“Fintech is basically if Wall Street and Silicon Valley had a kid,” said Jeff Hauser, director of the Revolving Door Project, a progressive advocacy group. “Over time if they get too strong in these unregulated areas, they will take advantage of people with less access to lawyers and less understanding of the fine print.”
Those suspicions about fintech will be on full display this week when the House Financial Services Committee, led by Rep. Maxine Waters (D-Calif.), summons Robinhood co-founder Vlad Tenev, other executives and hedge fund managers linked to the brokerage for a potentially explosive hearing. Among the witnesses scheduled to testify at the Feb. 18 session are GOP megadonor Ken Griffin, a hedge fund titan whose company, Citadel Securities, is a key source of revenue for Robinhood.
Robinhood halted stock purchases by the small investors as hedge funds and other firms that were betting against GameStop and other struggling companies began to lose massive amounts of money as the stock soared.
The brokerage has attributed the move to demands from a clearinghouse — a middleman that finalizes and settles trades — for $3 billion to back up trades as it continued to rack up buy orders from its customers. But the cutoff of the individual investors drew fire from everyone from Sens. Elizabeth Warren (D-Mass.) to Ted Cruz (R-Texas), who echoed criticism of Robinhood for restricting its customers while hedge funds could keep trading.
Progressive Democrats’ increasingly bitter attitude toward the emerging companies is also being played out in a battle over President Joe Biden’s choice to head the Office of the Comptroller of the Currency, the top cop for the nation’s largest banks, because the expected nominee has close ties to fintech.
Michael Barr has faced pushback for his paid advisory roles at two prominent firms. He advised cryptocurrency trader Ripple between 2015 and 2017 on international payments matters and was a consultant for Lending Club on various projects, including on the “Small Business Borrowers’ Bill of Rights.” Those relationships have raised fears among some progressives that he might be too cozy with the industry.
Senate Banking Chair Sherrod Brown (D-Ohio), who has long been skeptical of claims from the fintech industry, has actively supported an alternative candidate for comptroller, law professor Mehrsa Baradaran.
Finally, a newly energized Consumer Financial Protection Bureau under Biden is set to increase scrutiny of fintech on everything from lending terms to the handling of personal data, a sharp pivot from the CFPB under President Donald Trump, which tended to cast competition from innovative firms as beneficial for consumer protection.
Fintech is an umbrella term that refers to innovation across a broad spectrum, including groundbreaking technology like cryptocurrency, which allows for faster payments, or new ways of sharing data. Many startups offer services that banks and other Wall Street firms traditionally provide, increasing the convenience of activities like lending or trading stocks by leveraging the internet.
One example: small-dollar loans that consumers pay back in installments. “They’ve made it so much easier for people to use these services vs. dragging your 50-inch television down to a pawn shop,” said Mary Jackson, CEO of the Online Lenders Alliance. She said online lending has also increased racial equity by making relevant decisions “colorblind.”
Robinhood, for its part, has sold itself as a way of helping regular people invest in stocks, a lofty goal that’s consistent with how the financial system is supposed to work.
“Robinhood set out to democratize finance and enable everyone to participate in what is widely recognized as the greatest wealth creator of the last century — the stock market,” Jim Swartwout, chief operating officer of Robinhood Securities, wrote in a Feb. 4 blog post. “This movement is happening now, at scale, and it’s one of the greatest financial transformations our country has ever seen.”
According to data from the company, roughly half of its customers are first-time investors, with a median age of 31, suggesting it is satisfying unmet needs. But the frenzy that saw the stocks of otherwise struggling companies like GameStop and AMC Entertainment rise and fall dramatically raises questions as to whether their customers understand the risks.
“Investing and gamification are in some ways opposing concepts,” Rep. Jim Himes (D-Conn.), a senior member of the House Financial Services Committee, said in an interview. “There aren’t a lot of people who make a lot of money investing, but those who do, do it in the long term. The idea you’re going to be a responsible investor by regularly trading via your device is just plain wrong, and a lot of people are going to get hurt by that idea.”
At the center of the debate is a long-standing goal, both by policymakers and the private sector, to reduce the number of people who are shut out of the financial system.
Without a bank account or a credit score, people have a harder time getting government aid or taking out loans. But more financial inclusion alone isn’t necessarily helpful, as evidenced by the subprime mortgage crisis that had dire consequences for people who lost their homes.
The question for policymakers is whether fintech will help increase people’s access to wealth without leaving them vulnerable to other abuses.
“One of the general promises of fintech is that this innovation will lead to increased inclusion and more access to all sorts of communities that have been left out in the past,” a Senate Democratic aide said. “Enough time has passed that a lot of these guys would need to show some results for their claims.”
Moves by a Trump-era regulator might not have helped their case politically. Recently departed Acting Comptroller of the Currency Brian Brooks, a former top lawyer at cryptocurrency exchange Coinbase, pushed to make it easier for upstart companies to share some of the privileges given to highly regulated banks.
Waters, the House Financial Services chair, has called for rolling back most of what Brooks did in that role, including his move to clarify that banks could hold crypto assets on behalf of their customers. “Why would we rescind that? What is political about that?” Brooks said in response during an exit interview last month.
Some fintech experts warn that the U.S. risks falling behind as other countries increasingly develop comprehensive rules of the road.
“I’m really worried that we are going to become Neanderthals,” said Linda Jeng, a former official at multiple regulators, including the Federal Reserve.
“It will be incumbent upon fintechs to inform policymakers today about what they do, what kinds of services they provide, because you look at countries and jurisdictions around the world, and they’re moving forward,” said Jeng, now a visiting scholar at Georgetown Law School and global policy head at fintech Transparent Systems.
For banks, fintech poses both opportunity and competition. Community banks have been partnering with such firms to provide services because they often lack the resources to afford technology development in-house.
However, rules that help fintechs also open the door to tech giants like Google and Amazon to further enter finance, a potential threat to banks that looms large and boosts skepticism among Democrats.
Ultimately, to really improve financial outcomes, lawmakers have to look at the structure of the entire system, argued Saule Omarova, a professor at Cornell Law School.
“We’re still dealing with structural inefficiencies,” she said, citing the Robinhood episode. “Congress needs to be thinking about how the financial market is set up from the core out if we don’t want these things to happen.”