Dubious Story On Strategic Funding Unfounded
June 22, 2017
A questionable story published by Allen Taylor of Lending Times pushed the boundaries of journalism earlier this week. Citing a single anonymous source, Taylor wrote that an alleged breakdown in negotiations between Strategic Funding Source (SFS) and CAN Capital (CAN) had compounded into more problems for SFS when a burst water main drenched their main office and server room at a time when they supposedly had no disaster backup plan in place.
“Unfortunately, in order to save money, they [SFS] did not have a disaster backup plan in place,” is the quote Lending Times ran with from their anonymous and only source.
Peculiar on its face, especially with no published response from SFS to confirm it, the story was nonetheless rebroadcast by a new blog calling itself SmallBusinessLending.io, who added their own little editorial flair to it in an email they sent out.
“Having cut a few corners to save money, the company [SFS] didn’t have a disaster backup plan in place. Owch,” the email said.
Eager to determine the accuracy of the story, I reached out to SFS personally for comment, whose executives responded with an astonished bewilderment. They invited me over to go see for myself, which I took them up on. AltFinanceDaily had ranked SFS as one of the largest small business funders of 2016, and their demise (especially in a great flood of some kind) would indeed be newsworthy.
A water main was struck on the 5th floor of Tower 45 at 120 West 45th Street, only one of three buildings in Manhattan that SFS has offices in. Andy Reiser, the company’s CEO, and David Sederholt, a Senior Advisor, gave me a tour of several floors, including the 5th where the incident happened. There is some water damage on lower floors, prompting some employees and executives to reshuffle their workspaces, and necessitating the use of available office space up on the 19th floor. That much is true.
Little, if anything seemed to have been disrupted, however, least of all their servers, which Sederholt maintained is in Amazon’s cloud anyway. They have redundancy built in nonetheless for all types of disasters should something impede New York’s operations, they explained, with Virginia and Texas operations as their fallback.
Just to be sure, I visited their other Manhattan offices at 1501 Broadway and 145 West 45th street, each of which hummed with normal activity.
The company wouldn’t comment on matters regarding CAN. CAN, if you recall, suspended funding operations almost 7 months ago and rumors have surfaced from time to time on industry forums regarding a comeback, but none have been confirmed.
On June 13th, American Banker reported that CAN had laid off an estimated 55 employees in their Kennesaw, GA office.
A message left for Lending Times about their reporting on SFS had not been answered by the time this story went live.
The Tesla of Alternative Lending
May 16, 2017
Tesla has autopilot. Apple has Siri. And Upstart has its own high-tech software model that places the startup in a category of its own for online lending. All three of these companies may be very different but what they have in common is a reliance on artificial intelligence and machine learning for their proprietary technology.
“You hear so much about how Tesla cars will drive themselves, how Google or Amazon home assistants talk to you to as if you’re human. In lending we are the first company to apply these types of technologies to lending,” Dave Girouard, Upstart co-founder and CEO told AltFinanceDaily.
So what is machine learning exactly, particularly as it relates to finance? One of the main components that goes into machine learning is not looking at the same data everybody else does. “We are known for looking beyond FICO and the credit report. We look at who the employer is, what industry you work in, where you went to college, what you studied, several hundred variables affect how we price credit,” he said.
Upstart, a direct-to-consumer lending platform, uses artificial intelligence and machine learning for everything from verifying a potential borrower’s identity, to making a credit decision, to pricing credit. Today 25 percent of the company’s loans are 100% automated.
“This is a radical departure from the industry,” said Girouard. “It’s a function of being able to build more automation to verify information about the borrower.”
Indeed the differences between machine learning and traditional credit models is kind of like comparing a self-driving vehicle to walking.
“The whole term machine learning implies that software gets smarter and better on its own with no human intervention. Every day thousands of repayments are made to Upstart along with delinquencies, and defaults. As this happens the software is adjusting its pricing on the next loan, learning in real time every day,” Girouard said, without even the slightest concern of tipping his hand.
“We have a several year head start and a data science team that are math and statistics PhDs. These are the types of people hired by Google or Tesla or Amazon. Traditional consumer credit doesn’t tend to have machine learning skills,” he added.
Nevertheless his vision for artificial intelligence and machine learning in the lending community is far greater than as it applies to Upstart alone. “We think virtually all flavors of lending will depend on AI/ML within 10 years. We’re at the very early stages, but it’s hard to imagine a successful lender anywhere who doesn’t use similar technology over time,” Girouard said.
Inside Upstart
Upstart is a hybrid lender that funds 20% of loans from their balance sheet. Two months ago they began licensing software as a service (SaaS). The software is managed by Upstart but it appears on the partner’s website. “A bank could use our technology to originate loans,” said Girouard, adding that the company is in conversations with two-to-three dozen banks about future partnerships.
The machine learning approach seems to lend itself to favoring certain demographics. In the case of Upstart, this happens to be millennials, evidenced by the lender’s average customer age of 28, almost all of whom have college degrees.
“Obviously we understood early that the millennial generation doesn’t have 20 years of credit history and they have a hard time getting loans. It struck us, tell me you wouldn’t give a loan to a 25 year old just because they have a thin credit file? It doesn’t make sense. What if they studied at Stanford and work at Google? There is more to be known about an individual than a FICO score,” said Girouard.
Perhaps the greatest evidence of whether or not Upstart’s approach is working is to catch a glimpse of the company’s balance sheet. Upstart expects to reach the $1 billion milestone for loan originations in calendar 2017. And perhaps even more telling is they anticipate being profitable by the summer. “An IPO for us would be a couple of years out,” Girouard said.
That timing could be perfect, particularly considering Wall Street’s apparent love/hate relationship with some players in the alternative lending space.
“People tend to paint the whole industry with one brush and it’s not a very pretty brush at the moment. But soon they will begin to appreciate there is a significant difference between these companies. Upstart really does have a very differentiated and unique product,” said Girouard.
What You Need to Know About The CFPB and Small Business Lending
May 10, 2017
On Wednesday, the Consumer Financial Protection Bureau (CFPB) held a hearing on small business lending. Here’s why it mattered and what you need to know:
Why: The 2010 Wall Street Reform and Consumer Protection Act, aka Dodd-Frank, empowered the CFPB to collect data on small business lending. The CFPB is just now getting around to rolling this out. The purpose is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses. In short, to determine if women and minority-owned businesses are operating on a level-playing field when it comes to accessing credit.
Who: “I’m an MCA funder, factor, equipment lessor or other, and this only applies to lenders right”?
Maybe, maybe not. Although Section 1071 makes several references to loans and credit, it doesn’t refer to the companies subject to data collection as small business lenders. Instead it says financial institutions which it defines as “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.” That sounds incredibly broad.
What: What are they trying to collect?
- the number of the application and the date on which the application was received;
- the type and purpose of the loan or other credit being applied for;
- the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant;
- the type of action taken with respect to such application, and the date of such action;
- the census tract in which is located the principal place of business of the women-owned, minority-owned, or small business loan applicant;
- the gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application;
- the race, sex, and ethnicity of the principal owners of the business; and
- any additional data that the Bureau determines would aid in fulfilling the purposes of this section.
How: Great question. The law says that where feasible the underwriter or analyst isn’t allowed to know if the business is woman-owned or minority-owned and that this information must be captured separately and kept secret from the underwriter. The section is actually called the “NO ACCESS BY UNDERWRITERS” section. Oddly, as this applies to all small business lending, not just faceless transactions, one wonders how an underwriter is supposed to avoid discovering the gender or ethnicity of the applicant. It is possible that in 2009 when this section was drafted, the architects could not imagine a business lending universe that looked beyond FICO scores and balance sheets.
When: It’s still early days. Right now the CFPB just wants to know everything about what these “financial institutions” do and how they do it before they start requiring the data be collected. To that end, they’ve published a Request For Information, seeking voluntary responses so that they can start formulating the data collection framework in a way they believe best.
Where: Where can you read and watch more about this? We’ve got some information on this page here, including a video of the hearing.
What should I do? Should I do anything?
Join an industry trade association. When it came to the proposed regulation in New York, they did most of the heavy lifting. There are many to choose from depending on your business model. In New York though, the regulations were purely proposed. Under Dodd-Frank, the CFPB already has the power to collect data. They’re just finally getting around to using it.
CFPB to Collect Data on Small Business Lending, Implement Section 1071 and Circulate RFI
May 10, 2017
Update: We are streaming the hearing LIVE on our home page.
Update: You can download the CFPB’s Request for Information here. A transcript of Cordray’s prepared remarks are at the bottom of the page.
Update: CFPB White paper estimates that merchant cash advances are less than 1% of the small business finance market on an aggregate dollar volume basis, factoring 7%, and equipment leasing 13%. They estimate that the small business financing market is roughly $1.4 trillion in size. They also estimate that there are less than 1.5 million merchant cash advance “accounts” in the US, more than 6 million term loan accounts, and more than 7 million factoring accounts.
Update: The CFPB is releasing a Request for Information (RFI), asking industry participants to define a small business, explain where small businesses seek financing and the kinds of products that are made available to them, reveal the categories of data that small business lenders are using and maintaining, and to provide input on privacy implications that may arise from disclosing information to the CFPB.
Update: The CFPB is indeed announcing their plans to implement Section 1071 of Dodd-Frank.
Beginning at 1:45PM EST on Wednesday, the CFPB will be holding a hearing in Los Angeles on small business lending. According to the agenda, “the hearing will feature remarks from Director Cordray, as well as testimony from consumer groups, members of the public, and industry representatives.”
Sources contend that the director will use the hearing as an opportunity to announce the agency’s plans for the implementation of Section 1071 of Dodd-Frank which grants the CFPB the authority to collect data from small business finance companies. Some critics have characterized the law as an attempt to push affirmative action into small business lending, while others worry the CFPB will attempt to exceed its statutory authority and exact penalties based on the data it collects.
Unless Trump fires Cordray for cause, the director’s term will continue until July 2018.
industry representatives making remarks at the hearing include:
- Todd Hollander, Managing Director, Union Bank
- Makini Howell, Executive Chef and Owner, Plum Restaurants, and Main Street Alliance Member
- Kate Larson, Director, U.S. Chamber of Commerce
- Elba Schildcrout, Director of Community Wealth, East Los Angeles Community Corporation
- Josh Silver, Senior Advisor, National Community Reinvestment Coalition
- Robert Villarreal, Senior Vice President, CDC Small Business Finance
If possible, we will attempt to embed the live stream on our site.
Full transcript of Cordray’s prepared remarks below
Thank you all for coming. It is good to be here again in Los Angeles. Today, the Consumer Financial Protection Bureau is announcing an inquiry into ways to collect and publish information about the financing and credit needs of small businesses, especially those owned by women and minorities. We are well aware of the key role they play in our lives. Small businesses help drive America’s economic engine by creating jobs and nurturing local communities. It is estimated that they have created two out of every three jobs since 1993 and now provide work for almost half of all employees in the private sector. Yet we perceive large gaps in the public’s understanding of how well the financing and credit needs of these entrepreneurs are being served.
As you probably know, Congress provided the Consumer Bureau with certain responsibilities in the area of small business lending. And there is a strong logic behind this. When I served as the Ohio Attorney General, we recognized the need to protect small businesses and nonprofit organizations by accepting and handling complaints on their behalf, just as we did for individual consumers – an approach that proved to be very productive. In addition, the line between consumer finance and small business finance is quite blurred. More than 22 million Americans are small business owners and have no employees. And, according to data from the Federal Reserve, almost two-thirds of them rely on their business as their primary source of income.
Congress specifically has charged the Consumer Bureau with the responsibility to administer and enforce various laws, including the Equal Credit Opportunity Act. Unlike other consumer financial laws, the ECOA governs not only personal lending, but some commercial lending as well. In fact, we have now conducted a number of ECOA supervisory examinations of small business lending programs. Through that work, we are learning about the challenges financial institutions face in identifying areas where fair lending risk may exist, and we are assisting them in developing the proper tools to manage that risk.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress took a further step to learn more about how to encourage and promote small businesses. To help determine how well the market is functioning and to facilitate enforcement of the fair lending laws, Congress directed the Consumer Bureau to develop regulations for financial institutions that lend to small businesses to collect certain information and report it to the Bureau. The Request for Information we are releasing today asks for public feedback to help us better understand how to carry out this directive in a way that is careful, thoughtful, and cost-effective.
***
We have considerable enthusiasm for this project. In my own case, I have seen firsthand how small business financing can have a big economic impact. When I served as the Treasurer of Ohio, we had a reduced-interest loan program to support job creation and retention by small businesses. The way the program worked was that the state could put money on deposit with banks at a below-market rate of interest, and this deposit was then linked to a same-sized loan to a small business at a correspondingly below-market rate. This so-called “Linked Deposit” program had been authorized more than twenty years earlier, but had gradually fallen into disuse.
At its core, however, the program made good sense. Small businesses are often in desperate need of financing to update and expand their operations, and if they can get inexpensive financing, they often can fertilize their ideas for growth and be even more successful. So we diagnosed the program and found that after its initial success, it had become too bureaucratic. We heard from both banks and businesses that the program, which was still paper-based, was so slow and cumbersome that nobody wanted to use it.
So we changed all that. We put the process online, rebranded it as the “Grow Now” program, and made specific commitments to those who wanted to participate in it. We told them they could fill out a typical application in 30-60 minutes, and we promised them they would have a yes-or-no answer on their application within 72 hours. That was not easy, and it required very close coordination with the banks that took part in the program. But we did it, and the “Grow Now” program really took off. Only about $20 million had been allocated when we started, but in less than two years we deployed more than $350 million, helping about 1,500 small businesses create or retain approximately 15,000 jobs across the State.
It was also exciting and interesting to see how the businesses were able to use the loan funds. I can recall a construction business in northeast Ohio that needed a loan to buy a large piece of equipment so the company could compete for new and different jobs. They got the money, they got the equipment, and they thrived. I recall a manufacturer in northern Ohio that needed money to turn their factory sideways on their property so they could utilize more space and employ more people. We funded the build-out, they executed on it, and they met their goals for growth of output, revenue, and jobs. And I recall a company in western Ohio that started out as a caterer, began making their own tents for events, recognized that they might be able to succeed as tentmakers, and needed financing to be able to bid on a major project with the U.S. Department of Defense. We got them the loan, they got the bid, and Inc. magazine named them one of its 500 fastest-growing businesses of that year!
***
The moral of this story is that business opportunity – especially opportunities for small businesses – often hinges on the availability of financing. People have immense reserves of energy and imagination. Human ingenuity is the overwhelming power that allows human beings to reinvent the future and make it so. These forces unleash what Joseph Schumpeter called the “gales of creative destruction” that constantly mold and reshape the patterns of our economic life. Innovation has sharpened our nation’s economic edge for generation after generation, but when credit is unavailable, creativity is stifled.
To make the kind of meaningful contributions they are capable of making to the American economy, small businesses – particularly women-owned and minority-owned businesses – need access to credit. Without it, they cannot take advantage of opportunities to grow. And with small businesses so deeply woven into the nation’s economic fabric, it is essential that the public – along with small business owners themselves – can have a more complete picture of the financing available to this key sector.
Some things we do know. We are releasing a white paper today that lays out the limited information we currently have about key dimensions of the small business lending landscape. According to Census data, and depending on the definition used, there are an estimated 27.6 million small businesses in the United States. We estimate that together they access about $1.4 trillion in credit. Businesses owned by women and minorities play an especially important role in this space. Women-owned businesses account for over one-third (36 percent) of all non-farming, private sector firms. The 2012 Survey of Business Owners, the most recent such information available, indicates that women-owned firms employed more than 8.4 million people, and minority-owned firms employed more than 7 million people. Those are huge numbers: by comparison, in 2014 fewer than 8 million people were employed in the entire financial services sector.
When small businesses succeed, they send constant ripples of energy across the economy and throughout our communities. For example, a 2013 study by the Federal Reserve Bank of Atlanta found that counties with higher percentages of their workforce employed by small businesses showed higher local income, higher employment rates, and lower poverty rates. In order to succeed, businesses need access to financing to smooth their cash flows for current operations, meet unexpected contingencies, and invest in their enterprises to take advantage of opportunities as they arise. Another study found that the inability to obtain financing may have prompted one-in-three small businesses to trim their workforces and one-in-five to cut benefits.
Unfortunately, much of the available data on small business lending is too dated or too spotty to paint a full picture of the current state of access to credit for small businesses, especially those owned by women and minorities. For example, we do not know whether certain types of businesses, or those in particular places, may have more or less access to credit. We do not know the extent to which small business lending is shifting from banks to alternative lenders. Nor do we know the extent to which the credit constraints that resulted from the Great Recession persist and to what extent. The Beige Book produced by the Federal Reserve on a regular basis is a survey of economic conditions that contains a huge amount of anecdotal information about business activity around the country. But it has no systematic data on how small businesses are faring and whether or how much they are being held back by financing constraints.
Given the importance of small businesses to our economy and their critical need to access financing if they are to prosper and grow, it is vitally important to fill in the blanks on how small businesses are able to engage with the credit markets. That is why Congress required financial institutions to report information about their applications for credit from small businesses in accordance with regulations to be issued by the Consumer Bureau. And that is why we are here today for this field hearing.
***
The inquiry we are launching today is a first step toward crafting this mandated rule to collect and report on small business lending data. To prepare for the project, we have been building an outstanding team of experts in small business lending. We are enhancing our knowledge and understanding based on our Equal Credit Opportunity Act compliance work with small business lenders, which is helping us learn more about the credit application process; existing data collection processes; and the nature, extent, and management of fair lending risk. We also have learned much from our work on the reporting of home loans under the Home Mortgage Disclosure Act, which has evolved and improved considerably over the past forty years.
At the same time, we recognize that the small business lending market is much different from the mortgage market. It is even more diverse in its range of products and providers, which range from large banks and community banks to marketplace lenders and other emerging players in the fintech space. Community banks play an outsized role in making credit available to small businesses in their local communities. And unlike the mortgage market, many small business lenders have no standard underwriting criteria or widely accepted scoring models. For these reasons and more, we will proceed carefully as we work toward meeting our statutory responsibilities. And we will seek to do so in ways that minimize the burdens on industry. Our Request for Information released today focuses on several issues.
First, we want to determine how best to define “small business” for these purposes. Despite the great importance of these firms to our economy, there is surprisingly little consensus on what constitutes a small business. For example, the Small Business Administration, in overseeing federal contracting, sometimes looks at the number of employees, sometimes looks at the annual receipts, and applies different thresholds for different industries. For our part, the Consumer Bureau is thinking about how to develop a definition that is consistent with the Small Business Act, but can be tailored to the purposes of collecting business lending data. So we are looking at how the lending industry defines small businesses and how that affects their credit application processes. Having this information will help us develop a practical definition that advances our goals and aligns with the common practices of those who lend to small businesses.
Second, we want to learn more about where small businesses seek financing and the kinds of loan products that are made available to them. Our initial research tells us that term loans, lines of credit, and credit cards are the all-purpose products used most often by our small businesses. In fact, they make up an estimated three-fourths of the debt in the small business financing market, excluding the financing that merchants or service providers extend to their small business customers to finance purchases of the sellers’ own goods and services. But we want to find out if other important financing sources are also being tapped by small businesses. Currently, we have limited ability to measure accurately the prevalence of lenders and the products they offer. We also want to learn more about the roles that marketplace lenders, brokers, dealers, and other third parties may play in the application process for these loans. At the same time, we are exploring whether specific types of institutions should be exempted from the requirement to collect and submit data on small business lending.
Third, we are seeking comment about the categories of data on small business lending that are currently used, maintained, and reported by financial institutions. In the statute, Congress identified specific pieces of information that should be collected and reported. They include the amount and type of financing applied for; the size and location of the business; the action taken on the application; and the race, ethnicity, and gender of the principal owners. Congress determined that the reporting and disclosure of this information would provide a major boost in understanding small business lending. At the same time, we are sensitive to the fact that various financial institutions may not currently be collecting and reporting all of this information in the context of other regulatory requirements. And we understand that the changes imposed by this rule will create implementation and operational challenges.
So we will look into clarifying the precise meaning of some of these required data elements to make sure they are understood and consistently reported. We will be considering whether to add a small number of additional data points to reduce the possibility of misinterpretations or incorrect conclusions when working with more limited information. To this end, we are seeking input on the kinds of data different types of lenders are currently considering in their application processes, as well as any technical challenges posed by collecting and reporting this data. We will put all of this information to work in thinking carefully about how to fashion the regulation mandated by Congress under Section 1071 of the Dodd-Frank Act.
Finally, the Request for Information seeks input on the privacy implications that may arise from disclosure of the information that is reported on small business lending. The law requires the Consumer Bureau to provide the public with information that will enable communities, government entities, and creditors to identify community development needs and opportunities for small businesses, especially those owned by women and minorities. But we also are authorized to limit the data that is made public to advance privacy interests. So we will be exploring options that protect the privacy of applicants and borrowers, as well as the confidentiality interests of financial institutions that are engaged in the lending process.
***
The announcement we are making today, and the work we are doing here, reflect central tenets of the Consumer Financial Protection Bureau. We are committed to evidence-based decision-making. We aim to develop rules that meet our objectives without creating unintended consequences or undue burdens. We want to see a financial marketplace that offers fairness and opportunity not just to some, but to all. A marketplace that does so without regard to race, ethnicity, gender, or any of the other elements of our fabulous American mosaic. We all know that small businesses are powerful economic engines. They supply jobs that lift people out of poverty or dependence, teach essential skills, and serve as backbones of our communities. So we mean to meet our obligation to develop data that will shed light on their ability to access much-needed financing. It is essential to their future growth and prosperity, and therefore to the growth and prosperity of us all. Because what Cicero observed in ancient Rome still holds true today. He said, “Nothing so cements and holds together all the parts of a society as faith or credit.” Our communities depend on both of those precious things just as much today.
As we launch this inquiry, I want to remind all of you that we value the feedback we get. We take it seriously, consider it carefully, and integrate it into our thinking and our approach as we figure out how best to go forward with this work. So we ask you to share your thoughts and experiences to help us get there. And we thank you again for joining us today.
Two Small Biz Owners Talk Online Borrowing
May 5, 2017
Katie Basson, President of Birch Tree PromotionsDuring National Small Business Week, we wanted to see what we can glean from a couple of small business owners who have taken to the Internet for their capital needs. Entrepreneurs Katie Basson of Birch Tree Promotions and Asha Waterstreet of Tasteful Additions document their experience as first-time online borrowers, and here’s a hint: Both of them would do it again.
And while their stories are unique, there are some parallels in Basson’s and Waterstreet’s online borrowing experience starting with the fact that both women got their capital needs met through SmartBiz Loans. Both raved about customer service. And for both, marketing and the media played a key role in their decision process.
Where their stories diverge, however, is in their response to the amount of financial products targeting women-owned small businesses. While Waterstreet does not give much thought to demo-tailored loans, Basson’s experience is that the number of programs geared toward women small business owners is lacking. This despite the fact that the United States is home to more than 11 million women-owned small businesses who employ millions and produce $1.6 trillion-plus in combined revenue.
Meanwhile SmartBiz Loans seems to buck the banking trend when it comes to extending capital to entrepreneurs like Basson and Waterstreet. “One third of loans [we process] are to women-owned businesses, which is higher than the average for traditional bank loans to small businesses,” Evan Singer, CEO of SmartBiz Loans, told AltFinanceDaily.
Katie’s Story
Birch Tree Promotions, whose name was inspired by a trip to Basson’s grandparents New England cottage where the moon-lit birch trees shined, was founded in 2006. The Newburyport, Mass.-based business, whose annual revenue hovers at about $1 million, specializes in selling premium promotional items. Similar to the birch tree at that vacation cottage, Basson seeks to make her brand stand out from the rest.
“It’s amazing to do this kind of volume for such a small place. I attribute that to technology, which is why I completely appreciate a company like SmartBiz that leverages that technology to be efficient,” said Basson, who counts among her clients Bain Capital, Philips and Amazon Robotics.
Her need for capital arose with a growth spurt during which time she hired a number of part-time employees.
“Up until [using SmartBiz Loans] we were sort of going along using lines of credit from local banks. I expressed my desire to have a long-term solution help with cash flow so it’s not boom and bust all the time. Instead there would be a significant amount of capital to use for managing the cash flow of the business where making payments each month made sense. None of them were interested. Somehow I didn’t fit their traditional model,” she explained.
The roots of Birch Tree Promotions reside in Basson’s quest to achieve a work/life balance, throughout which she observed financing needs for women-owned home-based business being overlooked.
“There was nothing I could see out there that was targeted to me. I didn’t have a storefront; I’m working out of my home office. That made it seem suspect to them. I wasn’t serious if I didn’t own office space,” she noted.
But Basson, whose business is run 100 percent online, would not take no for an answer. “If I could pay a $20,000 line of credit, why wouldn’t they view me as a viable credit risk?” she quipped. So Basson set out on a journey to find a lender that was more open minded. She read about SmartBiz loans in an article published by a major financial publication, and then it was off to the races.
“I was amazed at how easy it was and how quickly everybody responded to me,” said Basson, adding that she even received a call on a Friday night from a SmartBiz representative to let her know where her loan stood and so that she wouldn’t have to worry over the weekend.
SmartBiz Loans matched her up with First Home Bank in Florida for an SBA-backed loan. Basson borrowed $200,000 over a 10-year term and her monthly payment is $2,274. The loan process took four weeks.
“Managing cash flow was the biggest, most important piece in addition to having funds available should I need them for big orders. We need some resources if we’ve just landed a huge order. We pay for the goods and then wait to get paid by the big company, and we needed more financial flexibility for that,” said Basson.
Perhaps the greatest testament to her online borrowing experience resides in whether or not she would return to the online lender for her capital needs in the future. The answer? “Indeed” she would.
Asha’s Story
Waterstreet launched Tasteful Additions about six years ago in Rochester, New York. The inspiration for her business came from a family vacation to North Carolina where she and her daughter visited a tasting store featuring flavored olive oils and balsamic vinegars. Ten bottles later coupled with frequent requests from her 12-year old for salads at dinner, Waterstreet knew there was something there.
So she opened up her own tasting store featuring flavored olive oils, balsamic vinegars and gourmet salts. And while in recent weeks she brought her small business entirely online doing away with the brick-and-mortar location, Waterstreet came across a need for capital about three years ago.
“I wanted to expand some of my products, and that was primarily the reason I decided to apply for a loan to get more capital. Credit cards were too high interest and I didn’t want to do that,” she said, adding that she initially went to her local banks only to be met with a process that she described as “tedious.”
In fact, after inquiring with a traditional bank for a loan, she was later greeted by her local banker with a pile of paperwork that she immediately rebuffed. “Being a small business and with me running things I didn’t have time, honestly. I’m trying to open the store, run the business and meet with customers, and I was like, ‘forget it,’” she said.
Instead she opted opting to complete an online application, a process she described as “simple.”
“They took care of everything. And when they had questions, they called me. It was so easy. Whenever you think something’s too easy you wonder, ‘What’s the catch?’ I was shocked there really wasn’t a catch,” said Waterstreet reflecting back.
It was while reading a food trade magazine that Waterstreet came across and ad for SmartBiz Loans. The rest is history. “I read about what they do. I called and the process was so easy and quick. And I got a very good interest rate as well. I was not getting raked over the coals or anything like that,” she said.
Waterstreet would not discuss the details surrounding her SBA loan but suffice to say that if she were to find the need to access more capital in the future, she would likely go to SmartBiz first.
Neither Basson nor Waterstreet considered any other online-lenders.
Fintech Sandbox? States, OCC Mull Regulatory Options
May 2, 2017It’s called the “New England Regulatory FinTech Sandbox.”
State banking regulators across the six New England states are exploring the creation of a regional compact that would allow financial technology companies to experiment with new and expanded products in “a safe, collaborative environment,” says Cynthia Stuart, deputy commissioner of the banking division at the Vermont Department of Financial Regulation.
Stuart asserts that she and her New England cohorts are adroitly positioned and uniquely qualified to oversee laboratories of finance. In Vermont, for example, she heads an agency that oversees regulation and examination of banks, trust companies, and credit unions as well as such nonbank financial providers as mortgage brokers, money transmitters, payday lenders and debt adjusters.
Financial watchdogs at the state level, Stuart observes, “are already witnesses to a wide breadth of financial services offerings and understand how they impact communities and consumers. As technology intersects with financial regulation,” she adds, “state regulators also appreciate the need to be open to technological innovation while balancing risk and return.”
The regional fintech sandbox is the brainchild of David Cotney, the former Massachusetts Commissioner of Banks, and Cornelius Hurley, director of Boston University’s Center for Finance, Law and Policy. The sandbox stitches together elements of Project Innovate, a development program for fintechs inaugurated by the U.K.’s banking regulator, and the European Union’s “passport” model for cross-border banking operations.
In the U.K., the Financial Conduct Authority is supporting both small and large businesses “that are developing products and services that could genuinely improve consumers’ experience and outcomes,” according to a 2015 report by the London agency. In harmonizing the regulatory regime for the sandbox across state lines of Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and Connecticut, the program emulates the EU’s “passport.” Since 1989, a bank licensed in one EU country has been able to set up shop there while – thanks to the “passport” –operating seamlessly throughout the 28 states of the EU (soon to be 27 after “Brexit”).
“It’s still preliminary,” Cotney says of the proposed New England sandbox-cum-passport, “but we’ve talked to the financial regulators in all six states and there’s universal openness. Nobody want to be seen as being a barrier to innovation.”
(Barred by law from lobbying in Massachusetts, Cotney hands off the Bay State duties to Hurley while he meets with regulators and other officials in the five remaining New England states. In March, Cotney was named a director at Cross River Bank, a Fort Lee, N.J.-based, $600 million-asset community bank known for its partnerships with peer-to-peer lenders including Lending Club, Rocket Loans and Loan Depot.)
This nascent effort of financial Transcendentalism in New England is, meanwhile, taking place against the backdrop of an increasingly acrimonious battle between the Office of the Comptroller of the Currency and state banking authorities over the licensing and regulation of fintech companies. At issue is the OCC’s plan announced in a December, 2016 “whitepaper” to issue a “special purpose national bank” charter to nonbank fintechs.
Siding with the OCC are the fintechs themselves, including Lending Club, Kabbage, Funding Circle, ParityPay, WingCash. “A special purpose national bank charter for fintechs creates an opportunity for greater access to banking products, empowers a diverse and often underserved customer base, promotes efficiency in financial services, and encourages industry competition,” Kabbage wrote to the OCC in a sample industry comment to its whitepaper (which is on the agency’s website).
Also on board for the OCC’s fintech charter are powerful Washington trade associations such as Financial Innovation Now, the membership of which comprises Amazon, Apple, Google, Intuit and PayPal, and industry research organizations like the Center for Financial Services Innovation. The U.S. banking establishment also appears largely supportive of the OCC. While qualifying its imprimatur somewhat, the American Bankers Association declared that it “views the OCC’s intent to issue charters as an opportunity to further bring financial technology into the banking system…”
But an irate army of detractors is condemning the fintech charter outright. Consumer groups, small-business organizations, community banks, and state attorneys general number among the furious opposition. No cohort, however, has been more hostile to the OCC’s fintech charter than state banking regulators.
Maria T. Vullo, superintendent of New York State’s Department of Financial Services, has emerged as a firebrand. “The imposition of an entirely new federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape,” she wrote to the OCC earlier this year, “will invite serious risk of regulatory confusion and uncertainty, stifle small business innovation, create institutions that are too big to fail, imperil crucially important state-based consumer protection laws, and increase the risks presented by nonbank entities.”
Although big-state regulators from New York, California and Illinois have been in the vanguard of opposition, their unhappiness with the OCC is widely shared. Vermont regulator Stuart, who emphasizes the need for regulators “to embrace change,” nonetheless disparages the OCC’s endeavor.
“Of particular concern is the creation of an un-level playing field for traditional, full-service Vermont institutions to the advantage of the proposed nonbank charter,” she told AltFinanceDaily. “The special purpose national nonbank charter would not be subject to most federal banking laws and would be regulated with a confidential OCC agreement. The disparity in regulatory approaches is concerning.”
What had been confined to a war of words – rounds of angry denunciations packed into letters and press releases directed at the OCC — reached fever-pitch last week when, on April 26, the Conference of State Banking Supervisors filed suit against the OCC in federal court. The lawsuit seeks to prevent the agency “from moving forward with an unlawful attempt to create a national nonbank charter that will harm markets, innovation and consumers,” according to a CSBS statement.
Among other things, the conference’s complaint charges that by creating a national bank charter for nonbank companies, the OCC has “gone far beyond the limited authority granted to it by Congress under the National Bank Act and other federal banking laws. Those laws,” the conference’s statement continues, “authorize the OCC to only charter institutions that engage in the ‘business of banking.’”
Under the National Bank Act, the conference’s complaint asserts, a financial institution must “at a minimum” accept deposits to qualify as a bank. By “attempting to create a new special purpose charter for nonbank companies that do not take deposits,” the complaint adds, the OCC is acting outside its legal authority.
Christopher Cole, senior regulatory counsel at the Independent Community Bankers Association – a Washington, D.C. trade association of Main Street bankers known for punching above its weight — asserts that the state banking regulators are on solid ground. “The whole question comes down to what should a bank be for purposes of a national bank charter,” he says in a telephone interview. “The Bank Holding Company Act (of 1956), federal bankruptcy laws, and tax laws – all three – define banks as insured depository institutions. It’s right there in the statutes. So our recommendation,” he says, “is for the OCC to go back to Congress” and ask for the explicit authority to create a fintech charter.
Because the OCC has “short-circuited rule-making” protocol required by another law – known as the Administrative Procedures Act — “the process hasn’t been kosher,” Cole adds.
Many members of Congress are also expressing outrage at the OCC. Not only have Democratic Senators Sherrod Brown of Ohio and Jeff Merkley of Oregon strenuously objected to the OCC’s fintech charter, but on March 10, 2017, Jeb Hensarling, the chairman of the House Financial Services Committee, fired off a “hold-your-horses” letter to Comptroller Thomas J. Curry. Signed by 34 House Republicans, the March 10 letter reminded Curry that his term of office would officially be up at the end of April, 2017, and urged him not to “rush this decision” regarding the fintech charters.
“If the OCC proceeds in haste to create a new policy for fintech charters without providing the details for additional comment, or rushing to finalize the charter prior to the confirmation of a new Comptroller,” the letter from Hensarling et alia declares, “please be aware that we will work with our colleagues to ensure that Congress will examine the OCC’s actions and, if appropriate, will overturn them.”
Never mind the stern letter from Chairman Hensarling, or the fact that an impressive array of Congressmembers on both sides of the aisle are bipartisanly unhappy, or that state banking regulators’ have filed suit, or that Curry’s replacement as Comptroller is overdue: the OCC is pushing ahead. The agency will play host to a bevy of financial technology companies and other financial institutions on May 16 for two days of get-acquainted sessions in its San Francisco office.
Billed as “office hours,” the West Coast meetings will consist of one-on-one, hour-long informational meetings “to discuss the OCC’s perspective on responsible innovation,” Beth Knickerbocker, the OCC’s acting chief innovation officer, says in a press release.
The office hours, Knickerbocker adds, “are an opportunity to have candid discussions with OCC staff regarding financial technology, new products or services, partnering with a bank or fintech company, or other matters related to financial innovation.”
Back in New England, Hurley, the Boston University law professor advocating the regional sandbox, says: “No one knows where fintech is going. But one place it’s not going is away.”
SmartBiz Loans Expands Its Footprint With a NorCal Bank
April 25, 2017Technology-based lending platform SmartBiz Loans, which is dedicated to facilitating SBA loans, has expanded its bank roster. SmartBiz announced today a new partnership with Sacramento-based Five Star Bank, bringing the tally of the number of banks on the startup’s platform to five and thrusting marketplace lending into the spotlight once again.
Five Star already delivers SBA loans to customers but through the SmartBiz platform will slash both the time and costs in the underwriting process while reaching new small business customers in the process.
Evan Singer, CEO of SmartBiz Loans, told AltFinanceDaily that the mindset of the executive team at the Silicon Valley startup has always been to bring banks back into the fold and to incentivize them to fill a void in the market left by the financial crisis by originating smaller loans, in particular SBA loans.
“What we’ve seen in the market is that good businesses cannot get access to low-priced capital if they want to borrow $250,000. So sure, if they want to borrow $5 million they can get access. That’s why we came up with the idea to bring the banks back through fintech,” he said.
Five Star Bank, a privately held bank with $850 million in total assets, is pleased to be among those ranks. James Beckwith, president and CEO of Five Star Bank, was introduced to the SmartBiz technology about a year ago after which time the bank execs began the due diligence process.
“I was intrigued,” Beckwith told AltFinanceDaily. “We felt the need to somehow play in the space. But we also knew it wasn’t practical for us to develop our own platform. So this was really right in our sweet spot of how we like to partner with people.”
As a result of the partnership Five Star Bank, which makes loans from its own balance sheet, is reaching small business clients the bank did not have access to before.
“Our market presence didn’t allow us to touch a lot of these businesses before, whether from Los Angeles, or Arizona, or San Jose. It’s really people we were unable to touch now being touched through the SmartBiz partnership,” said Beckwith, adding that the small businesses span industry verticals.
“At this point we’re looking at deals in the Western United States and we hope to expand that. The small businesses are really all types – construction companies, PR firms, consulting firms, — there’s no concentration in terms of industry type,” he noted.
The bank’s target customer is seeking a loan for $350,000 or less and the average loan size is $250,000 to $270,000. Terms of an SBA loan on this platform are comprised of a rate of Prime plus 2.75 over a 10-year period.
“The term is much longer and the rate is much lower than traditional loans. Small businesses can save thousands of dollars per month by getting an SBA loan through the SmartBiz and Five Star partnership,” said Singer. In fact, Five Star bank spends about one-tenth of the time on a file or customer originating from SmartBiz than it would on a customer coming from the traditional retail side of their business.
Industry Shakeout
Much of the fallout in the marketplace lending market segment has been tied to the stigma of subprime lending. Beckwith is quick to point out, however, that the underwriting standards for the loans on this platform, which are agreed upon by both Five Star and SmartBiz, are high.
“If you look at some of the average FICO scores we are doing, they are actually good deals. They’re SBA, they’re not subprime deals. I would not characterize them as subprime deals at all,” Beckwith said.
Meanwhile the marketplace lending segment has undoubtedly become more crowded in recent years, attracting the likes of lenders and non-lenders alike, evidenced by the participation of Amazon and Square Capital in this space, for instance.
According to Singer some industry shakeout can be expected in the near term. He expects over the next couple of years that those marketplace lenders and other alternative lenders unable to meet customer demands will either experience a wave of consolidation or they simply won’t be around any longer.
“We are already starting to see a number of our loan proceeds being used to refinance expensive shorter-term debt where they save thousands per month. Businesses are getting smarter with available options and folks that are able to best meet and deliver with small businesses on their minds first are going to come out on top,” said Singer.
SBA 7(a) Cap
As a technology platform dedicated to SBA loans, the issue of the program’s annual allotted cap is something that gets revisited on an ongoing basis. Nonetheless even when the SBA program has come close to suspension, Congress has stepped in to keep it afloat.
“The great thing about SBA is that it has support from both sides of the aisle in D.C. We’ll see what happens this year,” said Singer.
James agrees. “Every year that this becomes an issue the cap has been increased. I feel comfortable that what has happened in the past will happen again in the future because these programs are very viable. The small business space has very strong economic development activity.”
If they’re right this bodes well not only for the Smart Biz and Five Star partnership but also the new banks that the tech-based lender has in its pipeline.
“We are adding banks into the marketplace. And we’re selective about who we add,” Singer said.
Does Fintech Have a Distinctively British Accent? – From Congressman McHenry’s Speech
April 1, 2017Regulation around technology-enabled lending has generally been a point of contention in the US. Even regulators are finding themselves at odds with other regulators, like the OCC vs. the NYDFS for example. Might relationships like these be contributing to America’s innovative decline?
At LendIt last month, Congressman Patrick McHenry (R-NC) said, “Is it any wonder that Fintech has a distinctively British accent these days? It’s good reason. We have regulatory competition around the globe, but we don’t have the right regulatory competition here in the United States. And while we have a patchwork of conflicting, and overlapping, and confusing regulations, in places like the U.K., they’re creating an entire ecosystem of financial innovation and allowing it to flourish. And they become the model for the rest of the world and the intellectual property center for the rest of the globe when it should be here in the United States.”
Forward-looking regulation has helped a nation like Kenya make the movement of money cheaper in their country than it costs to move money here, McHenry said. “They’ve moved generations ahead overnight,” he exclaimed.
If you haven’t seen the video, check it out below:
Or you can read the full text from our transcription of it:
“And thank you all for being here. This is a wonderful celebration on, you know, a stereotypical February or March day here in New York. Cold as can be. Good to be inside. But thank you for taking the time to gather. The work that you’re about improves the American economy, gives more options for my constituents and for the citizens across this great country of ours, and gives them better options and opportunities to make decisions for themselves and put power back into their hands in a very competitive environment.
In fact, it’s really liberating to be out of D.C. especially at moments like this. You don’t know what the latest news story is gonna be or the latest tweet, so good to talk about something meaningful over the long run. And the reason why I’m here is because my focus legislatively has been around utilizing technology for innovative forms of finance.
I came about this in a very simple way that’s relatable to other people. But you know, the idea of Fintech, in 10 years, in 20 years, the term “Fintech” will be scoffed at kind of the way that we scoff at how they described Amazon 20 years ago. They said it was an e-Commerce site, that it was a webpage. Right? And we laugh at people that would describe it that way today. Every company that’s in the retail space has an e-Commerce site. Everyone is competing in this new form that Amazon represented the new wave of 20 years ago. So, the term “Fintech” may be much like referring to something as not a website, but a webpage. And in time, the way people are interacting with the banking system is going to continue to change in fundamentally different ways.
It’s exciting to think about how consumers and small businesses across America are gonna find these new ways to access capital over the next generation. And you all are at the forefront of that. And at D.C., I’ve tried to lead the change of that change in mindset. And you know, this is not only about helping Fintech companies, but also about fundamentally altering how regulators interact with innovative companies. And so, the focus on lending, helping families access capital as I said in the beginning, I came to it in a very natural way.
I saw my father start a small business as a child. When I was a child, the youngest of 5 kids, I saw my father start a business in the backyard mowing grass. Very simple, relatable thing. Most of us have mowed grass at some point in our life. And my father started that small business in our backyard and he used the great financial innovation of his time to buy his second piece of equipment, which he put on a MasterCharge. Great financial innovation and that helped him start a small business.
Now, that small business didn’t change the world, but it changed my brother’s and sister’s lives and put the 5 of us through college. That’s a meaningful thing and that is the American dream as my father defined it and as I define it. Now, that’s not creating Facebook. It’s not this other sort of revolution of internet technology, but it certainly made a huge difference in our community and for our family.
So, how did we utilize technology and help those small businesses like my father access and grow? The plight of small business in America though right now is real. The next generation of small business owners are struggling to get off the ground. The facts are that small business loans used to make up a majority of bank balance sheets. Now, 20 years— Well, in 1995, they were majority of the bank balance sheets. Now, it’s 20% of bank balance sheets.
Now, you also see small town America, which used to lead the country in small business starts, small counties, small communities across the country have lagged. So, smaller counties used to lead the nation in new businesses even as late as the 1990s, mid `90s. But just in this decade alone, small counties have lost businesses. U.S. counties with 100,000 people or fewer residents lost more businesses than they created. We see stagnation among small business owners and small business starts. This is why Fintech is so vital and so important. Technology is the only way to ensure that we spread and democratize capital outside of Austin, Boston, Silicon Valley, and New York.
How do we get the rest of the country, small town America, and even the urban areas that don’t get the focus and attention? And so, I think the power of harnessing big data is gonna fundamentally change the way we look at debt. It’s already happening. And you’re the leaders of it. Instead of relying on the credit score, which was a great innovation in the 1970s, fixed the problem in the 1970s, today, companies are using big data to better understand who will and who should qualify for loans. And what we’re discovering is that the way we help people out of debt is by understanding the data behind the debt.
Look at the way technology is fundamentally changing lives and places like Kenya. Think of this. In Kenya, the phone, your smartphone, our smartphone is that way to financial inclusion in Kenya. The movement of money cheaper in Kenya than it is here because of this simple device. It’s more powerful in that jurisdiction than in ours because of regulation and forward-looking regulation. And instead of loading buses filled with luggage that’s filled with cash in moving money in Kenya, they’re now doing it through a fast transfer over their mobile device. They’ve moved generations ahead overnight. And in fact, in many ways, they’re leading the world in Fintech deployment. So, we’re living in a new and exciting era in financial services. It’s actually matched the best interest of consumer protection with the demands of global smartphone-led revolution that we, as consumers, are driving. Now, that’s what’s happening in the real world.
So, let me translate back to you what is happening in the analog world of Washington. D.C. The regulatory challenges of Fintech are real. It’s major in Washington. We have a diversity of regulators. That’s certainly part of our American system. And that’s not gonna change any time soon. So, what is the current landscape? If you are in Fintech and you wanna make sure you’re complying with financial laws and regulations, where do you go? Who do you ask? Who do you talk to? Is there an open door in Washington? Do you know who your regulator is? Do you know who your regulator should be? Do they meet with you? Are they willing to meet with you? What’s your legal and compliance cost before you even get a product hashed out? These are major things you have to wrestle with in starting your businesses or growing your businesses. So, believe it or not, the difficult question is who do you talk to in Washington? And there is no simple answer. And because there’s so little clarity on which regulator to go to, often there’s even less clarity of how the underlying laws or regulations are being enforced by that regulator in this new marketplace.
And so, this is the hidden secret of Washington. The regulators themselves are so behind when it comes to understanding technology that they themselves do not really know how to apply regulation to innovations in Fintech. They just simply do not know. And trust me, I realize this as a legislator. 5 years ago, I helped craft what is called the JOBS Act. I wrote a piece of the JOBS Act. It resulted in 14 pages of legislative text around investment crowdfunding. 14 pages of legislative text. 3 years later, the Securities and Exchange Commission wrote 700 pages of regulation around my 14 pages of law. And if you are all involved in investment crowdfunding under Title 3 of the JOBS Act,— three of you, right— there will be a lot more had they written good regulation and actually complied with the mindset of Congress when we passed the JOBS Act.
So, I see this when regulators don’t actually know how to meet the demands of innovation and what’s happening in this information revolution that we have. And so, as a result, America is actually falling further behind the rest of the world. And unlike other areas of the world, which have created regulatory sandboxes for banks and technology companies to innovate and find a light-touch regulation, here in Washington or there in Washington, regulators are struggling to adapt.
And is it any wonder that Fintech has a distinctively British accent these days? It’s good reason. We have regulatory competition around the globe, but we don’t have the right regulatory competition here in the United States. And while we have a patchwork of conflicting, and overlapping, and confusing regulations, in places like the U.K., they’re creating an entire ecosystem of financial innovation and allowing it to flourish. And they become the model for the rest of the world and the intellectual property center for the rest of the globe when it should be here in the United States.
Well, while we’re all trying to figure out whether or not virtual currencies are more like property or money here in the United States, top countries around the world are using digital currency to move payment platforms overnight, change payment platforms, make it cheaper, more affordable to move funds for the smallest and the biggest. So, while the world’s rapidly adopting new financial technology to expand the middle class, our country’s regulators have created capital deserts here in the United States in rural and in urban areas. We understand the notion of an urban food desert. If you can get good food that is close to your home in an urban area, you can actually feed your children wholesome meals. We understand that. That’s a big discussion. Well, likewise, we’re starving off small business innovators in urban areas and let’s say less desirable zip codes in urban areas and less desirable zip codes in rural areas. And so, we’re starving off opportunity and that has a result in small business starts and the rise from the turn in the economy from those that are living on the margins to those that move up to the upper middle class and upper class based off being starved from capital.
We have to fix that. Fintech is the solution, but the regulation has to change. And that is something that I’ve been focused on over the last 6 years. And I think we have a trilogy of good ideas that I would submit to you this morning. First is let me just tell you my mindset in regulating and legislating. And to borrow from startup culture, the bills that I try to focus on are minimal viable bill. It’s a simple idea.
One idea that focuses on solving a discrete problem. Something in the marketplace that needs a regulatory fix in order to flourish. And it will help the greatest number of people and have the greatest impact on tech companies, bank startups, and small business folks and families. So, looking at the headache test, one of the areas of interaction with the government that’s creating unnecessary delay is the IRS not having a piece of technology that will allow people to verify income data.
And so, as a result of that, I’ve — legislation that is called the IRS Data Verification Modernization Act, 45060 for those of you who are in the game on this, but it simply will do this. It will automate a bottleneck manual process that is utilized via e-mail and fax with the IRS in verifying basic information that you, as lenders, need to allow mortgages, student debt, refinancing, and small business loans. It’s the taxpayer’s information. You pay for the service to verify it. We should have better service rather than the shoddy service IRS is currently giving you. You should be able to get this in an instant with an API rather than getting something faxed to you in 7 to 10 days. It’s absurd that the IRS can’t update and we’re gonna force them to update.
Our second bill, it goes directly to returning consistent uniform systems for our capital markets, which I believe is a fundamental thing in our 50-state regime with a variety of regulators. We have to have some base level of understanding on what is valid. And the bill is simple. It codifies the Valid-When-Made Doctrine that we’ve had in this country for nearly 100 years. And that was an established legal precedent prior to the Second Circuit Court’s decision in the Madden case. Madden versus Midland. And our view is the Second Circuit’s opinion was unprecedented. It’s created uncertainty for Fintech companies, banks, and the credit markets; making credit less available and more expensive. So, the simple fix is returning to the Valid-When-Made Doctrine. Congress under our constitutional system has the right to make this very clear to the courts of our intention when we pass the original law and nothing has changed when it comes to this. And this is the second bill that I’ll be pushing this year.
And finally, a third piece of legislation that is broader in discussion and it’s the Financial Services Innovation Act. This bill creates a new paradigm for regulators in Washington. It says in a first of a kind way, it forces regulators to meet the demands of rapid innovation in financial services. Instead of the old analog version of command and control regulation that’s messy and rigid based off of opinion, not fact, my bill requires agencies of jurisdiction to create offices of innovation that will engage with entrepreneurs and provide a regulatory on-ramp for financial innovation. It basically forces all the regulators, all the financial regulators to create a new door for financial innovation. A welcoming door. Come in with your ideas. Let’s talk about regulations that can enable this technology to flourish. And in getting data in return, the agency would be in permanent beta testing mode, which would give them data to prove out consumer benefit or consumer harm. It will give them data to adopt the whole footprint of regulation in all these financial regulators.
Now, that is a major mindset shift for our financial regulators, a major mindset shift for any regulator in our American system of governance. But with thorough analysis, I believe that innovators will be better off in this regime when you have data that is driving the decision making of regulators and regulators driving decisions that are informed rather than opinion based.
Now, saying that we’re gonna base our politics off of fact these days is its own enormous political challenge, but I think it’s important that we all agree facts are important things and we should base our decision-making solely on that set of facts in order to do the right thing for our country, the right thing for our economy, right thing for families, right thing for small business starts. So, permanent beta testing involves continuously evolving, testing, and proving. It’s what you do everyday as innovators.
Now, those are 3 major pieces of legislation that can have an impact, but the mindset in Washington is much— Well, it’s much different than you might think. Legislators are eager for new ideas, for new information. They’re eager to hear what you are about and what you’re doing. And given the nature and the speed of innovation, you have an obligation to be engaged in Washington. If you’re not engaged in Washington, Washington is still gonna be engaged in what you do. You’re just gonna get worse rather than better. So, if you inform decision makers you have data to backup what you’re expressing, what you’re advocating for, we’re gonna be better off, but you all in your pitches, right, have to— The basic startup pitch, you’ve got to answer one question. Why now? Why now? I think American financial innovation is at an inflection point. I really do. We’ll either lead the world in the next few years or we’re gonna be left behind. It’s our choice. It’s our choice. And it’s time that regulators treat innovation no longer as a threat, but as an opportunity to consumers. It’s time to recognize that regulators need to recognize— I think it’s time that they recognize that consumer protection and innovation are not mutually exclusive. Now, that’s the reason why it’s now, but it’s not gonna happen unless you engage in Washington and make your voices heard. You’ve gotta make your voices heard in order to get the results we need so we can have innovation flourish in this country, that we can be the market leader for the world, that we can be an exporter of these ideas rather than having to export ourselves to different markets in order to take that data and that mindset and deploy those resources globally.
Let’s make sure that we can lead this market to better and greater things. With your engagement, we can. Without your engagement, we’re gonna be left behind. So please, please engage in Washington. Make your voices heard. And with your voices being heard, I think we can have change for the better. So, thank you for your leadership. Thank you for the opportunity to be here with you. God bless.”
