Law.com: NY Lawmakers Eye Bolstering Regulatory Framework for Fintech

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By Brian Lee

As New York has emerged as a global leader in fintech, lawmakers on Thursday looked into oversight of the industry.

Members of the New York Assembly’s Standing Committees on Banks and Science and Technology acknowledged recently that the companies offer a multitude of products consumers want on their mobile devices, such as advances on their weekly wages, or “buy now, pay later” opportunities. And they’re available without having to go to a brick-and- mortar store.

But the industry also operates with limited regulation, while also possibly perpetuating a cycle of poverty, the lawmakers said during a hearing in Albany, when it heard three hours of testimony from industry leaders.

Andy Morrison, associate director of the New Economy Project, said there’s an urgent need for New York to advance structural reforms that close loopholes to the state’s usury law that are exploited by fintech and other “predatory” lenders.

Morrison cited a state Attorney General’s Office report that said New York ranks sixth worst in the country in banking access, which he said fuels banking inequality while “emboldening financial predators to exploit New Yorkers” through fintech.

He said the companies that give customers advance money on their paychecks, with fees and gratuity, seek to evade usury laws.

These so-called earned wage access companies are “essentially payday loans by another name,” and the practice is illegal, Morrison asserted, while adding that they charge a whopping average of more than 330% in interest.

“These products target low-wage workers, gig economy workers, and it exacerbates poverty and inequality in our state, particularly in redlined communities of color,” Morrison said. “We’re concerned that New York state is not doing enough to address this issue. The Department of Financial Services has not been enforcing our usury law against these companies, potentially turning a blind eye to the usurious lending that’s happening right under our noses.”

Earned wage access companies are not currently licensed by DFS.

Morrison said the organization wants New York to take more action, and to strongly oppose A5053, a bill that proposes to exempt earned wage access from the state usury law.

Alternatively, Morrison said New York should establish a living wage that would prevent these fintech products from thriving.

Yu Shan, assistant professor of finance at Syracuse University, said “open banking” is rapidly growing within fintech. It’s the financial services model that allows third-party providers to access customers’ financial data in traditional banking institutions through application programming interfaces.

Shan said open banking promises to foster competition and innovation and contribute to a more resilient financial system. But it also presents ”a series of cybersecurity, privacy and legal challenges that need to be addressed before the full potential of open banking can be realized.”

Shan explained that “the provider itself may be a startup comprising 10 employees with no or little experience or expertise in cybersecurity.” The provider is attractive to cyber criminals who are aware certain fintech companies can’t invest in security measures as banks do.

During the hearing, lawmakers expressed concerns about what steps, if any, fintech companies undertake to promote responsible financial behavior from their consumers.

Fintech also includes more widely used companies that New Yorkers of all income brackets use, such as Doordash, Venmo, PayPal and Cash App.

Penny Lee, president and chief executive officer of the Financial Technology Association, a Washington, D.C.-based trade association, said the state is a global leader in the space, with more than 1,000 fintech companies here, and at least 20 that are worth more than $1 billion.

Lee said the majority of MTA members are either headquartered or have offices in New York, where there’s been “an incredible amount of innovation,” and the industry is trying to break through barriers to banking options.

Phil Goldfeder, CEO of the American Fintech Council, said he travels the country to support legislation that is appropriate, responsible and makes sense for the industry. The former Assembly member said lawmakers had an important duty of setting proper guardrails to ensure that responsible fintech is able to flourish in New York, while consumers are properly protected from irresponsible actors.

Elaborating on bad actors, Goldfeder said that there are a number of buy now, pay later entities that “shouldn’t be allowed to continue to work under that regulatory framework that already exists.”

Meanwhile, New York’s industry could be subject to stricter regulation in the buy now, pay later space, if far-reaching legislation introduced by Gov. Kathy Hochul in January passes in the legislature.

The bill seeks to require buy now, pay later lenders to obtain a license to operate in New York, and for DFS to set regulations, including a limit to late fees, and a requirement that companies report to credit bureaus and implement fraud protections, in alignment with the credit card industry.