It may be the year of the dragon and a U.S. presidential election, but 2024 will also hold important milestones for digitally native financial services – or fintech – companies that millions of American consumers and businesses rely on daily.
The use of fintech has reached mass adoption over the past decade, with eight in ten consumers using digital financial tools. Regulators and legislators, in turn, have spent the last few years analyzing aspects of the emerging fintech industry, learning about its benefits for consumers, businesses, and the economy, and working to balance innovation with consumer protection. Since 2021, regulators have operated under President Biden’s executive order to spur competition in the economy, with a particular mandate to advance personal financial data rights. Republicans in Congress have similarly focused on the benefits of fintech and how to shape a future of finance that incentivizes responsible innovation and creates competition in the marketplace.
Many of these dynamics will come to a head in 2024. To that end, here are the issues that FTA is watching in 2024 that will likely shape the evolution of increasingly digital financial services.
Final open banking (a.k.a. 1033) rule. It’s been over a decade in the making, but this much-sought-after Consumer Financial Protection Bureau (CFPB) rulemaking will likely be finalized before 2024 closes. As required by Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it will formally establish consumers’ control over how their financial data is used and shared. This rule can help consumers more conveniently and efficiently view and manage their money and switch to financial products that are better tailored to their budget and financial needs. Key to the final rule will be parameters around firms’ secondary use of data, including for research and development, product improvements, and AI development (more on this last one below).
Enhanced pressure on the state vs. federal regulatory dynamic. The U.S. has a unique regulatory system in that multiple agencies at the state and federal levels regulate financial institutions, products, and companies. Notably, for fintechs, state regulators are primarily responsible for licensing and oversight, with some firms also subject to federal oversight, including through their bank partnerships. While this system has worked for decades, with the increase in innovative products offered by fintechs, federal regulators have called for greater oversight of the industry.
This interplay is particularly apparent in the 2023 finalization of the federal banking agencies’ third-party risk management guidance and the Financial Stability Oversight Council’s final nonbank systemically important financial institutions designation framework. Similarly, last year, the CFPB proposed a digital payments rule that would include supervision of large participants in those markets, a proposal that is overly broad and could hamper innovation if finalized as drafted.
However, it sets up an interesting dynamic between the states and federal regulators for ultimate jurisdiction – perhaps best exemplified by last year’s battle between the Conference of State Bank Supervisors (CSBS) and the CFPB over the Bureau’s attempt to monitor and even enforce state regulatory actions. Given the divided partisan control of Congress, we expect increased activity from the states in the fintech space on everything from standardizing money transmitter licenses to earned wage access (EWA) and Buy Now Pay Later.
McHenry cements his legacy. With House Financial Services Committee Chairman McHenry (R-NC) retiring this year and seeking to cement his legislative legacy, expect consumer privacy rights, expanding the definition of an accredited investor, capital formation, and stablecoin legislation to be key policy considerations of the Committee. While some states have enacted privacy laws, a comprehensive federal solution remains in limbo. However, last year, the Chairman’s Data Privacy Act of 2023, which updates the Gramm-Leach-Bliley Act, did pass out of Committee. The Fair Investment Opportunities for Professional Experts Act, legislation to expand access to investment opportunities for all Americans, also passed out of the House.
The future of artificial intelligence. The latter half of 2023 was dominated by AI, both in Washington and in discussions around the globe. While banks and fintechs have deployed responsible AI for years, including for consumer and small business lending, we anticipate increased focus both on Capitol Hill and within the regulatory community on how AI is being used in financial services, application of existing risk management frameworks, and whether any outstanding gaps merit consideration or further regulatory action. For example, last year, the SEC proposed an overly broad predictive data analytics rule that would limit the use of modern technology, including AI, in investment services.
Modernizing financial infrastructure. The U.S. remains woefully behind other developed nations when it comes to the use of innovative technologies in financial services. For example, UPI in India, Pix in Brazil, and Faster Payment System in the U.K. allow everyday people to pay with the tap of a button. This past summer, the Federal Reserve unveiled the long-awaited FedNow faster payments system, which continues to grow in use and reach. This year, we expect these conversations to continue on the use of AI, APIs, and other new technologies to spur faster payments and improve government services and operations.
2024 is shaping up to be a dynamic year for the fintech industry, with progress on foundational issues like establishing rules of the road for open banking and growing awareness of the power of fintech to spur competition, innovation, and consumer choice. FTA looks forward to informing regulatory and legislative deliberations to shape a future of finance that works for all Americans.