The U.S. is still in the early stages of implementing open banking, but the conversation is well underway. Kurt Lin, CEO and co-founder of Pinwheel, is an industry expert who has spent his career building infrastructure to enable innovators to build the future of the financial system. In a recent interview, he discussed how the role of the Consumer Financial Protection Bureau (CFPB) has evolved and how recent regulations may bring open banking to the U.S.

How has the role of the CFPB evolved and how will these changes impact consumers?

Kurt Lin: As the fintech space continues to evolve, so does the CFPB. Amid the industry’s boom in recent years, the CFPB has taken the stage as the primary regulator of the sector, supervising and creating regulation at pace with innovation. The CFPB remains dialed into consumer abuses and works to uproot long-accepted but malignant practices such as overdraft fees and depositor fees, along with creating new regulations for emerging technologies. 

Much as we are working to create a fairer financial system at Pinwheel, the CFPB is working to do the same, as is further signaled by recent remarks given by Director Chopra. The latest guidelines indicate that the CFPB is pushing for a world where consumers have more control over their data, leading to increased agency and choice over their primary financial institutions. 

What major regulatory changes are coming that will impact banks and fintechs?

Lin: The CFPB is further codifying Section 1033 of the Dodd-Frank Act to promote open finance. A few examples of initiatives we can expect to see this year: 

Increasing consumers’ ownership over their financial data. Income and employment data is arguably the most important part of someone’s financial life, but the amount of regulation around portability, security, and ownership, doesn’t match up to the significance of this type of information. Under new regulation, we expect things like Direct Deposit Switching (DDS) to become the norm. DDS is at the core of open banking. Income starts at the direct deposit, and having more control over that information and the flow of funds is critical for consumers to remove the immense friction that prevents them from quickly setting up or moving their direct deposits. 

Subsequently, as consumers will have more control over their data, we expect an improvement in how we evaluate creditworthiness and underwrite loans. As it stands, income still isn’t a key factor in a traditional credit score. However, a recent study we just conducted found that over 80% of consumers are comfortable sharing their income and payroll data. That’s a pretty clear signal that the general population is aware that it will be advantageous for them to control and share this information to access better financial products. 

After last year’s FTX scandal, it is very apparent that crypto regulations are coming. What do you envision new crypto regulations will look like? 

Lin: Crypto is not my main domain, however, I have a few thoughts:

There’s a lot of talk about things like regulations to require crypto exchanges to have proof of reserves, etc. to create more transparency and trust in the ecosystem.  

While it’s productive to see this dialogue, there is still a lot of work to be done around establishing clear guidance. For example, what are the right standards, how should this be audited, how do you get visibility into what the true liabilities are, etc.  

I don’t expect clear or immediate action, but I expect increased scrutiny of the ecosystem, particularly around centralized exchanges. This increased scrutiny will also include market participants taking an even more active role in building new tools to better monitor behavior on-chain and using those tools to inform future regulations.  

Are there any areas in fintech and/or banking that you see lacking regulation or oversight?

Lin: Speaking broadly about this topic as a whole, it can be extremely slow to enact new policies such as these. In the meantime, we’re excited about helping to cultivate an open banking-like structure by furthering our partnerships with payroll providers. This is something we’re hyper-focused on this year, which will help more broadly unlock consumer-permissioned income data. This has two benefits: it will give consumers more control over their financial info and enable banks and fintechs to use this data to build more robust offerings.

Photo by Leyre Labarga on Unsplash

Lenders have always faced some level of uncertainty, but the past few years have truly put the industry to the test. While many have enhanced their systems with new enabling technologies, there are still a number of uncertainties– including inflated income due to Covid relief funds and increased spending power thanks to a student loan repayment pause– that create confusion in the underwriting process.

We spoke with PayNearMe’s Senior Director of Sales Jill Bohlken for some insight into how today’s lending environment has changed and what we can expect to see going forward into this year.

Describe the current lending environment and how it has changed over the past few years.

Jill Bohlken: In one word, the current lending environment is unpredictable. A number of converging market forces are causing some uncertainty among lenders, merchants, and borrowers alike.

We have consumer prices continuing to rise, leading to less disposable income and more borrowing by consumers to cover costs. According to the New York Fed’s Q3 report, households last year increased debt at the fastest pace in 15 years, and credit card balances collectively rose more than 15%.

Meanwhile, seven interest rate increases led to lower margins for lenders at the same time they face increased competition to attract new customers.

External forces like supply chain disruptions continue to inhibit some lending markets, such as auto. And emerging trends such as longer loan terms (upwards of seven years for an auto loan) and instant financing carry increased risk of delinquency, prompting lenders to build reserves and reduce overhead to cover themselves in case of default.

Can you discuss any notable trends or changes in consumer borrowing behavior that you have observed?

Bohlken: Last year, the economy saw unprecedented demand for goods and services driven by a surplus of Covid relief funds combined with a shortage of supply. More recently, we’ve seen loan demand start to normalize due to inflation and higher interest rates. For billers, managing risk and delinquency is always a priority. According to Experian, 60-day delinquencies for new car loans sat at 0.48% by Q3, with used car loans at 1.17%.

A more positive trend was the rise in online loan applications completed exclusively by web and mobile devices. This self-service innovation improved the speed of transactions and accelerated loan approvals, not to mention making the experience more convenient for consumers.

What tools, data, or technologies can help lenders mitigate the risk of default before extending a loan?

Bohlken: The expanding use of artificial intelligence and machine learning to analyze large swaths of data and produce actionable insights is by far the most exciting tool lenders should pursue. Payments platforms can feed a data warehouse to store transaction data in one place, then apply machine learning models to either an individual client’s data or aggregated industry data to create smarter risk models.

For instance, AI can be used to analyze cohorts of customers using hundreds of data points (zip code, income level, credit score, etc.) and assign the group a risk score. AI can even bring in data from government sources, such as unemployment and GDP reports to shed light on risk further. This research helps lenders determine how and where to find high-probability, low-risk customers and adjust their risk analysis and marketing spend accordingly.

How about once the loan has already been extended?

Bohlken: A payments provider can help lenders prevent late or missed payments using a number of tools and strategies, such as sending payment reminders by text, email, or push notification. The provider can offer a wide range of payment channels to allow customers flexibility in how they pay. In cases of chronic late payment, the provider can intervene with offers to help avoid default, such as flexible repayment plans.

What’s especially exciting is that AI and ML now make these strategies even more effective. For example, AI can be trained to constantly scan payments behavior to identify customers who have multiple late payments, then automatically initiate a series of engagement messages that move the customer toward payment. AI can also automate solutions to common payment problems. For instance, if a customer has multiple ACH returns, AI can apply a business rule requiring them to pay with cash or card only.

These automated solutions save lenders both time and money. Not only does the AI circumvent many behaviors that could lead to default, but it also eliminates the time and labor of manually resolving payment problems.

Looking ahead in 2023, will lenders be more hesitant to extend loans to borrowers?

Bohlken: It’s hard to say with certainty, but demand does remain fervent. According to a recent Consumer Pulse study, one in four Americans plan to seek new credit or refinance in 2023. However, according to Experian, auto loan balances have grown by 7.6%, so lenders may want to shore against risk, adjusting the credit profiles of their customers and trimming back-office budgets to keep a higher level of reserves.

At the same time, lenders may lean into the adage, “a bird in the hand is worth two in the bush.” That means putting more emphasis on servicing existing portfolios and maximizing return by reducing delinquency, lowering the cost to collect, and improving operating efficiency through automation and optimization.

If lenders cut back on extending loans, where will the overflow in demand go? Will consumers turn to payday loans, or will alternative lenders be able (and willing) to fill loan demand?

Bohlken: In my interactions with many large lenders I have noticed that many are reducing their workforce, a way of battening down the hatches and right-sizing operations to suit the precarious lending environment.

In terms of consumer overflow, I see movement in several “alternative” types of loans, including buy-now-pay-later, which breaks payments for a large-ticket item into several payments; and buy-here-pay-here, which allows car dealerships to act as both seller and lender. Both these options appeal to customers who may have poor credit and/or limited options for securing traditional financing.

Payday loans, on the other hand, are losing their luster after almost a decade of bad press and heavy regulatory oversight. They still play a part in some consumer borrowing, but most consumers who can find alternatives will do so to avoid the heavy interest rates and fees.

Photo by Ann H

The Consumer Electronics Show (CES), a tech event that showcases the latest advancements in consumer electronics and technology, is a must-attend conference for those working in the field of tech. But what if you work at a bank?

This year, U.S. Bank sent five representatives to walk the floors of CES to scout out what’s new and what’s possible when it comes to banking technology. Among the group attending last week’s technology showcase were U.S. Bank Chief Innovation Officer Don Relyea and Senior Vice President and Head of Applied Foresights Todder Moning.

We caught up with Relyea and Moning to get their thoughts on the show.

You’ve just returned from CES. Tell us about what U.S. Bank was looking for at the show.

Don Relyea: We are looking for several things. We go to get an understanding of how ready for primetime various technology verticals are for mass consumer applications. We also go to detect new disruptive technology trends well in advance of their readiness for consumers, so we can prepare to take advantage of opportunities – as well as avoid (or leverage) a disruption. A good example is how, a decade ago, we detected the early rise of natural language processing and started testing and learning with it, eventually leading to us being ahead of the curve in releasing an industry-leading voice assistant a decade later.

Todder Moning: We think about it like a “tech safari” or a “future safari” – allowing us to see a lot of the new products or emerging R&D work across multiple tech spaces and across multiple industries. It helps us to see what consumers, business owners, and our employees are going to be experiencing in their lives and helps us better understand what financial solutions are going to become most important to them. We look for how the spaces and tech we follow are progressing and for the weird or unexpected. That gives us new ideas that we take back to start work in our innovation labs and business lines.

Was there any tech on display that had the potential to help improve the user experience?

Relyea: More than I could ever tell you about. A big trend we saw in this space was the leveraging of AI for hyper-personalization across every industry. Companies in so many different verticals were converging AI, digital twins, the cloud, and the sensors in your consumer devices to create highly personalized and useful consumer experiences.

A great example is Incheon Airport (Seoul, South Korea) using a digital twin combined with AI, IoT sensors and consumer phones to give travelers a navigational guide like none other: an augmented reality robot avatar that will lead them around the airport wherever they need to go. Another one I loved was an AI scanner that analyzes your face and detects your skin condition in order to recommend skin care products. When the point of sale becomes your bathroom instead of the mall, that will be a gamechanger.

Moning: Yes, a lot of it.

1. Sustainability and waste tracking
2. New experiences in the automotive and transportation industries
3. The broad use of sensors, AI, displays, and wearables that are bringing services, health, and wellness directly to the consumer
4. Easier interconnectivity in smart homes and smart devices across product brands to finally start making those contexts easier
5. Continuous advancement in VR/AR glasses for digital and virtual experiences
6. Automation and autonomy in vehicles, robots, and other appliances/devices that will help assist or do things for people

How about tech for back office operations?

Relyea: Again, I’ll go to the Incheon Airport example. Not only did a friendly little robot provide guided navigation, but also the airport used the digital twin for operational efficiencies as well, helping to manage air traffic, vehicle traffic, foot traffic, and physical plant operations.

Moning: To be candid, the fintech part of the show was pretty sparse. It’s been that way in years past too. CES is typically far less interesting when it comes to technology we might directly implement to our systems, and much more interesting in seeing how we can integrate into the experiences where consumers would want to use their money. Which, we’re seeing more and more – particularly with embedded finance – is kind of everywhere.

When it comes to implementing ideas like these at a bank, is it better to be on the leading edge to gain a first-mover advantage? Or is it better to wait for other firms to jump in first?

Relyea: It really depends on the use case. In some cases, with fintechs and reg tech, it may be better to be an early mover. In others, where the maturity of the technology is not clear, it is better to wait until the technology achieves a good level of maturity.

Moning: It depends. We like building prototypes to try ideas first. We also like collaborating with or investing in startups when it makes sense. We will go first when it makes sense and we’re ready, like when we were first in ApplePay, first in Zelle, first in real time payments networks, and first to have smart chat services with all three major smart-speaker brands. Other times, we’ve seen the first-in-market attempts by others at really new technology fall flat or miss the mark. So first-mover vs. fast-follower really depends on each opportunity.

If U.S. Bank was exhibiting at CES, what would be the newest tech you would showcase?

Relyea: We get so much out of exploring the show floor, and so we find other ways to launch and showcase our own innovations, but we’re rather proud of our Smart Assistant, including the launch of our Spanish language version this year – the nation’s first voice assistant for banking in Spanish. Other candidates would be some of our work within the real time payments space, perhaps some of our blockchain initiatives or the recent launch of our financial education program for college athletes, which we are doing in collaboration with Opendorse. There are a lot of digital innovations happening across U.S. Bank that combine the best of digital with our amazing team members.

Moning: Some of our voice tech stuff is pretty cool, at the leading edge. We’ve done some really good things with real time payments in auto and some other areas. Our approach tends to be more of one where we work quietly behind the scenes until just the right time to launch it to the public, rather than showcasing our work in prototype or in pilot. I’d love to share more, but we’ll hold some of those cards close to the vest.

Outside of fintech applications, what was the coolest thing you saw at the show?

Relyea: I liked the MPC micro power chip that pulls low amounts of power from dirt and moisture. I haven’t seen anything quite like it before – that can charge a battery array and light an off-grid structure. I’m looking forward to when their tech is commercially available.

Moning: It would have to be the BMW Dee, a concept car that had “e-Ink” panels all over the outside of it, including the windows, and changed color in real-time based on music or your mood. As a sustainability concept, the Under-Ocean Farming that Siemens was showing was amazing. And from Caterpillar, the giant equipment company, they were showing remote autonomy, where you could control a real excavator that was in Peoria, Illinois from a seat at CES in Las Vegas. Pretty incredible.

Photo by Maurício Mascaro