provide information
sufficient to disclose the consumer details about the outcomes
of the decisions that were made with the AI, also known as the
adverse action notices, required under Equal Credit Opportunity
Act (ECOA) and Fair Credit Reporting Act (FCRA). These notices
inform the consumers, which is important, and the members of
the reasons they could not get the credit they sought. However,
the quality of models can vary and a fully transparent AI model
like the one we custom built for Commonwealth Credit Union is
necessary to generate accurate adverse action notices. AI can
be a powerful force for good when done right. It is not the
boogieman.
With more data insights and better math in the form of
artificial intelligence and machine learning, Zest AI clients
can safely expand credit access through more accurate risk
predictions, state-of-the-art model governance. Many of our
customers, when we look across the results that they are
seeing, we will see increases in approvals of 25 percent,
decreases in charge-offs. Who does not like that? It expands
access to their full customer base.
Zest AI focuses on being the catalyst for economic equity
by leveraging AI's potential for good. Everyone has worth.
Lending decisions should reflect that. I will say that again.
Everyone has worth. Lending decisions should reflect that. This
idea of credit worthy? These are Americans. Every American
should have equal access, fair access and a fair shot at
credit.
I look forward to working with you all and sharing any
insights I can on the work we do at Zest AI to improve
equitable access to mainstream credit.
[The prepared statement of Mr. de Vere follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you, Mike, and speaking of that
innovative Kentucky credit union, Karen Harbin is now
recognized.
STATEMENT OF KAREN HARBIN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COMMONWEALTH CREDIT UNION
Ms. Harbin. Thank you. Good morning. I am Karen Harbin,
president and CEO of Commonwealth Credit Union, headquartered
in Frankfort, Kentucky. We are a state-chartered credit union
with over two billion in assets and 18 branches in the central
Kentucky and Louisville metro areas. Thank you for the
opportunity to be here today to talk about how fintech
partnerships enhance our ability to serve our credit union
members.
In 2019, Commonwealth set out to make better lending
decisions for our members. The lending team wanted to
confidently lend down the credit spectrum through more
accurate, unbiased decisioning that would not increase risk.
They also knew we needed to innovate the lending process to
meet our members' increased demand for a fast, frictionless
lending experience.
We set out to find a fintech partner in the marketplace
that could help us meet these challenges, and we found one in
Zest AI and their underwriting tool. Zest AI was ready to fill
in the gaps with increased automation and accuracy. This
allowed our underwriting teams to focus on members who need
more personal support with their application. Their technology
has allowed us to say yes to more members while not negatively
impacting charge-off and delinquency ratios.
With nearly three-fourths of all consumer loans decisioned
automatically under this partnership, Commonwealth's ability to
compete with other lenders has skyrocketed. Since 2021, Zest AI
has helped Commonwealth approve more than 370 million in
consumer loans. The performance of these loans is also
stronger.
With this technology, we can approve member loans outside
of regular business hours, enhancing convenience and
accessibility. For example, in 2023, we recorded over 3,000
more loans than in 2019. Zest AI has helped us make previously
invisible credit files scorable, again enabling us to say yes
to a broader and more diverse range of applicants.
Using automated underwriting as part of our partnership
with Zest AI, Commonwealth has increased our approval rates for
minority borrowers, doubling it for auto loans, increasing by
40 percent for credit cards, and raising it by 9 percent for
personal loans. Loan approvals for female borrowers have also
seen similar increases. This partnership has been very
successful for us and we believe this is a great example of how
working with the right fintech partner can benefit financial
institutions like Commonwealth.
We have heard from numerous members who thank us for
approving their loans. Many are now turning to us when other
lenders are turning them down. Zest AI has made it easier for
us to now serve them.
Unfortunately, there is still uncertainty in the regulatory
environment with fintech and AI usage. Regulators frequently
recognize the advantages of technological collaborations, yet
they have also voiced apprehension that certain technologies
like AI may be functioning in ways that neither they nor
consumers fully understand.
We are concerned that regulators taking a stringent stance
on AI usage in the financial sector could disproportionately
harm credit unions and smaller institutions while benefiting
the largest incumbents. For example, statements from the
Consumer Financial Protection Bureau (CFPB) suggesting that AI
algorithms function as opaque black boxes introduce uncertainty
about the level of regulatory scrutiny, especially in the
absence of evidence of harm to consumers.
When regulatory entities approach technology in this
manner, it reinforces the concern that smaller entities could
face obstacles to success as only the largest institutions may
possess the resources necessary to meet such rigorous
standards. We believe regulatory assessments of new
technologies must embrace balanced and flexible approaches to
risk management that can accommodate innovation while
protecting consumers. While there may be need for clear rules
of the road, those rules should not be so stringent as to
stifle innovation or disadvantage smaller institution.
In conclusion, the impact of credit unions including
Commonwealth Credit Union lies in our genuine commitment to
serving communities. Every step we take is in line with our
primary mission to better the lives of those we serve. Our
partnership with fintechs like Zest AI allow us to better serve
our members. It is important that regulators not create
expansive requirements or new hurdles that threaten the ability
of credit unions to take advantage of successful partnerships
like we have with Zest AI.
Thank you for the opportunity to be here today, and I
welcome any question.
[The prepared statement of Ms. Harbin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you, Karen.
Last but not least, we recognize Amy Roberti, head of
global policy with Stripe. You are recognized for 5 minutes.
STATEMENT OF AMY ROBERTI, GLOBAL HEAD OF PUBLIC POLICY, STRIPE
Ms. Roberti. Thank you, Mr. Chairman, and distinguished
members of the subcommittee. Thanks for welcoming Stripe to
Kentucky. Thank you as well to our wonderful host, the
Lexington Brewing and Distilling Company, whose business Stripe
has the privilege of serving.
Stripe is a technology company that builds economic
infrastructure for the internet. Businesses of every size from
the smallest of startups to big public companies use our
technology and tools to accept payments online and grow their
businesses.
Stripe was founded in the U.S. in 2011 by John and Patrick
Collison, two brothers from Limerick, Ireland. Before Stripe,
they built another startup and found that the biggest challenge
was accepting payments. That is when the idea of Stripe was
born.
Patrick and John created just seven lines of code that they
could give to businesses to start accepting payments online in
a matter of minutes. Since then, Stripe has grown along with
some of the world's biggest and most innovative online
companies but we also power the digital transformation of
companies that are not traditionally online, like Ford Motor
Company and Target. They use our software for a range of
corporate functions, from analyzing revenue, finding sales
opportunities, and preventing fraud.
These tools are not just available to industry giants. We
serve millions of small businesses across the U.S.; nearly half
a million of the businesses we serve are actually rural
businesses. I am proud to say that more than 34,000 of them are
here, based in Kentucky.
Today, we are seeing a fundamental shift in how businesses
access financial services, with software platforms integrating
payments, capital, and other services directly into their
business operations. A great local example of this is Pay HOA,
a Lexington-based startup. They built a software platform that
helps homeowners associations manage their communities more
efficiently, from providing payment services to communications.
They serve over 20,000 associations and nearly 650,000
homeowners across the United States, showcasing how local
businesses can leverage technology to solve industry-specific
challenges.
To make all of this work, Stripe partners with a number of
financial institutions. These partnerships enable us to jointly
extend the reach of financial services to underserved
businesses. Last year, Stripe helped businesses around the
globe process more than one trillion dollars in payments
volume. That represents 1 percent of global Gross domestic
product (GDP).
The economic growth is powered by acquiring bank and
network partnerships, but these are not new. They have been
around for decades. The difference now is that they are scaling
and more finely tuned to meet the needs of each individual
business.
This growth does not just happen in big tech hubs. As the
online economy grows, we see that it is compounding locally,
too. Since 2010, states including Kentucky, Tennessee, Indiana,
Texas, and Nebraska, just to name a few, have seen per capita
payment volume grow more than four times during this period.
Payment volume increased approximately seven times in
Knoxville, five times in Omaha, four times in Louisville,
Houston, and Indianapolis, and three times in Nashville and
Dallas.
Growth is not limited to urban areas. Over that same
period, rural areas across the U.S. increased processing volume
on Stripe fivefold and rural businesses here in Kentucky saw an
impressive eight times increase in volume.
How do we keep growing the GDP of the internet? We have a
few policy recommendations that we added to our testimony. In
short, we think keep promoting bank and tech partnerships,
provide a Federal framework for payments companies, digitalize
government services that hurt small businesses, and keep
fostering innovation.
In conclusion, Stripe's humble mission is to grow the GDP
of the internet. We are optimistic that technology-driven
improvements can help achieve this goal. Through thoughtful
policies that scale access and oversight on a positive basis,
we can create a more inclusive and efficient financial system
for all Americans and drive economic growth.
Thank you for the opportunity to participate in this
hearing and thanks for the warm Kentucky welcome. I look
forward to your questions.
[The prepared statement of Ms. Roberti follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you very much. I appreciate everyone
for their testimony. I do want to recognize Jim Cash, the
president and CEO of the Kentucky Credit Union League, who is
here and also Ballard Cassady, president and CEO of the
Kentucky Bankers Association. I appreciate both of you all for
being here today.
We will now turn to member questions and the chair now
recognizes himself for 5 minutes.
Mr. Trager, tell us a little bit more about how banks can
leverage these third-party relationships to improve access to
credit, expand financial services offered to consumers and
small businesses, and talk about how important it is for
especially community banks to leverage these third-party
relationships in a very competitive environment relative to
regional and large Global Systemically Important Banks (G-
SIBs)?
Mr. Trager. As a community bank, you know, it is our goal
to serve more people in more places that the big banks have
great difficulty in serving. As I mentioned, we have 47
branches. Those branches serve a very real purpose in our
community for a very unique clientele but they, through those
branches, it would be impossible to serve the few million
consumers that we serve.
Our infrastructure and the efficiency is just not capable
of a person--or it is very difficult to have a person walk into
a bank, walk into a branch, and get a $1,000 loan within 24
hours. We just have legacy systems, infrastructure. It is very
difficult to do that. Like I said, we serve 100,000 customers
through those--120,000 customers through those 47 locations.
With the help of Enova and a fintech, we can serve a few
million customers with a need and be able to provide access to
that need that customer, for one reason or another, is hesitant
to go to a traditional branch bank.
Chairman Barr. So it is fair to say because the enormous
cost of investing in technology is harder for smaller community
financial institutions, these fintech partnerships are critical
to level the playing field between the community smaller
institutions and the big banks?
Mr. Trager. Without question and we are not a small bank.
It applies to us because we know the cost involved but to our
brethren, smaller banks, there are, I do not know, 2,400 banks
in the country, 1,800 of them are under a billion dollars in
assets. We are six and a half billion. For those folks in
particular that may not have the capital and resources, it
would be vital for them to be able to partner with folks, with
fintechs, the right fintechs, to be able to offer more products
and services to more people in more places.
Chairman Barr. Thank you. Ms. Harbin, could you give us an
example, a really good example of the financial inclusion
benefits of partnering with a Zest AI and serving a customer
who otherwise would not have access to credit?
Ms. Harbin. Thank you. With Zest AI, we have been able to
make more accurate, unbiased decisions and go deeper with our
members and provide financial services to them where they
otherwise cannot get services. Zest AI looks at about 190 to
200 data points and provides us a decision in 2.4 seconds. It
takes us, if a manual underwriting, it would take us five to 7
minutes and we are looking at 15 to 20 data points.
Zest AI has many stories to tell you. One in particular, a
couple came in to one of our branches and he had a temporary
hardship, where he had reduced hours and he did not know how he
was going to pay his bills. We were able to approve him on the
spot and provide $6,000 that he could use until he got back on
his feet. That would not have been possible without an
immediate decision from Zest AI.
All consumers are looking for immediate access. You go to
the drive-thru somewhere, you want to be serviced immediately.
Us being able to have a decision in 2.4 seconds is fantastic
and our members are elated with that service.
Chairman Barr. Mr. de Vere, can you speak to some of the
recent pronouncements or expressions of concern from the
Consumer Protection Bureau that could threaten the innovation
of artificial intelligence in promoting financial inclusion?
Mr. de Vere. Yes, I think from our perspective, we lean in
with the regulators. So if we are talking about the CFPB, we
are a supervised entity and the regulations that are on the
books are sufficient to protect members from our perspective.
We also work with National Credit Union Administration (NCUA)
and have a tremendous partnership with them. So, from our
perspective, I think regulations are necessary to protect
consumers.
I think, Congressman Barr, you brought up a very good point
at the beginning. It is really about competition and if we
overregulate, we will end up stifling competition, and our
financial institutions will be for the worse.
Chairman Barr. My time has expired, and we might have time
for some more questions. We will get to Ms. Roberti and Mr.
Chartier in a minute.
With that, we now recognize Mr. Rose for 5 minutes.
Mr. Rose. Thank you, Chairman Barr, for holding the
hearing, and for the opportunity to be a part of this. I had
the honor, as you know, just a couple months ago to host you
and Mr. Flood in my district, Tennessee's Sixth District, for a
similar type of hearing. I share your view that it is important
for us to take these hearings back out to our districts, and
not only to get testimony from folks who we might not see in
Washington, but also so that folks here in your district and in
mine can see what our work looks like.
While it may seem at times that these things are a little
cumbersome and staged or whatever, the insights that we gain
from the witnesses are invaluable for doing our work, and very
often are both the inspiration and the encouragement for the
work that we do to change the law and make it possible for the
American people to engage in the freedom of transactions that
they wish to. So I will dive straight into my questions.
Ms. Roberti, in my district, the Sixth District, again, of
Tennessee, there are over 400 active Stripe merchants.
Hopefully, that is an accurate number. Stripe has facilitated
over five million in payments just in this past June. So those
figures indicate that the work that Stripe is doing is
appreciated by both merchants and consumers alike.
One specific service that Stripe offers is Stripe Connect.
I know that companies like Ford have adopted this technology
with great success. Could you explain how Stripe Connect would
work with dealerships like Ford of Cookeville, my hometown, to
connect consumers, merchants, and dealers?
Ms. Roberti. Thank you, Congressman. Yes, we are proud to
partner with Ford Motor Company. I think it is a great example
of a product that we offer, Stripe Connect, where we actually
onboard the dealerships, and so they have access to the full
suite of payments, products, antifraud, everything they need to
run their business. Then, those accounts are connected accounts
to Ford Motor Company generally, so both parties get the
benefit of the business insights that we can see from the
transactions that are happening in their dealerships. It is
sort of taking maybe a small dealership and giving them the
tools that a Fortune 50 company would have and we have seen
that leads to increase in sales, increase in customer
understanding, happier users, more revenue.
I think it is a great example of a product that just
enables innovations for smaller dealerships that maybe would
not have access to that.
Mr. Rose. Thank you and at the back end of Stripe Connect,
what role do bank partnerships play in launching an innovative
product like Stripe Connect?
Ms. Roberti. I think this is where, when we talk about
bank-fintech partnerships, sometimes it sounds very exotic, and
we are talking about things that are not just the day to day.
So for us, a lot of our bank-fintech partnerships are the more
mundane, just banking identification number (BIN) sponsors. A
bank is partnering with us to facilitate those payments that
are happening every day. So that is how we would partner with a
bank for Stripe Connect and to help Ford Motor Company.
Mr. Rose. Thank you. Unfortunately, in today's regulatory
climate, we have regulators who seem to be afraid many times of
novel or innovative technology being implemented in the
financial sector. Ms. Harbin, as regulators consider acting in
the fintech space, what would you say is important for them to
consider from a community financial institution perspective?
Ms. Harbin.We support a balanced regulatory approach but
the regulations cannot be so rigid that it forces smaller
institutions such as Commonwealth and other community banks out
of business with overregulation. So I guess that is----
Mr. Rose. I share that concern. The quandary I think is to
balance the need for innovation against the safety and security
of our financial industry and the consumers that rely on it.
In the last moments here of this round, Ms. Roberti, I know
that Stripe is proud to offer a hundred different forms of
payment across their online and in-person payment processors.
One aspect of payment processing development that concerns me
is the erosion of the acceptance of cash as a payment method.
How does Stripe facilitate the acceptance of cash during in-
person transactions?
Ms. Roberti. Thank you, Congressman. I think this is
important because we are in the business of giving our users
what they want and it is clear that users, merchants want to
offer cash as a payment method in many cases. So we have a
product that is a point-of-sale device called Terminal that you
have probably seen when you are paying for something in a store
and we absolutely can operate that with a cash drawer as a cash
option, and we think that is really important to offer
consumers that choice.
Mr. Rose. Thank you. I see my time has expired. Thanks for
your indulgence, Chairman, and I yield back.
Chairman Barr. Thank you. The gentleman from Wisconsin, Mr.
Fitzgerald, is now recognized.
Mr. Fitzgerald. Well, thank you, Chairman, very much and
thanks for hosting us. What a wonderful opportunity to have a
larger discussion on many of the topics that we have been
focused on in DC for some time. As most Members of Congress, of
course we like to talk about our own districts. So let me talk
about the Fifth District in Wisconsin quickly, where we do have
a bank, the Horicon Bank, that has had employees that have been
finalists for the American Bankers Innovators of the Year in
2024. The reason I bring that up is because what Horicon Bank
has been doing is utilizing technology to benefit customer
experience with features like opening an account online, as we
are all familiar with, interactive teller machines, video and
chat services, as well as helping back office functions, fraud
prevention and compliance.
Horicon is focused on software as a service solution,
rather than banking as a service one. So my questions are kind
of related to that.
Mr. Trager and Ms. Harbin, have you seen examiners
differentiate between institutions that use software as a
service and banking as a service? Then, what is the biggest
obstacle, do you think, in implementing banking as a service
solution? So there is kind of the front end for technology and
the back end. I am wondering if you had any comments on that.
Mr. Trager, you can go first, I guess.
Mr. Trager. Thank you for the question. It is a good
question. I am not sure of the exact label of it. You know, the
fact of the matter is that the regulatory environment is very
necessary. I have a high degree of respect and regard for our
regulators.
Any time you do anything new or innovative, it is subject
to a lot of scrutiny. That waves a flag of risk. Now, we have
so much at stake that we understand that risk, and we are very
forthcoming with our regulators, anything new we do, we throw a
lot of resources at it. I mean, we have 35 folks in our
compliance department.
So we tend to be able to navigate that with some challenge.
I think for others, it certainly is even more challenging, and
for us it is always of concern whenever we try to do anything
new and innovative.
I would just say we ask for some appropriate regulation.
You cannot regulate around everything. Sometimes, it is just up
to the execution of the regulators. They have the tools in
place, without question, to address the challenges of
innovation. I think there is not a congressional response to
every incident that happens.
So, we make it work. I think it is very difficult for a lot
of banks to make it work. It is certainly difficult for us to
make it work.
Mr. Fitzgerald. Ms. Harbin, you have a comment on that?
Ms. Harbin. Thank you. So we have had--we have been with
Zest AI since 2021 and had numerous exams and audits, reviews,
and we are met with applause. They applaud our efforts to go
deeper and serve more members. We are serving more people in
protected classes.
Zest AI provides us with numerous reports that we share
with our board on a quarterly basis. We do an Return on
Investment (ROI) on the service, the cost/benefit analysis. We
went through great due diligence with Zest AI when we chose
them to be our partner, have quarterly business reviews with
Zest AI where we go over what we are seeing in our loan
portfolio, both the loans that are decisioned by Zest and the
loans that we have done manually. We look for ways to increase
our usage with Zest. So it might be they say if you increased
or adjusted your Debt-to-Income ratio (DTI) or your number of
trade lines, you could increase your approvals by 10 basis
points, but your risk stays stable, and your yield goes up.
Those are the type of conversations that we have with Zest,
a great partner and because of that, we have not received
anything from our examiners that raise an issue with safety and
soundness of our credit union.
Mr. Fitzgerald. Very good. My time has expired. I will
yield back.
Chairman Barr. The gentleman yields back. The gentleman
from Texas, Mr. Sessions, is now recognized.
Mr. Sessions. Mr. Chairman, thank you very much. What a
great opportunity for us to come and take what we regularly do
in Washington, DC, to come back to these districts. I want to
say to people who are back here, not just here today but also
listening, that I believe that there is a lot of conversation
that happens exactly in Washington, DC, that is happening here
and that is how we connect more consumers with financial
institutions to the benefit of consumers, to where they can
make decisions about themselves, their future, and for their
families.
I would like to, if I can, after thanking you for bringing
us here, to recognize that the conversations that you, John and
Scott have had where really the word safety and soundness that
we understand is important but the word security has sneaked
into our lexicon.
I would like to ask each of you--perhaps Stripe and Zest
would offer their analysis first--but as we have gotten into a
world where we are interconnected more and more, so have people
through malware and other criminal activities sneaked
themselves into what I would say the system, not just into an
individual company. In Texas, which is where I am from, we have
financial institutions that report time after time after time
their customers being at risk because of malware and criminal
activity.
If I could just have you perhaps go down the line and talk
with us about the activities that you believe either--whether
you are receiving good information back from regulatory
organizations, law enforcement, or others that will help you to
stay leading edge. Thank you.
Mr. Chartier. Sure, thanks for asking that. I think the
safety and security of the data and of the customers is really
important to us, and we have a team that works on that
specifically. It is a pretty large team and uses a lot of
analytics to understand what attacks are coming at us, how we
help prevent those, implement additional security to do that.
I think that from the regulatory or the oversight
standpoint, or even the assistance standpoint from law
enforcement, we find they are very helpful but somewhat
overwhelmed right now with all of the things that are going on.
So when you reach out and you say, hey, this is a problem our
customers are having, they say, thank you, and they put it in
the data base and get it shared rapidly but they cannot always
do a lot to help the individual that might have been impacted.
Mr. Sessions. Do you share that information, or do they
share back with you, and do you think it goes across the
organizations that might be banks, bankers?
Mr. Chartier. Absolutely. We subscribe and others subscribe
to the service that when you put that into the service, it gets
shared across. We also have panels and other discussions that
occur.
Mr. Sessions. Thank you. Do we want to hear from Stripe or
Zest?
Mr. de Vere. Thank you for the question. So obviously,
security is critical in the line of business that we are in.
You are dealing with, obviously, banking information,
individuals' personal information. We take that very seriously
as an organization and have all the necessary protocols in
place.
I think the thing that I would offer or watch out for is
that there are some other players that are coming into the U.S.
from overseas and they are trying to service community banks
and credit unions here in the U.S. Personal information is
being sent overseas, which is a really great risk for our
consumers.
So what I would encourage from a Zest perspective is we use
a cloud-based security system and have never had an issue but I
would watch out, and I would offer to the congresspeople here
that we do have players coming in from the outside that I think
are putting an American consumer at risk.
Ms. Roberti. I think we would not have a specific
experience to add but just we feel an obligation to be
guardians of the financial ecosystem as well. As technology
improves for all of us, the bad guys are using technology as
well and that is why I think we are heartened by regulators
also embracing technology and taking strides there because I
think they see it as a tool that we all need to combat
cybercrime and other fraudsters that are happening online.
Mr. Sessions. Do you believe that when you--would you spot
this perhaps for a customer? Or do they spot it, and do they
notify you? Or are they pretty silent about what they have?
Ms. Roberti. No, I think it goes both ways. When we spot
it, we have an obligation to raise it with law enforcement and
we do that often.
Mr. Sessions. Thank you very much.
Thank you, Mr. Chairman. I yield back my time.
Chairman Barr. The gentleman yields back. Last but not
least, the gentleman from Nebraska, Mr. Flood, is recognized.
Mr. Flood. Thank you, Mr. Chairman.
Good morning. It is good to be here in Lexington, Kentucky,
the horse capital of the world. When I look around Lexington
and your district, Mr. Barr, I see a district that looks a lot
like mine. I represent Lincoln, Nebraska, which is home to the
University of Nebraska. Similarly, you have a flagship
university right here and there are plenty of rural areas that
are also in this district, full of hardworking, quality, sound
and fit banks in all sizes throughout the State of Kentucky.
Which brings us to the topic of this hearing. Third-party
partnerships with banks and fintechs. I am really interested in
the third-party fintech partnerships because community banks,
in order to be successful, have to compete with the G-SIBs,
with the banks like Wells Fargo and Bank of America. It is
important, when you look at the Paycheck Protection Program
(PPP), community banks, banks that have relationships with
their customers, hit that program out of the park because they
knew what their customers needed, they knew what they could
take on, and they watched for fraud, and they protected the
American taxpayers.
Fintech partnerships can take lots of different forms,
something as simple as a mobile banking app or an updated
customer interface are the types of features that consumers and
particularly younger consumers that will probably never go
through a bank drive-thru, they will probably not walk into a
bank and fill out a deposit slip and hand it to the teller.
They are going to do everything on their phone. For me, it is
very important that especially in rural areas, we have these
third-party relationships.
I am going to start with Mr. Trager. In your testimony, you
made an interesting analogy comparing partnerships between
banks and fintechs to the partnership between a restaurant and
a delivery service like Uber Eats. Would you mind expounding on
that analogy for our benefit?
Mr. Trager.Thank you for the question. You know, it takes a
village. I mean, when you are offering products to a lot of
consumers that do not necessarily have standard access we need
to partner with folks that help identify the consumers that are
in need for us so that we can provide the funding that we
plentifully have, or we have in a plentiful way.
Yes, the example is a good example. You know, we are the
Uber Eats. We generate more business for our partners, and then
we help deliver that product. So they enable us to market and
to get out and make our services be known to a very broad
audience that we help deliver the product. That is what we
bring to the table.
Mr. Flood. Thank you for that.
Ms. Harbin, can you provide some examples of products
Republic Bank offers in partnership with fintechs that expand
access to banking services to people that might otherwise be
unbanked or the under-banked?
Ms. Harbin. At Commonwealth Credit Union, we provide
personal loans, auto loans, mortgage loans. We are able to go
deeper with Zest AI. We actually have three of their models
right now, auto loan, personal loan, and credit card. We have
data that shows that we are going deeper into those protected
classes.
We have been with Zest AI since 2021, and that portfolio of
loans has quite a bit lower delinquency and charge-offs than
our entire portfolio. So we are very proud of that.
We know that we have to compete on a larger level and the
way that we can do that is with Zest AI. We do not have the
funds for technology like the large megabanks. I think 17
billion is something I read that one of the huge megabanks
spent on technology. In contrast, last year, we spent about 9
million.
So we have to partner with fintechs to compete on the same
stage for our members and to give them the products and
services that they are looking for in the timeframe that they
want it.
Mr. Flood. I need to correct the record. You are with the
credit union. You are the president and CEO of the Commonwealth
Credit Union. I was also going to direct that to Mr. Trager,
but I already hit him with one question, so I let him off the
hook on that.
One quick, very quick story. I had a 23-year-old guy that
had helped--he works in my congressional office. My car was out
of gas and he on his own accord went and filled it up. I said,
well, what did you pay? He said $59. I wrote him a check. I
handed him the check and he looked at it and he was like, what
am I supposed to do with this?
[Laughter.]
Mr. Flood. That is a reminder of where we are and where we
are going.
Thank you. I yield back.
Chairman Barr. The gentleman yields back. Thanks so much
for these questions.
With the indulgence of these witnesses, we are going to
engage in a quick second round, lightening round if you will,
where each of the members will have an opportunity to ask one
final question. We will start here.
Before I go to my final question, I do want to recognize
State Senator Donald Douglas, who has joined us. We appreciate
State legislatures taking a look at the innovation that is
happening in financial services because obviously, you have a
role to play as well.
In that vein, let me ask my question to Mr. Chartier.
You testified earlier today, and we have talked about this
before. You have urged Congress to reverse the mistake that
Congress made with invalidating the True Lender Rule from the
OCC. You have urged Congress to reinstitute the OCC True Lender
Rule and making Federal law applicable to all banking
institutions and clarify these opt out authorities.
Why is preemption, Federal preemption, so important in this
space that is interstate commerce, and how would that enable
more innovation and financial inclusion? Also, if you could,
describe the problem to those who are watching.
Mr. Chartier. Sure. Thanks for that question. I leave
preemption to the lawyers and the bankers a little bit but I
would say from a service provider, from a product developer,
you want to get the largest market you can reach as thoroughly
as you can. I talked about how there are populations--and
certainly Steve talked about how banks have a problem serving
certain populations, because you cannot evaluate them, because
they cannot develop the technology that is necessary.
When you go to put that investment into building a product,
you want to reach as many markets as you can to increase the
efficiency of the delivery of that so we can lower the prices,
so we can be more competitive. When you go to do that in the
U.S., you run up against State laws, because each State has
instituted laws over 200 years that influence credit products
that consumers or small businesses can get.
When you go State by State, often they will have defined
products. I always talk about they define for a consumer or a
small business looking at credit. It is like a 10-story
stairwell, and they want to get to the top but a State will
come in and they will say you can have floors one through
three, but you cannot have floors five and six, and then maybe
we will give you eight as well. So people get trapped where
they are because there are not products that fit the place they
are in their credit or financial health journey. So the State
environment makes that very difficult.
The banks can come in with a steady--with a consistent
product across all the states because of their preemption and
they can deliver it to all those people and that allows people
to move freely through a pathway of financial products back
into regularized and more standard and traditional banking
services. That is the importance. The OCC recognized the
confusion that was out there and said, when the bank originates
a loan, it is the bank's loan. If they then choose to manage
their balance sheet by selling off some interest of that to
make sure they are fitting the regulatory environment, that
does not change anything. That is critical to us because that
allows that uniform presentation of the product across all of
the markets.
Chairman Barr. Thank you. Mr. Rose?
Mr. Rose. Thank you, Mr. Barr. I want to thank you again
for hosting this hearing.
Ms. Roberti, I want to pick up where I was when I ran out
of time before. I just want to say I would urge Stripe and all
payment processing companies to continue to accept cash. Sixty-
seven percent of Americans still use cash for making in-store
payments. My late colleague, Representative Payne, and I
introduced the Payment Choice Act for this exact reason. Cash
is king and Americans should not have their business refused
for paying with legal tender.
My question for you, are there any plans to remove cash as
a payment option at Stripe in-person terminals?
Ms. Roberti. No plans, Mr. Congressman.
Mr. Rose. Super. That is great to hear. The civil
libertarian in me says I want to see cash continue to be an
acceptable form of payment and maybe even the next generation
will come to appreciate it at some point.
Thank you. I yield back.
Chairman Barr. Mr. Fitzgerald.
Mr. Fitzgerald. Many Fintech companies are pushing Congress
to establish an optional and tailored Federal charter for
payment companies. They are also seeking direct access to the
national payments system. This would obviously bypass some of
the bank partnerships and allow these companies to avoid the
full spectrum of bank regulation.
Ms. Roberti, you are familiar with it, and you have had
some time to kind of consider what the challenges would be. If
some of these bank regulations are unnecessary under such a
charter, how would you still be able to scrutinize the safety
and soundness of the fintech companies?
Ms. Roberti. Thanks for the question. Look, I think in
other parts of the world--so we are regulated. We have 80
licenses across the globe and in other parts of the globe, we
have different bespoke kinds of payments regulation.
In the U.S., it is different. It is more binary. So you can
either be a State-regulated, State-chartered payment entity
with all the limitations that come with that, or you can be a
full-fledged bank and there is not much in between. So I think
what we would just encourage in partnership with State
regulators and recognizing the great work of Conference of
State Bank Supervisors (CSBS) and the modernization that has
happened there, but we should just think about ways to
innovate. It works in the rest of the world and with it comes
supervision that is tailored for the level of risk that it
presents.
There is something between, like I said, the risk of a
full-fledged bank offering loans and then payments. I do not
think we have all the answers, but I think we would encourage
the committee, as you have, and others to just take a look at
what options are out there.
Mr. Fitzgerald. Mr. de Vere, do you have a quick comment on
that one? Very good, thank you.
Chairman Barr. The gentleman yields. The gentleman from
Texas, Mr. Sessions.
Mr. Sessions. Mr. Chairman, thank you very much.
From time to time, almost every time when we come into a
hearing, we learn things that we did not know and that is
because we have a staff that works regularly on some of the
issues.
I would like to go to Karen Harbin if I can. The question
is that I learned from our notebooks here of our homework, the
National Credit Union Administration, NCUA, does not have
authority over third-party vendors who partner with credit
unions.
The question is, in your opinion, is this helpful or
harmful and should this be recognized and give them the
authority, or do you believe you have the knowledge and the
resiliency to handle this yourself?
Ms. Harbin. Thank you for that question. We believe that we
do not need NCUA to have third-party vendor authority. We look
at our third parties and do due diligence which is adequate. If
NCUA had that authority, it would increase costs to credit
unions because they would have to staff with experts that
looked at all these vendor relationships, and it would
ultimately cost credit unions a lot more money. So we do not
support it.
Mr. Sessions. So this allows you to be more nimble?
Ms. Harbin. Yes, more flexible.
Mr. Sessions. This allows you to make decisions that you
would choose to make.
Ms. Harbin. Exactly.
Mr. Sessions. You do not believe that it would be
necessary, so do not need to approach this issue.
Ms. Harbin. Do not.
Mr. Sessions. I found that very interesting as a question,
because we tend to want to have the viewpoints that we want to
give everybody an opportunity to go to third-party vendors but
hold them accountable also. I found this as the most
interesting question that has been unanswered here.
I would come back to this question that I still have not
just about safety and soundness but security. Did anybody else
have feedback that they would like for us to know? Because I
have heard the testimony that has been given that you believe
that law enforcement does listen. You believe that law
enforcement is perhaps doing the best that they can. Do you
offer other feedback? Because I still believe the feedback that
I have heard, albeit from a lot of Texas entities, is that
there is still a huge concern about the numbers that keep
adding up about the criminal elements of malware. Does anybody
else have anything to add on that issue? Yes, sir.
Mr. de Vere. The OCC, Comptroller of the Currency Hsu just
recently was quoted about AI and fraud, or fraudsters out there
that are leveraging AI today and the need for better tools.
I think I would just add to your security comment and talk
about the importance that organizations like Commonwealth and
other financial institutions not only could leverage better
technology like AI for underwriting, but you can also leverage
AI to identify fraudulent behavior, that humans cannot find
patterns, but the AI actually can. It will have a material
impact if more and more financial institutions adopt this
approach.
In our recent release with one of our customers, we were
able to eliminate 60 percent of the fraud just by focusing on
the top 15 percent most risky applications that came through.
That is a material impact. The average credit union is losing
$500,000 a year to fraud.
When we talk about security, I think it is also important
to add in fraud and the opportunity that these types of tools
have.
Mr. Sessions. I would like to agree with you. I hear over
and over in these conversations that larger or smaller
organizations still learn a lot about the things that are
evolving every day. At some point, it is hard to get
necessarily what I would call a customer or end user to stay up
with all those things. Perhaps it is people who you have only
given a loan of several million dollars to, but they also find
themselves in an attack.
I am kind of looking for your feedback to tell me where you
think that presentation should also include to where you give
information back perhaps to your customers to where they can
give information that flows all the way to the individual that
says, here are the things that we believe you should include as
leading edge security back into your own company.
Mr. Chairman, thank you very much. This hearing, as I
looked at what we were attempting to codify here into
understanding about fintech relationships is being improved. I
think it was worth my time to be here today. I yield back.
Chairman Barr. Thank you. We do appreciate you and the
other members making time to come to Kentucky.
Finally, Mr. Flood from Nebraska.
Mr. Flood. Thank you, Mr. Chairman. Again, thank you for
the invitation to Lexington.
This is for anyone that wants to maybe react to it in a
very brief way. I am interested in what are regulators and
examiners talking to you about when it comes to bank fintechs,
partnerships. Are there things maybe they are misunderstanding?
Are there things that you maybe think they are not looking
closely enough at? What are those conversations with the
examiners and the regulators like in your bank or credit union,
and where do you think we are going with all this?
Ms. Harbin. Thank you. I will answer that first.
As I said before, we do a great deal of due diligence
before we ever partner with a fintech. The examiners look for
that. They also look that we are monitoring the portfolio, and
we understand what is going on with the portfolio, and make
changes and adjustments as needed if we see something getting
out of hand, such as delinquency or charge-offs but our
delinquency and charge-off using Zest AI is much better than it
is in the overall portfolio.
Mr. Trager. There is not much I can add to that. That is
absolutely right. They are looking for thorough due diligence,
oversight, and monitoring when it comes to partnering with
third parties.
Mr. Flood. Quick question about Kentucky, just so I can
understand your banking landscape here. The mix between
federally chartered banks and State chartered banks? In
Nebraska, we have 139 State chartered banks. Now that is down
from 180. We have seen a lot more folks move their charter from
the OCC to the State side. What is happening in Kentucky? Are
people moving to the State or are they moving to the fed?
Mr. Trager. I think, I do not know, five, 6 years ago, it
seemed like there was some movement toward the fed, toward
that. I think that has kind of stabilized. At this time, I do
not sense that there is a lot of movement.
We are State chartered, FDIC. Primary--FDIC and the State
are our primary regulators. You know, there is some benefit to
familiarity. They are familiar with us, we are familiar with
them.
Given some of the innovative products that we have, it is
very helpful from an education standpoint when they come in
that we do not have to start from scratch and refamiliarizing
them with the things that we do.
Mr. Flood. As a State chartered institution, how is the
Kentucky legislature looking at digital assets, digital asset
custody? Is there a State regulatory framework that is in place
or being talked about? Is it something you are interested in?
Mr. Trager. I am not knowledgeable in that regard.
Mr. Flood. It is pig Latin to most people over 35. I hear
you.
Mr. Trager. Right, right.
Mr. Flood. I guess I ask because one of the questions we
are going to have in Washington is, we have this question,
there are a lot of folks on the other side of the aisle
especially that want a Federal top-down thumb on everything
when it comes to digital asset custody. For me, a State pathway
is very, very, very important. As a State chartered institution
working with your State senators and your State
representatives, I really hope that the banks in the State of
Kentucky can continue to be State regulated and not have to
deal with some foreign power. The State of Kentucky should
determine its own future in digital assets. When your customers
and you feel like it is the right time to take custody of their
digital assets, I hope that you can do that without burdensome
interference from the Federal Government.
With that, thank you, Mr. Chairman. I yield back.
Chairman Barr. Spoken like a true former State legislator.
For those of you who do not know, Congressman Flood was the
speaker of the unicameral legislature in Nebraska. Thank you
for sticking up for the Commonwealth of Kentucky from Nebraska.
Mr. Flood. I am a Kentucky colonel.
Chairman Barr. So thank you to all of my colleagues for
making the trip today. Thank you to our witnesses.
These field hearings are--they are hard to plan, because we
are bringing Congress to the American people and it is
expensive and it takes time and a lot of effort. I want to
thank my staff for organizing this. It takes a lot of hard
work. So Mary Rosado, my chief of staff, I want to thank Tatum
Dale, my district director, and our entire district staff,
Tyler Staker my communications director, Kaylee also for
helping out. All of you all.
Let me also thank the staff of the Financial Services
Committee. Megan Guiltinan, my Financial Services Committee
staffer, Jeff Reyes, who is the staff director of the FI
subcommittee, Kathleen Palmer, David McGrath, Trish Halloren,
Grace Tricomi, Beau Brooks, Glen Sears representing the
Minority Staff, Rob Waggoner, and Jelia Megawati with
Representative Rose. Thanks to all of you all for putting this
together, and to our guests, thanks for being here.
To our witnesses, we are so grateful for your insightful
testimony.
Without objection, all members will have 5 legislative days
within which to submit additional written questions for the
witnesses to the chair which will be forwarded to the witnesses
for their response. I ask our witnesses to please respond as
promptly as you are able.
[The information referred to was not submitted prior to
printing.]
This hearing is now adjourned.
[Whereupon, at 11:19 a.m., the subcommittee was adjourned.]
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