Letter for the Record to Members of the House Subcommittee on Digital Commerce and Consumer Protection (Committee on Energy and Commerce)

Prepared for the hearing - Disrupter Series: Improving Consumer’s Financial Options With FinTech

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Dear Chairman Latta and distinguished members of this Subcommittee:

Thank you for the opportunity to submit this statement for the hearing “Disrupter Series: Improving Consumers’ Financial Options with FinTech.”

The FinTech, or financial technology, boom, has much in common with the ascent of “sharing economy” platforms like Uber and Airbnb. Just as these services have vastly improved consumers’ transportation and lodging options, Fintech products can offer more choice and convenience and lower costs to consumers, entrepreneurs and investors. Scholars have noted in particular the potential for FinTech to advance the well-being of lower-income Americans and be part of a path to their inclusion into the financial system.

But regulatory barriers—some fairly new and some almost a century old—are hindering FinTech’s ability to deliver. Fortunately, the U.S. House is set to vote this very week on a bill containing many provisions that eliminate or reduce this red tape.

The Financial CHOICE Act contains many measures aimed at curbing overregulation and ending too-big-to-fail. It also contains several provisions that would free innovators and entrepreneurs and help make the Unites States a leader in FinTech.

Crowdfunding—which allows filmmakers, recording artists, and other entrepreneurs to raise funds online from millions of fans on sites like Kickstarter and Indiegogo—is becoming a new frontier in investing across the world. Entrepreneurs are using portals to find investors, without the need for the “middlemen” of brokers and stock exchanges. But in the United States, even individuals raising small amounts have been barred from raising funds from ordinary investors due to securities laws dating back to the 1930s.

The Jumpstart Our Business Startups (JOBS) Act of 2012, signed into law by President Barack Obama, attempted to change that situation, and the CHOICE Act continues this work. CHOICE Act provisions cut through red tape on advertising and marketing investment crowdfunding offerings by small entrepreneurs, and allow ordinary investors the opportunity to build wealth with these firms.

Similarly, peer-to-peer and “marketplace” lending have expanded credit options for consumers and small businesses. Consumers and entrepreneurs who can’t obtain a bank loan now have alternatives for borrowing money other than simply maxing out their credit cards.

But this type of lending is threatened by the ruling in Madden v. Midland Funding, in which the Second Circuit Court of Appeals reversed a century of “valid when made” precedent by letting a state apply its usury cap to a loan made in another state that was bought by a third party. That ruling created massive uncertainty in the non-bank lending market, and FinTech innovators fear it could devastate their business models that depend on a national market. The CHOICE Act restores the “valid when made” doctrine by stating that a loan’s interest rate stays valid regardless of whether the loan is subsequently sold or transferred.

These measures in the CHOICE Act are just a start. There are many other public policy proposals that could lift barriers to FinTech, so that it can fully flourish and benefit middle and lower-income Americans. The appended policy brief outlines many of these barriers and solutions. My Competitive Enterprise Institute colleagues and I are happy to discuss this topic and these measures further with committee members and their staff.


John Berlau

Senior Fellow

Competitive Enterprise Institute