SF Fed’s Fintech Team Answers Questions About Inequity, Supervision, Career Opportunities, and Innovation

October 15, 2020

Can the use of data and technology improve equity? How should fintech be supervised? Fintech Director Mitchell Lee and Fintech Policy Advisors Tayeba Maktabi and Kaitlin Asrow addressed these questions and more in a Quora session about the growing financial technology industry. Users’ submitted questions on a wide range of topics, including economic inequality, how to get into the fintech field, as well as what the SF Fed Fintech team is up to now. Here’s a look at some of the most popular queries.

How can the Fed use fintech to reduce the economic inequality?

Mitchell: The Federal Reserve has conducted a lot of research on economic inequality, but I am particularly concerned about the impact of COVID-19 as the early analysis I have seen shows that smaller businesses and minority-owned businesses are being disproportionately impacted. Even before this crisis, the Minority Business Development Agency of the US Department of Commerce conducted studies that show minority-owned businesses are generally smaller by employee size, more highly concentrated in vulnerable labor-intensive industries, and generate lower revenues than their non-minority counterparts.

Not surprisingly, the virus and its impact on shutdowns are weighing heavily on these businesses. As a son of small business owners, this hit close to home. My parents solely relied on our restaurant to pay their bills, their home mortgage, and to send my sister and me to college—something they could not afford to do for themselves.

So how does the Fed and fintech fit into the picture? Many fintech firms have emerged since the 2008 crisis with a stated goal of tackling some of the issues of economic inequality, including providing better access to underbanked consumers, providing lending to smaller businesses, expanding services to low-income segments of the population, and improving financial transparency.

How should fintech be supervised, and based on what types of regulation or guidance?

Mitchell: This is one of the most challenging questions out there today from a supervisory perspective and has implications beyond fintechs. Our current regulatory framework for financial institutions in the US is fairly fragmented and includes not only the Federal Reserve, but also the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Consumer Financial Protection Bureau (CFPB) among others.

The scope of these regulators depends on the type of charter and/or legal entity the financial institution chooses, the types of products they offer, and also the types of consumers they target. This gets rather complex and some critics fairly point out that the complexity also means that different types of institutions may be subjected to different levels of regulatory scrutiny even if they engage in similar activities. For example, bank and nonbank lenders who may both be offering a similar kind of loan product can be subjected to different regulators and regulations. In fact, some of the biggest risks during the 2008 Financial Crisis emanated from nonbanks.

How has the SF Fed Fintech group influenced the industry?

Tayeba: Our team has a number of ongoing initiatives aimed at engaging more closely with the industry. Our Fintech Navigate program provides industry partners with an opportunity to meet with SF Fed analysts on topics they may be challenged with. The SF Fed also co-hosted Innovation Office Hours with the Board of Governors August 11–13 to meet with banks and technology firms offering digital banking and payment solutions.

These initiatives are geared at both learning from the industry about trends in the market but also helping answer industry questions on issues such as third-party vendor risk management or Bank Secrecy Act/Know Your Customer laws as they may apply to specific products or services they are offering to consumers. In addition, a fintech firm may not always know what laws may apply to them or even who their regulator(s) may be. As such, our objective through these initiatives are to help technology and banking firms developing digital products and services understand the risks and to design products and services with consumer protection and equitable access in mind.

What advice would you give a high school student who is interested in fintech? What are the emerging skills? What area should be focused on in college?

Tayeba: First of all, I’m excited to know you are interested in fintech! It’s certainly an area that is constantly evolving with increasing opportunities. Here are a few things you can do:

  • explore and research,
  • make room in your schedule to take a FinTech class or two,
  • and speak to individuals who may be working in fintech.

Kaitlin: Fintech is a huge topic, so there is a lot to explore. My biggest piece of advice is to study something that you are genuinely curious about and interested in. That will allow you to enjoy what you do, while making a difference.

In terms of particular topic areas, I think cybersecurity and data governance/management are only going to become more important. I would also point you to “privacy-enhancing technologies,” which are an interesting branch of innovation that can help us use data for everyone’s benefit, while also protecting it.

What is the SF Fed Fintech team doing to combine technology, inclusion, and innovation?

Tayeba: One of the foremost goals of the SF Fed Fintech team is to promote innovation that is inclusive of all U.S. consumers, protects users, and is safe and sound. We understand that innovation comes with risks; our goal is to make sure the balance of risks does not exceed the benefits.

Our team in San Francisco has spent several years working closely with the fintech community. Through our engagement, we have not only learned to appreciate the benefits of technological innovation but, in some cases, have seen it as an important tool in enhancing access to underserved and underbanked communities.

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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.