Navigating Global and Personal Financial Crises with FinTech

0:02 You are listening to Leaders in Lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here, decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Hi, this is Lynd sutter Bille of Upstart, and welcome to Leaders and Lending. I'll be joined today by Penny Lee, who is the President and CEO of the Financial Technology Association, a Washington, DC based trade association representing fintech industry leaders. The FTA educates, informs, and engages with Washington, advocating for modernized policies and regulations that spur innovation and drive inclusion.

0:49 Let's get started, Hi, Penny, thanks for joining me today on Leaders Lending. Thanks for having me, Lynne is a great honor and pleasure to be here. Great well. Your website says that the FTA educates, informs, and engages with Washington, and you're advocating for modernized policies regulations that spur innovation drive inclusion. Can you expand on that. We're kind of in your words, describe the mission of the organization. Sure, yet it's a little bit taking out the word salad, as they would say. And so what we do is we represent the fintech industry and kind of a wide aperture of how we define it, primarily as digitally native financial services companies, and so those are things that people use on an everyday basis, whether or not to have their DoorDash delivered and paid for. But a buy now, pay later product, a P two P venmo a cash app, all those kind of horizon. And what we do is we sit in the nexus of Washington and try to translate business to Washington and Washington to business and try to work with the regulators, legislators and others to craft and think through how to put the US kind of in the forward looking phase of what is the future of finance, meaning what are the regulations that we need to put in place that modernize to fit the products and services that are now in the marketplace. What is the type of legislation we need to look at, or what are the types of things we need to adopt again to make sure that the US remains competitive

2:21 not only in the products and services that they offer consumers and small businesses, but also in a global sense. We're now in a global world economy and in a global competitive landscape, so we want to make sure that our consumers when they're traveling overseas, has accessed that our rules and regulations allow for this free flow of money, but also to use the ingenuity that is occurring kind of on a global scale to be able to have that adopted here in the United States. Yeah, that's interesting. So I know there's a few different kind of fintech or financial industry associations growing up, and I do think they really have to focus on different areas and what in your mind, really differentiates than the FTA from some of the other organizations I would see. You know, it was started kind of to try to address kind of the larger fintech industry, and so we made as I said, we made the definition of it broad but yet narrow in the sense of trying to capture all that is encompassing of you know, financial technology or those products and services that are in that space. And so we don't focus on where some might have a more niche where they're representing just those that are in the lending space or just those that are in the data aggregation space, or just those that are in just a little bit more of a niche area. So we try to represent those that are in lending, those are in payments, those that are in the capital market space, those that are in binanal pipulator or earned wage access or

3:54 other you know, kind of what makes this ecosystem of fintech. So trying to represent the broader industry. Okay, now that was certainly helpful. So, and I think you personally have a really interesting career background, kind of a combination of politics, policy, angel investing. Tell us about that. You know, what your career path looked like, what different areas have you worked in, and kind of how you ended up rather leading the FTA. So it started first love was in campaigns. I volunteered for my first campaign when I was fourteen years old, and that was the path I was going to go study political science and journalism in college. And then immediately after college got connected with the campaign in Texas and then just that spurred kind of that work that I did there for many years was with Democratic Party and worked on a couple was the privilege of working on a couple of presidentials, and then was with a governor in Pennsylvania, Governor Rendell, and then from there was recruited out to run the Democratic Governors Association, and then that le me into working with then majority leader in the Senate, Harry Reid, and it was during that time was hired in seven and during that time we obviously faced a financial crisis in eight and it was an incredible moment in time to be part of that conversation, but also a very heady days, very scary days, very defining moments that we had periodically throughout that But what we did see was

5:28 it was a time where, you know, there was always this kind of disdain to have to engage in Washington and kind of a they don't really understand what we're doing anyway, so a kind of an avoidance of Washington. And what Owait really proved across all different sectors was you neque to spend time in Washington because there might be a time on one they need to bail you out, or two that you have to make sure that they understand what your products do and don't do. And so when I left the Hill, that was something that I carried out with me was again trying to not be scared of Washington, but also the lessons that you learn in those companies that had taken the time to educate along the way that it wasn't only in a crisis that they were coming to Washington, that it wasn't only in a negative light, but had systematically and periodically showed up time and time again. So we had a good understanding. You know, that really illustrated one night early in the days of the financial crisis. I never forget that first time we really had Secretary Paulson and Chairman Bernank come to the Hill and, you know, to present kind of what was happening because all of a sudden, incredible amounts of activities. Bear Stearns was in trouble, AIG was in trouble, like all of this activity was going on. And it was a first meeting in which we expanded it to more than just leadership staff, and that was the banking staffs and financial services and all the different staff in the room. So it's probably about fifty people with principles and staff. And you know, I'll never forget Secretary of Pulse and asking, okay, just want to understand the room,

7:02 who has ever traded a derivative? You know, no hand goes up and he's like, Okay, who's ever worked on Wall Street? Not a hand goes up and he's like, okay, so this is going to be a theoretical exercise. And you know, he you know, slowly educated us all on kind of some of the nuances. But you know, he was an own personal relationship that he had with the Wall Street community and others that kind of helped us lead us to a place where we ended up getting to with the TARP and other aspects. But that kind of illustrated how important it is to again maintain that conversation, develop those relationships. So when there is a time of crisis or need or trying to think forward, how do we reshape the United States? You know right now on kind of what this future of finance looks like, that process is there, and so that's kind of translated to where I am now. I came into this role working at a firm called Invariant, a lobbying and public affairs firm, and we had several fintech clients and it was them that recruited me to ask if I'd be interested in building out this new trade association that represented the larger industry Okay, great now. I love that anecdote about Sexuary Paulsen. During the Great Financial Crisis, I also did a lot of campaign work, although I didn't translated that into later careers. After college, I went directly into financial services. And

8:35 I always tell people that campaign politics is in many ways kind of a hand to hand combat, and it really prepares you for a lot of difficult situations over the course of your career, and I think people who have that experience tend to kind of roll with it. Challenging things happened because you started out early with difficult bosses and a variety of experiences, you know, in a way, I was actually working at Smith Barney at the time, which does not exist as a company anymore. So I was working for an institutional consulting team, certainly d of Spelt, and saw the industry disruption firsthand. Although although not in New York or DC. Were there times during those years where you felt like, we don't know where this is going to end, and we think the landing could be could be very very hard, and just the unknowns, Like what was that like from a I think emotion standpoint of really being in the room where a lot of really important things happened. It was you know, you didn't know, you didn't know how big the contagion was, you didn't know, you didn't necessarily know other than the banking community also what was being affected. And then you had the global component on it.

9:48 And so it was every hour, every day realizing this. Well it might have just seemed isolated initially to a housing and to Wall Street and to some niche products that were you know, oversecuritize or over exercise. It. Then every day became bigger and larger, and then you had multinational companies saying, I can't make payroll. The banks have called the paper we leverage on a daily basis just to meet payroll. We're going to go under. And these are major, major, multinational, non bank companies that were starting to feel these overall effects. Let alone the hundreds of thousands of people that lost their homes and trying to find, you know, a new way or how they were going to live as well. So it was just this kind of this complete uncertainty and you know, wanting to you know, not know, and especially initially where to put the finger in the dike. You know, it wasn't which problem to solve it wasn't just one sector that we could solve for, it was multi and so I credit the leadership of Secretary Paulson and Chairman Bernanke and the Fed governors that were involved, and the leadership in the House in the Senate to be able to look at the landscape put politics aside.

11:07 And there was you know, some obviously some very partisan, you know, features that have to work through, but you know, to go to the White House and have Speaker Pelosi, to have Leader Read, to have McConnell, and to have others there putting aside and saying what do we need to fix this so it's not an overall collapse. And so that was what you just didn't know. You didn't know where the floor was and which finger to put in what you died, you know at that point. Sure. Yeah, there's a great quote that I heard the other day, and I can't recall offhand where I heard it, but I've repeated it and it's been repeated by a couple of my colleagues here at upstart that you have to be willing to sprint when the distance is unknown. Yes, exactly, Yeah, and that is very much true when growing either a startup or a company through kind of rapid growth phases and after well Smith Party became no more, I did have the opportunity later on to work at JP Morgan and the Federal Reserve, and reform around triparty repo and white paper was something that I helped implement at the Bank as we were as I managed one of the teams that worked on the global liquidity trading there, and so that was certainly interesting to then see some of the cleanup. What are some of the other kind of industry changes you saw coming out of that, like some of the positive things that you feel like we're really done well in addition to the kind of bipartisan work to clean up a big problem, but maybe like new regulation or new oversight that came out of that. Yeah, well, I think, you know,

12:39 plus or minus whatever your opinion is on the Consumer Financial Protection Bureau, you know, the creation of that bureau has a positive effect. It now has again depending on the directorship or depending on where your perception would be, but just having the notion that there is a regulatory body being a perspective of what is best for the consumer. How that's interpreted is I'll leave that to others. But that was something I think that has been overall positive to have that notion and to have a place where consumers can go, consumers can have a voice, and at the same time thinking through the products and services that are in the marketplace to ensure that there is consumer protection components to it that might not have been there prior, because you do not want you want to make sure that every product coming into the marketplace, especially that with money that touching consumers in small business, has the full safety and soundness, that there is a fairness element to it as well, but can instill the trust of the users for it. So I think that was, you know, something that was good. Obviously, some of the aspects in the mortgage industry, some other forums that have taken place when that respect have been good. Some of the other consumer protection asked of some of the financial sectors. I'll let others debate currently on Basel three endgame, but you know, there was obviously a higher capital requirements, some of the work done on the testing of the banks

14:13 and the stress testing, and you know, just ensuring that there was a greater dialogue occurring between again between Washington and what was happening on Wall Street. I think has been overall a positive event. Sure, sure, And I know you know here at Upstart, there's kind of a funny story about some of our founders and early employees kind of walking into the OCC office in San Francisco and just saying, Hey, we're going to do this thing and do you want to talk to us? And that isn't very common practice, so the regulator didn't really know what to make of them at the time either. But we've got a long standing history, you know, through our work and our government affairs team and engagement of our risk and compliance teams of working with the various regulatory agencies kind of opening up the company as much as possible, and then obviously where we have we do have state exams as a lender or as a broker, and kind of indirectly through many of our bank partners and credit unions that we work with, So you know, we spend a lot of time, I think engaging with the regulators. And I definitely think that your experience, having kind of seen the worst of what can go wrong and where things can spiral pretty quickly, is really helpful. And there are certainly areas in the fintech industry where people may not have that kind of global banking perspective and have not seen things go wrong. They've only seen it go up.

15:30 And I think last year opened some people's eyes with the bank failures and the kind of after effects of stimulus wearing off. So I know you've said before that the FTA is really working to use innovation to better those consumers and small business outcomes. What are some of the products and services being developed or kind of in the market as you see most innovative or that you're really excited about right now? Yeah, I would say that, you know, and again going back to what you asked about coming out of eight, I would say, separate from the regulation space, the innovation what has occurred, and you see a lot of products that came out in response similar to started others that were filling a marketplace gap, because what you did see was still the need for access to credit, access to affordable credit and in a way that could you know, reach those that might not have a credit report under bank underserved, but do it in a way that's not predatory, that does it in a way that allows them to be able to buy a home, finance a car, other means, but not in a way that puts them in incredible revolving debt or in compounding interests, you know, vehicles on that respect.

16:38 So I think there's been a lot of incredible innovation. And as we've gone and you saw another uptick, especially on adoption during the pandemic when people are at home, not going to a bank and having to relive their financial lives and one that is much more digital. And so a lot of the innovation in this space has been you know, from that from changing the way in which we interact with financial services, how we get the delivery of money, how we're able to just kind of work on that aspect. But it's also just some foundational just for the ability for you to accept a credit card online, the ability for you to for a small business to be able to have one place where they can do their bill pay, manage their treasury, all of that aspect of their whole you know, get access to credit is now something that can that is an everyday occurrence. So, you know, some of the products that are in this space that I think that are really exciting, again building on what some of the foundational things was, I think now it's just taken for granted that oh yeah, I can get my door dash delivered and with a debit or credit card and it's seamless, and not realizing it probably goes over four or five of our live intech rails to make that happen. It just seems ubiquitous and seamless. But what you are aren't starting just the availability again from a small business and consumer, that access to credit and access to more affordable credit. You know, acting controllers who likes

18:11 to say being poor is expensive because it requires you oftentimes to get a higher you know, they require a higher interest loan, or they require you know, more having more liquidity or denial of certain aspects. So you know, what we did see during the pandemic, especially you know, was trying during the first phase of the PPP was trying to get money out the door if they could, you know, people without bank accounts or without relationships with their bank, they weren't able to access you know, this incredible program. And so just that kind of overall need to be able to meet consumers and small businesses where they're at using digital tools that they want and provide consumers with more choice in the marketplace. Sure, sure, and I do think that that is always a good quote that being poor is expensive, and I think we all know the stats around you know what simple emergency like a car breaking down, a medical bill, unexpected sickness where you're out from work, and how impactful that can be on a pretty large set of population of Americans. I think one of the new products that I know all of our listeners are familiar with or newer products not new anymore, is by Now Pay Later or BNPL kind of the point of sale financing, whether online or in store. I do think the reputation sometimes can be a bit mixed. People think it's a lot of things and aren't exactly sure what it is, especially if they don't

19:41 work directly in the fintech industry. Can you share your thoughts though, what you see some of the benefits of those products, particularly for those consumers. Yeah, by Appay Later is kind of almost turned into a marketing theme, a marketing tool versus what it actually is. And you know it started, you know, it started originally in Australia and in Europe and again to that point of sale financing and for the traditional BNPL, I would say it's still so new. You know, it's a zero to low interest product in which you're able to make four payments over the course of six weeks to pay for a product. So it's a great tool again bringing competition into the marketplace.

20:27 It allows people, you know, just an alternative payment if they need to spread their payments again to meet their paychecks or whatever the case might be, or to address it an emergency immediately, they can do it in a way again that has the zero interest do it in a way that when they pay it off in four weeks, they don't occur any other fees attached to it. So it's a lower cost option that allows you to spread your payments over forre So yesterday the New York Post or the New York Fed put out a blog on their recent research, and you are starting to see, you know, a lot of folks having and we saw it during the holidays and uptick and kind of the use of by now pay later as we would define it to pay in for zero to no interest products. And that's because just again, people want alternatives in the marketplace to be able to use a product, a payment product that fits their need. You know, back in the day, I remember when credit cards started to get more adopted and the first time I used it in a grocery store. My dad was appalled, you know, He's just like, how come you're using a credit card? And I was like, well, one, it's convenient too. I'm not incurring interests because I was only paying paying what I could afford at the time. And so I said, for me, it's just convenience and I'm not incurring any other fees that I wouldn't any otherwise. And so you know, now it's just ubiquitous and everybody's now you know, tapped to pays, you know, with credit card or others, so you know that adoption. We're starting to

21:59 see similar to buy now prelator as an alternative payment that helps people budget and finance their needs. Sure, and I'm not sure. I think my parents do primarily use cards now, but they've been slow adopters in that way too, where it was always a sense of why would you use a credit card if you have the money, and there's a lot of reasons. And I do see a lot of the credit card companies now offering the payover time feature, which is kind of an embedded short term installment pay over four months instead of having that a crew interest and hit your balance and have more of a variable monthly payment. But of course then you have to qualify for that credit card the first time, which I think a lot of there's probably a good chunk of buy now, pay later frequent users who may not have qualified for that yet. Yeah, and a lot of bany now prelator eighty five percent use a debit card, so they do. There's an allergic or an allergy I guess to credit in that sense. And you saw that shift after eight where either they saw what their parents had gone through or others around them, and so there is that more default into a debit account versus a credit card use of credit cards, So that's a shift in consumer behavior as well.

23:10 Interesting. I can definitely see that, and I think the you know, I know you and I talked before about BNPL and credit reporting, and we've certainly talked about that at Upstart, as we use a lot of consumer credit data as inputs to our underwriting model. I know some of the different companies have taken different different taxs with do they report the first line? Do they only report of it's negative? Does it have to be over a certain amount of time? And it doesn't seem like there's a lot of kind of standardization yet, and I think you could you could certainly argue that it may you know, kind of hide the risk or obscure somebody's real DTI. Do you think that's valid or do you think that's more of a kind of theoretical fear of new products that people may not fully understand. What's unfortunate right now is is it's hard for credit viureaus to capture the positive aspect of somebody that uses bind now pay later in a responsible manner, in a way in which they're paying it off each cycle or you know, each four week period and doing it, you know, repeatedly, and not being able to build positive credit because right now it happens if you take out one, two or three different BNPL loans or use BNPL products, you're maxing out your amount of available credit, which could seem as a negative. And so until we solve some of those issues within just they weren't the credit vearas weren't built to capture daily transactional information, two week transactional information. They were more capturing or still try to

24:44 capture, you know, those large larger payments, monthly payments that you do for home and utility car and other aspects of it. So that ability, I think there's a hesitancy until you can fix that issue and for them to be able to really understand a the frequency, the amount, the regular cadence, that it's not maxing out a credit in a negative way, but yet in four weeks you can show somebody you know with a responsible repayment and that should be seen as a good credit indicator. Those are some of the hesitancy that you have in the marketplace. And then with only three bureaus, there is not harmonization across each and so viewing each of this data in a very different way is something that is just too comferssome for the companies to report into because it will be translated differently depending on the company in which they're engaged with.

25:37 So just a little bit of the word. I think the bin Now failure industry is ahead of the market as far as on the credit reporting side. But it's something that you know, our own companies work with very bin now pailaor work with the consumers and there's protections built into them, you know, you pause, you know, if someone is laid on a payment, they are from using that product again until that is satisfied, so they are in their own underwriting, they're trying to mitigate that risk as well and not put somebody in over extension. And these are often I think the average right now use of a VNPL product is like one hundred and forty seven dollars, so it's a very low It's a much different product than like I say, a mortgage or a car, or purchasing a large purchase. These are very very small oftentimes are very small purchases that are used on a frequent basis.

26:32 Sure, and I do think a little bit of the just novel mess of them is in the unknown around that, because it certain people can certainly get themselves into a significant amount of trouble quickly with credit cards, and the fees and the interest can build up to a place where they can't support those payments. I know all of the credit bureaus have built various kind of features and products to think about kind of those off tradeline payments like utilities and cell phone bills and rent, and how do you give people kind of credit for those sorts of activities to help kind of build their credit profile and have a more visible risk footprint. I think one of the other newer products. It's getting a lot of attention and all of our listeners may not be as familiar with it is earned wage access, which you had mentioned earlier. Can you talk a little bit about just what that is, what that means, and what are some of the solutions you're seeing out there. Yeah, and I would say it's kind of broken down to what you defined it as in the sense of it's earned wage access, and so it's access to your already earned wage.

27:32 As we know, often times here in the United States, we are paid either every two weeks or once a month. And to your earlier point in the conversation about there are times when people need liquidity, they need access to funds prior to a two week pay period for a variety of reasons, or they would just like you know, we do have a lot of folks that use earned wage access as a budgeting tool. They know, you know, if they get it funds on a more steady basis, they know exactly what they have to spend. So there's a variety of reasons, but essentially it's to help tide over in between work periods. It's based on what you've already earned, so when you go to work on a daily basis. You know, back in the day, it would be like can I get a Can I get it? Maybe a cash advance, and it was you know, money taken out of the till at the end of the night and you know, given to you and with the promise of being paid back. It's kind of in that same vein now obviously in a digital manner, and so it's allowing people to have access to the wages on a daily basis or on a depending on their frequency, on a regular basis based off of kind of what you've already earned. So that's what these that's the innovation that is happening.

28:47 There's two different i would say ways in which to in which it clows. One is employer based, so you work at many companies are working directly with an employer and it's an added benefit that they buy to employees. And then the other is direct to consumer, where you have companies in this space that those that don't have employers, such as you know, the United States House a representative only pays once a month and so there's we have a couple hundred house members or house staffers that use the product that obviously the employer does not pay, so you have you know, employers or employees that perhaps are gig workers ten ninety nine or their employer is not engaged in an earthen wage program that allows them again to be able to have access to their wages sooner than their pay period. Sure. Yeah, and I think that can be certainly meaningful to you. You know, from the products that you're seeing out there, are you seeing where people are kind of generally using those on a regular basis. Is it they like to have the safety and security of getting advanced access if needed, or is it kind of a mix of behaviors as those are getting more popular. Yeah, it's really a mix of be behavior.

30:00 It depends on kind of what the needs of the person is. Some that you know, like I said, want to use it as a budgeting tool so they know, you know, exactly how much they have to spend, either on a daily basis or on a more frequent basis. Some that need a car to work, car breaks down, they need access to a load cost, low fee, no fee product because right now altron it is in the marketplace. Are one that do have high interest based on you know, trying to trap you into you know, they make money when your behavior, you know, when you aren't able to make a payment, when you aren't able to satisfy an obligation, that's how they make money. So they want to push you into a risky behavior, which you know help them.

30:48 Whereas these products are, you know, there's no recourse, there's no interest, there's no fees attached. There is an aspect of them that you know allows you to have access to your earned wage on more free basis. So mixed use on kind of why and how people use it. Great? Great, Well, I think one really last question that I think I'd like to get your thoughts on. You know, we've talked certainly about some of the new products and some of the risks out there, but really like, how do you think about these either novel or emerging financial products, Like in what ways can they be a positive impact to consumer credit reports and not just their credit report but really just their overall financial health and wellness. Yeah, I mean, eventually you would want to be able to have this data available, the frequency of use, those that are repaying their obligations on a steady and regular basis, you know, just that they're showing and demonstrating responsible behavior that should be rewarded either on a higher credit score or allow them to have to your point, you know, to have them to have access to more capital, to you know, if they want to start a small business, if they want to you know, use it for a variety of different matters and means. So I think the positive aspect is that there are loafe, low cost, affordable products that are now coming into the marketplace that allow consumers and small businesses to have access to this affordable capital, to be able to one

32:19 live at healthier life, to meet the needs of themselves and their family. Three, be able to start incredible businesses without having to go into so much debt, but to be able to really strive in this economy. Sure, and I'm excited to see over the next kind of five to ten years where things had I think, you know, we're certainly seeing that the states aren't quite sure where they should regulate where the federal legislation which agencies are in charge of wide and I think it'll be some It's great to have organizations like the FTA out there kind of leading the charge and working through these issues. But thank you very much, appreciate the conversation. Glad to have you on the podcast and just thanks for your time today. Thanks Lind so much for having me. Upstart partners with banks and credit unions to grow households and expand consumer lending. Through its leading AI lending platform. Upstart powered banks and credit unions leverage AI to offer higher approval rates and experience lower loss rates while simultaneously delivering the exceptional digital first lending experience that consumers demand. Whether you're looking to grow and enhance your existing personal and auto lending programs or you're just getting started, Upstart can help. Upstart offers an end to end solution that can help you find more credit worthy borrowers within your risk profile with all digital underwriting, verification, loan closing, and servicing. It's all possible with Upstart in your corner.

33:42 Learn more about finding new borrowers, enhancing your credit decisioning process, and growing your business by visiting upstart dot com slash lenders. That's upstart dot com slash lenders