Apps or Assets?

Mitch Woods: Welcome to another episode of Lending Made Easy. Today, Bryan and I have a special guest with us, the beard, the myth, the legend, Mike Horrocks. And we're going to be talking about a big development in the world of digital finance. So the CFPB has proposed a new rule that could shake up the landscape for these large tech firms and other non bank companies that have been providing digital wallets and payments.

So as these services have become more ingrained in our day to day lives, so some of these concerns have also been bubbling up, right? So CFPB's new proposed rule tries to level the playing field by making these non bank companies fall into the same supervisory processes as traditional banks and credit unions, and means they could have to follow some of the same rules and regulations that are in place to protect consumers.

So, Mike, as our special guest today, I'd like to kick this over to you first. What does this mean strategically for a bank or a credit union today?

Mike Horrocks: Mitch, first of all, thanks for the intro there. And let's talk about the CFPB just for one second, because. It's great that they proposed this rule, but the last time I checked, the Supreme Court is really wondering, if the CFPB is still going to be around. So, I think you have to have every conversation around the CFPB.

Wondering if the Supreme Justices are going to actually stop it or not, right? So that's point number one. But let's just go with the assumption that the Supreme Court doesn't want to shut down the Federal Reserve and a couple other things that are all funded like the CFPB. Okay, that's kind of gives you an idea of where I'm, leaning on this, but you know, when you look at it, I mean, it's an interesting ruling that they're trying to enforce.

I mean, first of all, they talk about big tech and if you go into this, what I've seen is it says something about 5 million transactions per year. Okay. Now you think about the volume that some of the folks like,Venmo and PayPal and all them are doing, right? they're in the billions of transactions per year.

So I don't think this is necessarily a big tech. I think this is a all tech, right? Because if you're going to be scalable in the financial industry, 5 million transactions a year. Especially on the payment side is nothing right? You got it. You at least have to have north of 5 million. but you know, I do think that, this does have some,fairness.

And it's, in, in the concept that's out there, like as,if you look at a quote directly from, the director of the CFPB, director Chopra, it states that, payment systems are critical to our infrastructure. These activities used to be conducted exclusively by banks. And then I'm going to paraphrase the rest of it, right? But it's not anymore. It's wild, west. And so where do you go from there? and I think we need to be thinking about, how do you create fairness? Cause if banks don't know it, they are fintechs already. They, or they should be becoming a fintech, not just a bank.

And, you mentioned the impact on small businesses, and what this could mean to them as well. Well, behind every payment in the small business is a person, right? And so I think that you have to really be thinking about how is that person, how is that small business, how's big tech using their data and, not just for facilitating the payment. But also everything else that they could do behind the scenes.

Bryan Peckinpaugh: my great points,circle back to the beginning while I'm with you, it's gonna be really interesting to see how things play out in the courts here in the near future, and while I don't know that any of us know what will happen with the CFPB or the Fed or anything else, I don't see any wholesale move away from an overall desire to Regulate the financial services industry and in particular, protect the consumer, right?

If you go back to the original tenants for the CFPB, I think those were sound. how that has evolved over time is a different story potentially, but. there will continue to be a desire to protect the consumer, and this is a natural extension of that. You mentioned Wild West, and it certainly has been, and we, we've certainly seen over time with different providers, different technology, some of the issues that can arise without the regulation as they, they scale without,the restrictions in place that our partners in the financial services sector have on them.

So I would fully suspect whether it's in this, particular, framework or not a push to see similar regulations put on, the FinTech companies operating as financial service providers, whether that's payment companies or other,seeing some similar restrictions put on them, which I think broadly speaking is a positive.

Everybody should be playing on a similar playing field. There should be a focus on ensuring that. What unfortunately is a broadly financially illiterate, constituency in the United States of America, we need to be protected from ourselves as evidenced by credit card balances and other. loan debt that the average American carries.

we need some help in navigating, what is provided by these FinTechs. So that'll be interesting to me. See how that starts to, to dovetail. what role does everybody play? Cause you're right, Mike, it's not just quote unquote big tech. it's everybody. It's anybody that's providing these types of services, even if I'm only doing a hundred transactions a month. If that opens up somebody to potential fraud, identity theft, et cetera, there needs to be precautions in place to keep that out of the broader markets.

Mike Horrocks: Yeah. and I think that's what the CFPB is wanting to do. In fact, there's a quote out there that they'd say they call it appropriate oversight. And that's what they're trying to do. Again, I know a lot of bankers and everyone else, whenever you hear a government agency wanting to provide oversight, what's the extent of that?

But they do call it at least appropriate oversight. So I think that's what they're trying to do. The other thing I found interesting is, also if you kind of dig into the CFPB's comments around this, Mitch and Bryan, is,they actually, like, call out how,you think about everything that these big tech companies could do, it's really part of an infrastructure. And it really is our day to day basis, I mean, just like yesterday, I, I Venmo, money to like five different people. that, that digital payment that the approach is, it's just part of our everyday life. It's no different than, carrying a wallet and, giving out some cash to a store, years ago, decades ago, right?

When we were like an all cash society. but they kind of even alluded that it's such an infrastructure. It's like the railways. And the telecoms and I kind of got a,a laugh out of the railway comment, right? Because I think about if there's anything more, I don't know, antiquated and hasn't moved very much.

It's railway, railroad tracks, right? I mean, they're like all the same since the golden spike. they're still the same distance and whatnot. so, it's one of those things where at least in digital payments, it's, I'm glad they see it as essential and as an infrastructure. and I think the one thing that I do see from this, it's pushing fintechs and big tech is that they can maintain and develop the same kind of trust and confidence that a bank has now granted. I know some people say I can't trust my bank, but we all do. we put our paychecks in there every day thinking that we're going to get it out sometime. 

Mitch Woods: Mike, I think you bring up a good point there, right? It's not, I think with some of these things, it's not really about trust. It's about convenience. these companies have found a hole, right? They found a way into an industry that they weren't in before. And they've kind of inserted themselves in there and.

And change the game a little bit. It's not about the trust. it's about the convenience of those payments. It's, you don't have to write someone to check. They don't have to take it into the bank, deposit it, wait three days. it's instant. it's the instant gratification, which is more important.

Sometimes I feel like today than the trust. So, I mean, I guess a little bit of a different mindset there. 

Bryan Peckinpaugh: you raise a good point. Mitch, but I think the reality is it's somewhere in the middle. So, so should the banks, should the FIs have pushed more into these real time P2P,solutions? No question. should they have maybe ditched some of their investment or given up on some of the investment in the slower rails?

To do more real time between institution payments. Sure. But at the same time, there's reason for it, right? There is reason that you don't want money to come out of your account instantaneously to go to another. non trusted entity, right? It's one thing if the three of us are paying each other and, we all go out to lunch and Mitch, you pick up the check and Mike and I both Venmo you,maybe a fraction of what we owe, maybe all of what we owe, but we know who you are.

We know that we are trying to give you money,Easy example is if we decided to pay you in cash and we hand the physical dollars to you. Yeah, that makes sense. And you would want to replicate that in a digital world, but even in, even in the scenario where we know you, we don't know the technology, right?

We don't know what is happening and what the points of potential failure are and how a bad actor. could get access to either side of that transaction, and take it out of the, secure channel at any point in time, right? All it takes is somebody who has access to, your,Venmo at that point to, drain that out of an account as an example. And then my intention to pay you fall short because of things outside of any of our control. So, so there are absolutely reasons that. This shouldn't maybe have moved as quick as it did.you look at how fast something like Venmo just became a verb, right? How it went from initial product launch to becoming a verb for paying somebody a person to person.

Maybe that, should have taken a little bit more time. Maybe there should have been more, regulatory oversight and insurance of,the security of all of those, applications, although Venmo. for the most part has been pretty safe, pretty secure. but it does open up a, an entire world of potential fraud, and issues that aren't addressed the way they would be if they were going through the traditional financial services channels.

So, there's a gray area in the middle here. I think, it, it, Does beg for some oversight. What that oversight looks like is really what the issue at hand is.

Mike Horrocks: and Bryan, you brought up a good point and I just want to pull that thread a little bit more. You were talking about,the data that they can mine from this. And I think that's also, it's not just the safety and the transaction itself. Because like I mentioned, I've demoed a couple of people the other day, one of them, I caught it before I did it. I was supposed to send them like 54 dollars and some change and I almost sent them 5400 dollars and so fortunately that would have been resolved, but it would have been an unfortunate, if I was sending to somebody I didn't know. But the other thing is not just the transaction. But it's the data and the behaviors around that.

And what could some of these big tech firms do that would be very malicious in terms of knowing what my behaviors are around certain vendors and what else could they use against me, not only just in the moment, but that they could, use inappropriately. Two years, three years down the road, right?

That's, I think, something else that the CFPB and, others are thinking about. It's just that marriage between big tech and digital marketers. because if it's a transaction, it's once it's one and done. But in the digital world, it's all about how much interaction, what's the engagement I can have.

How many times can I keep you on that screen? And they're collecting data around you and around that transaction. And again, it's that excess of data that I think has the CFPB concerned. I, think that's where they're trying to protect consumers as well.

Bryan Peckinpaugh: Yeah, I think that's the crux, right? Is that there is a legitimate need to protect the consumer from themselves. we have talked about it on this podcast before the level of financial literacy has certainly gone down, people don't understand all of the elements, the way that we used to, and a lot of it is because of these tools that are out there, how easy.

It is to get personal credit, to get, to make payments, at the drop of a hat,funds move faster than they ever did. And that can be dangerous to folks who don't understand, the implications.

Mike Horrocks: I think the other fun thing will be how fast does the CFPB and just the nation,move on this, right? I mean, It's been over a quarter of a century before the, where we were talking about, well, coins are dead. 

Bryan Peckinpaugh: They should be. I'm tired of getting them.

Mike Horrocks: I know, but you know, it's like every month it seems like the mints producing another, coin of some sort. And it's like, okay, so what's going to happen here as well. How fast will we eventually move and solve this problem?

Mitch Woods: Well, Bryan, Mike, I think some great insights today. One thing that I learned is that I am not footing the bill for lunch when we go out. but I think anyone tuning in today, some great takeaways, around what's going on in, in tech industry and how that's really shaping,some of the strategy in the banking industry as well.

So I thank you guys both for your time and your insights and thanks everyone listening, for, tuning into today's episode of Lending Made Easy.