‘Sandboxes make me nervous’: 10 questions for California bank commish
Jan Lynn Owen is a bank regulator working at the epicenter of the digital revolution, yet she is unambiguously cautious about the fintech industry.
As commissioner of California's Department of Business Oversight, she is as well versed a regulator as you will find on fintech issues. It also helps that she has worked both at a big bank (JPMorgan Chase) and at a tech giant (Apple).
But she is quick to note the risks of the changing financial services landscape. She encounters young financial innovators — often wearing skinny jeans, she says — who come to her office seeking a license for a new consumer financial product or app but lacking the regulatory experience to safely launch a business.
“A lot of these young people come in and I’m very clear . . . if you can explain your business model and explain the products you want to serve, then we can help you understand the regulatory and legal hurdles that you have to go through,” Owen said in a recent interview with American Banker.
While California is largely seen as fintech-friendly (the state oversees 3,200 licensed consumer lenders alone), Owen believes in scrutinizing new models before letting them into the market. This also extends to concerns she has about cannabis banking, including state legislative efforts to create a new regime for banks that serve pot businesses, and payday-type lenders.
“We are nervous and scared to death,” Owen said with regard to legislative efforts to create a closed-loop system for pot banking in the state. If “my institutions want to get into cannabis business . . . I tell them that we would look at this as their regulator, as any other business type that is cash intensive, high risk and uncertain.”
What follows is an edited transcript of the interview.
Should chartering of fintech firms remain exclusively at the state level or is their merit in the Office of the Comptroller of the Currency moving forward with the fintech charter it is considering?
JAN LYNN OWEN: I do believe they need to be chartered at the state level. The previous administration felt that there was legal certainty regarding the OCC’s authority in this area. I believe that certainty is suspect.
If [an OCC charter] was so darn appealing, why hasn’t anybody applied for one yet? If it was everything that everyone wanted and needed, then we would have seen more activity and we haven’t.
I am anxious about the Treasury’s report on this. I think that will be fascinating and helpful.
We believe we are better able, through our licensing and examination authority, to prevent injury to consumers and redress it after it happens. I also believe that we, on the ground, are better able to help our companies that come in to see us with ideas about how to do lending better.
A lot of these young people come in and I’m very clear: If you can explain your business model and explain the products you want to serve, then we can help you understand the regulatory and legal hurdles that you have to go through. But we can also tell you what’s been done before.
What are your key concerns that prevent you from approving a license for a fintech firm?
Capital. Seriously. They may have a lot of money for development, but the concept of putting capital aside is a little difficult.
You have to be fingerprinted and we have to do background checks. And some of that is foreign to people. But also, they need to pay attention to what the Department of Justice has on them in getting (the management team) cleared.
We ask for a lot of contingency planning. I also ask for a lot of succession planning. I worry about these industries because nobody thinks of succession planning.
What advice do you give other state regulators trying to understand fintech firms and how to assess applications?
I tell my colleagues that they need to look before they leap. Consumer protection from my end doesn’t always mean that as a regulator, you need to leap into action.
Nobody — not the regulators, not the developers — can be certain about the best practices to keep the products safe and viable for the consumers. And I worry that we as regulators have to work to not raise consumers’ expectations and make promises that we can’t keep.
When regulators announce their involvement, we risk prematurely legitimizing fledgling technologies and products.
Does that concern include the so-called sandbox approach started by regulators in the United Kingdom to allow firms to test new products on consumers?
Sandboxes make me nervous. I can’t get past the fact that in my head, I see kids playing in a sandbox.
I think asking questions, having an innovation hub, working with people that are interested in some of the same issues — I think that’s crucial. But if you are going out to market with a product and you have a set of consumers that are your beta testers, how do those consumers know what they’re getting and what is their redress?
I’ve been pretty clear about the Arizona sandbox that there’s no enforcement provisions. The transparency of this, the public knowledge and who the participants are is totally missing. I’m hoping the Arizona AG is working with the state regulator. It’s not clear. That is a very broad statute and, boy, that just makes me very nervous.
Then what would you say is the right answer for fostering innovation without adding more harm to consumers?
It’s a struggle, right? There’s always that fine line between being a regulator and telling everybody what you do or just go behind the scenes and get the work done. There’s that fine line and we’re working on doing a better job of getting our information out because people don’t always know what we do or can do to help.
Innovation hubs are not a bad idea . . . regtech labs, I think, have a lot of viable options. But where you go from there and what do you need to change? I love all these bright ideas, but in many cases, you’ve got to change the law. And I will tell you, changing the law at the state level is a whole lot easier than changing it in Washington, D.C. But that’s where I think the innovation needs to be, because I know we can and are more nimble, and willing.
And we’ve been willing to listen to some of these ideas on cannabis and that’s been fascinating.
Can you give an update on regulatory efforts in the state regarding cannabis banking?
There is a bill that a [state] senator [Sen. Robert Hetzberg, a Los Angeles Democrat] is pushing, SB 930, and it would create a limited chartered institution that would be a closed-loop institution. It’s been reported inaccurately that it is a state-run or state-owned institution, so I would like that misnomer to be thrown out.
If this bill passes, this would be companies that are interested in doing a closed-loop, limited charter, moving money between each other for cannabis.
Now, it still doesn’t deal with the federal issue. It doesn’t deal with the fact that the feds aren’t giving out master accounts on these issues. We see no intention of them doing that. And it is a huge public safety issue in California. It’s also a huge taxation issue.
We are nervous and scared to death.
Now, if I look at my institutions and my institutions want to get into cannabis business ... I tell them that we would look at this as their regulator as any other business type that is cash intensive, high risk and uncertain.
What are your thoughts on using alternative data to qualify a borrower?
I think any alternative data to use to qualify someone makes perfect sense and we support that. On the non-depository side, we definitely look at that. I will tell you, I haven’t seen a lot of that on the depository side.
I believe they are starting to do that, but ... you’re looking at small-dollar loans. And we all know the stories about depositories and small-dollar loans.
What we would like to see is proper disclosures ... and products available to consumers so they get what is best for them and get them the knowledge to make the best decision.
I also believe that the industries are evolving and that nondepositories, small-dollar lending is going to be there. It’s just going to be another form of lending that will be available to consumers.
Your department recently reported that consumer loans between $2,500 and $4,999 were the most popular among consumers but carried annual percentage rates of 100% or more nearly 60% of the time. What are you doing to prevent further consumer harm from triple-digit APRs?
We do think it’s a problem. We are looking at egregious behavior within all of our licensees. But if we get a lot of consumer complaints or we see that our licensees are not complying with the law, to the best of all our ability, we’re all over them.
We will also look at the [auto title loan-related repossession] data that they give us in the annual report to determine what their problems are.
Candidly, if you’re repossessing 20,000 cars, that costs a lot of money. And that costs a lot of money to the companies. So we are also now starting to do a better analysis of the financials of these companies to see what kind of business are they in, are they going to survive?