Listen: Direct deposits and the CFPB’s new open banking rule

The combination of today’s uncertain macroeconomic conditions and the Consumer Financial Protection Bureau ’s new open banking rule coming this year has consumers wanting quick access to cash from their banks under the watchful eye of regulators. Consumers want the ability to move their data and accounts from bank to bank without risk, especially amid rising rates, Kurt Lin, chief executive of fintech Pinwheel , and Raj Date, advisor at Pinwheel and former deputy director of the CFPB, tell Bank Automation News in this episode of “The Buzz” podcast. “In a rate environment that really amplifies the economic gains and losses associated with being able to switch accounts, it becomes both something that matters in dollar terms and is very much in alignment with the broader policy agenda and direction of the financial regulators,” Date says. Listen as Lin and Date discuss today’s macroeconomy and the importance of secure direct deposit offerings ahead of the CFPB’s new open banking policies. 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Subscribe to The Buzz Podcast on iTunes , Spotify , Google podcasts , or download the episode . The following is a transcript generated by AI technology that has been lightly edited but still contains errors. Whitney McDonald 0:11 Hello and welcome to The Buzz a bank automation news podcast. My name is Whitney McDonald and I'm the deputy editor of bank automation news. Joining me today is Chief Executive of pinwheel Kurt Lin and pinwheel advisor and former deputy director of the CFPB Raj Date the to discuss today's macro economy and the importance of direct deposits ahead of open banking policymaking, which is in process.Kurt Lin 0:34 I'm Kurt Lin. I'm the co founder and CEO of pinwheel, we are the leading connectivity platform for connecting payroll accounts to both FinTech and financial institution apps.Raj Date 0:46 And Whitney, thanks for having us. I'm Raj Date by way of background. I've been an executive within a consultant for an investment banker to a regulator and now an investor in financial services firms of more or less every variety banks, finance companies, insurance companies, asset managers, spent time at McKinsey and capital on and on Wall Street, and then did a stint in public policy as the head of sort of the policy and research shop at the CFPB in the early days, then when Elizabeth Warren left to run for the Senate, I stepped into her role as the acting head of the agency and then stayed on as the Deputy Director for about a year. Finally, leaving in 2013. I am not a natural number two, that's some self learning I've had through through through that course. And I ended up starting my own firm in 2013, called Fenway summer, we are essentially a think of it as an old timey Merchant banking model focus just on the FinTech sector. And by that, I mean, we're willing to be flexible about how we participate in new ideas and innovative people. And, you know, for me pinwheel and my collaboration with Kurt and his team allows me to kind of do all those things, and in an area of the sector that I think is both simultaneously important and timely. And we talked a little bit about some of that stuff when you'd like.Whitney McDonald 2:12 Great. Well, thank you both for being here. We really appreciate your time. And I think that this topic here is very timely. And I think that we should kick things off with maybe a discussion of today's macro economy and how it's more important now than ever to offer these direct deposit. So I'll just pass it over to Kurt maybe to start.Kurt Lin 2:35 Absolutely. So I think you know, anyone who's been watching the news for the past, I would say six months or so, if not a bit, even before that. has heard time and time again that, you know, there is now rising interest rates, and now the market is turning and, you know, like, how do we handle this? What do we do this is mean doom and gloom? Or is there some kind of light at the end of the tunnel? And I think it's really important to understand that. What are the actual implications of rising interest rates? And actually understand that even before that, what would we what what was happening with, you know, lower interest rates, right, because I think that's the kind of the driver of a lot of what we're discussing today. And I think over the past, call it a decade plus where there's been this really strong bull market, it's been on the back of really low interest rates driving economic growth across the board. And especially we can talk about investments into innovation. There's a lot of investment dollars going into new technologies, especially in the banking world, and other things that are tightening up and people become more conscious of risk and making sure that they are managing their businesses effectively. I think you start to really understand that it's all about making sure that you are reducing risk and exposure, and also making sure that you're kind of returning to the fundamentals and the basics that make great businesses, great businesses, right. And so especially for banks, I think that is really looking at your deposits and making sure that deposit growth is really healthy, right. And so that's where the idea of making sure that your ability to capture direct deposits and making that process really frictionless for your consumers, and growing that is more important than ever. And I think there's two key pieces that really underpin this. One is when you think about the CFPB, his remarks about driving account portability. That is not only making sure that it's really easy for a consumer to be able to move their data from bank to bank, but also move their accounts from bank to bank. One thing that people largely forget is needing to actually move the money that you get paid with, right it's one thing to be able to say I can move my data over but I still get my paycheck. So my old account I'm just we're kind of stuck kind of in this limbo. And so being able to make that really easy, is a really important thing. And especially going into this macro, really being able to understand the consumer, and their income and how it changes is really important to understand the risk and exposure levels that you have as a bank. And so I think those two things are really kind of driving that. And I'll pass it off to Raj because he probably knows a lot more about not only CFPB, but kind of the larger environment that you can speak to so Raj Date 5:31 sure, I mean, there's so much to talk about within the dynamics of the macro environment today. But let's just focus on on rates a little bit, a little bit more, I mean, just the overall magnitude of what we're talking about, you know, as recently as the middle of 2021, you effectively had short term rates of nothing. And we're sitting here today with the two year Treasury at something like 425 450 basis points, a massive and very rapid swing, one of the interesting things to think about is, well, who gets the benefit of that exactly, and traditionally traditional commercial banks or have a so called asset sensitive balance sheets, which in practical terms means that as interest rates climb, they repriced their deposits upward, much more slowly, which means that they capture that the benefit of the lag between the time that their assets, their loans are generating higher interest spreads. But they're not really paying the depositors anymore, they kind of take their time to reprise upwards as your eyes or anyone else would do. But one interesting question is whether or not changes in technology and allow consumers and small businesses who in general, don't get the full benefit of rising rates offered the bank deposits can changes in technology, such as the products and services that Kurt is offering, allow them to capture more of that surplus as rates change. And to me that's worth the effort to try and figure out because, you know, it is a multi multi billion dollar question for quarter and therefore really worth really worth investing the time and energy. And this within in the stakes are pretty high, right? Because think about for the banking sector for any financial services firm, you simultaneously have reaped shocks that have potentially unpredictable impacts on the overall earnings trajectory of any business. And you have, we can do a credit environment that can only get worse. I mean, credit conditions have been astonishingly benign since basically since the end of the financial crisis. And that is going to end period full stop like it has to. And that's going to create a competitive dynamic, we're really paying attention, like the firm's that really can serve their customers well, and to do so efficiently and with the benefit of technology are going to be the winners. And the stakes couldn't be higher, and they couldn't be higher than right now, in my opinion. Whitney McDonald 8:10 Thank you both for setting the stage there and talking through the macro economy where the rates stand today and what that all means. I think that Raj started talking a little bit about where technology fits in and what this means and answering those questions. For the banks today, I think it would be a good pivot to talk through what pinwheel is, and where it fits into this puzzle. Kurt Lin 8:35 Yeah, absolutely. So when you think about what pennwell does, in the simplest terms, we provide a product that makes it really easy for consumers to connect their payroll accounts to any app, right. And so once you have that account connected, whether it's an ADP account, or workday account, or what have you, it allows pinwheel to do two main things. One is gather information about who someone is how much money they make, where they work, and share it with the bank, or the FBI, that is that information, whether it's to verify them for a loan, or what have you. And the second thing that we do is we make it really easy to update their direct deposit savings, right. And the problem that we're solving there is when you think about putting a direct deposit, I don't know if you've ever tried to do this yourself. But it is you have to either go you know, submit a paper form to your HR team, and then just cross your fingers and hopefully actually processing which more often than not, it somehow gets kind of lost into the ether. Or you are trying to self serve on some, you know, clunky portal that is really hard to navigate and is really confusing and oftentimes leads to errors, right? And so, our goal is to say, can we take all of that friction out of the process and make it as simple as just clicking? Once one or twice a once or twice, right? And not only do we do that, but we also embed that at the point of highest intent. So you know, during the account onboarding, or creation process, right, so you sign up for a bank account, you say, Hey, you created your account, go ahead and now fund it with their direct deposit using pinwheel and make that a really seamless process for the consumer all the way through. Raj Date 10:26 You know, if you think about the, the idea of making deposit switching or account switching, cheaper, easier, more streamlined, it fits pretty nicely with what are the stated anyway, goals of the administration broadly. And many of the Financial Services regulators, probably most significantly, the CFPB, I would characterize a lot of the sort of economic thinking within the financial regulators and within the White House as being kind of summed up by competitive markets work, they work to fill market niches, and create benefit for both suppliers and consumers. And you can rely on markets to work except when they don't. And they don't, when you have present any one of a handful of market failures or obstacles to efficient market functioning, things like, you know, agency problem or market power imbalances or information asymmetry or critically, switching costs, the extent there are transaction costs that that put sand in the gears of customers moving their business, well, then you should not affect expect the market to function as efficiently and to lower costs and prices as quickly as it otherwise would. As a consequence, it shouldn't be too surprising to a director of the CFPB like Rohit Chopra, who has spent basically his entire career around consumer protection issues and competition issues. To be laser focused on this, I would argue it's probably the through line of the vast majority of the policy agenda at the CFPB today. And as a consequence, I think that an offering like the one that Kurt is describing, particularly in a rate environment that really amplifies the economic gains and losses associated with being able to switch accounts, it becomes both something that matters in dollar terms, and is very much in alignment with the broader policy agenda and direction I think of the financial regulators. Whitney McDonald 12:34 Great, thank you. And yeah, thanks for bringing that up to the the main focus of the CFPB right now and how this is in line, or pinwheel is in line with that that mean, kind of bigger picture focus of the of the Bureau. I'm wondering if we can talk through a specific use case or example of how to or who has been using pinwheel and what that looks like. Kurt Lin 13:00 Yeah, absolutely. So I think one of the best examples we can share is one of our valued customers is Cash App blocks consumer offering. And what we help them do is really make the process of not just fitting direct deposit, but I would say more broadly, the entire process of being getting up and running on the banking product. Seamless, right? And so what largely happens is they're either you know, it's a for those who don't know, cash up is a peer to peer, you know, payments that were first and foremost, where you can, you know, pay your buddy back for, you know, whatever something that they did. And that's largely how they're able to kind of get folks familiar with the product. And then from there, they say, you know, do already having money come in from friends, why not also sign up for a bank account. And the big drawn for them, I think, is largely the draw for a lot of neobanks as well, more broadly, which is there are a good chunk of folks in the country, I'm sure Raj probably knows the number much better than I do. Because it always seems to be kind of changing, but have a look at the latest stats. There's a lot of folks who are either unbanked or underbanked. Right, or they are banked, but they are not being served well, right. They're subjected to a bevy of fees like having an account minimum ATM fees, etc. And so there's a real value and draw for these like newer neobank coming in to not charge a bunch of fees and make it really easy for them to actually enter the banking world in a way that is actually on terms that will not put them in a position where they will be able to succeed in the long run. Right? And so it's a big part of that. What we're doing is once that customer creates bank account, in that same flow, they say hey, and that you create an account, once you go and find it with your direct deposits and at that point pinwheels experience pops up they just To select either their pill provider or where they work, and then we make it easy to say, Okay, do you want to push all of your pages or some of your paycheck. And once they confirm that everything else happens in the backend, so we try to make it really as seamless as possible. Another example I can also share is, when you talk about the direct deposit piece, that's one piece of oftentimes a larger offering. So a good number of our customers also offer some form of earned wage access. And what that basically means is, you have all these customers who are working largely hourly jobs, yet, they're not able to get paid for everything, they get paid every two weeks or every month. And so it creates this problem where in between those pay checks, they run out of money, and then have to go to a payday lender or some other type of Tory provider, because obviously not great for them. And what Barnaby Jack says has promised, but has never really delivered in totality, is this ability to actually get someone paid every day. And so what we're finally able to do is say, we have direct connections into not only these payroll systems, but also Time and Attendance systems as well. So we can say, we know that, you know, Kurt has clocked in and clocked out at a ship today Chipotle, we also know that he is as of this very moment still actively employed. So you can reduce the levels of fraud and other bad actors and put those together and say, well, actually the third piece, which is with their direct deposit, we know that we can claw back whatever we for to them. When they do get paid in two weeks, you can put all those three pieces together. And now you have early access as a service or as a feature. And so we've been working with our customers to embed that into their apps as part of more of a holistic offering as well. Whitney McDonald 16:48 Now you've started kind of touching on it, can we talk through that data that's being collected so that FIS can have a better understanding of what their clients look like? Whether it's a head of a deep ball or avoiding that at all? Can you talk through that? Kurt Lin 17:03 Yeah, totally. And I'm sure there's a lot to add to this as well. I mean, Raj has mentioned earlier, the credit landscape is only going to get worse, right? I think like there has been a lot of focus on let's just grow loan volumes as quickly as possible over the past few years. And now there's kind of a shift towards, let's really focus on risk and exposure and make sure that's minimize as well as like collections and loss rates and what have you, right. And I think a big piece of that starts with having the data to understand what is really going on with this consumer. Right. And so one of the things that we've been really excited about is by connecting someone's payroll account, you can see in real time, their income and employment data, right. So you can start to see things like, Hey, someone is, you know, unfortunately, they've been furloughed, or worse, yet they've been terminated, it actually doesn't benefit you as the as the winder to just sit there and don't do anything, because actually, they're going to eventually default, it's much better to be able to get ahead of it and say, Okay, if we can see this coming down the pipe, can we offer them some sort of loan modification or some type of relief, so that we don't put this person further into, you know, financial duress, at the same time, protect our investments in our assets, so that when they do get back on their feet, we can actually, still, frankly, have a great relationship with that customer and also protect our balance sheet, versus having to sell that debt for pennies on the dollar to someone to a collector, right. And so that's one example of how having real time data, especially upstream makes a really big difference for the kind of credit landscape as a whole. I'm sure Roger, the more you can add to that. Raj Date 18:46 Yeah, maybe just a little bit of, you know, sort of longitudinal history on some of some of these issues. So when I first got involved in the credit card industry, embarrassingly, I guess you'd say, more than 20 years ago. Now, the state of the art in terms of decisioning, for both consumers and increasingly for small businesses, was using log regression models based on credit bureau attributes. And it you know, sort of worked except when it didn't, you know, there are plenty of people who don't have enough data on the at the credit at the credit bureaus to be able to make a decision based on those models, and it becomes a little bit of a chicken, the egg issue is you don't get data at the credit bureaus until you have some credit upon which you are paying. So it really was sort of a stubborn problem in the business of consumer credit extension. And so there would always been, you know, sort of this notion that, well, gosh, if the data were better structured, or if processing speeds were much higher than I would be able to use different methodologies with a wider and more diverse set of data to be able to serve a wider population of customers at a price that seems fair. But until relatively recently, all of that was just sort of a lot A hand waving and yes, maybe it might work some day, that's different now, like it is no longer open for debate, machine learning approaches using wider datasets do in fact, either in conjunction or stand alone allow you to make better decisions, it turns credit extension. And I would argue also with respect to loss mitigation efforts than traditional methods alone. But it does raise I think, a series of policy questions beyond just sort of the threshold of does this work? Because the answer to that is yes, it works to use different broader data sources, such as the ones that Kurt is talking about to make decisions. But it creates two other kind of policy questions that we need to wrestle to the ground. One is, well, who gets to decide whether or not you're going to use other data to make decisions about me? Is it my decision? Is it the financial institutions decision, it's somebody else's decision? And then number two, if it matters, and we can figure out who gets to decide what if something goes wrong? Last time I checked, things go wrong from time to time. And if something matters, and if something then there was wrong, how are you going to fix it? Well, I have a right to have it fixed or what? Which is why I think that you know, pinwheels decision to operate as CRA, which, you know, almost definitionally means that they have to be attentive to the remediation of errors if they occur, like that matters. And it's very difficult for me to imagine a world in which the use of wide new datasets either on an opt in basis or otherwise, doesn't, like why shouldn't we get the same consumer protections in that arena, as we do with credit bureau data? So I think I think that's the world in which we are going to be moving, or at least I hope so. Kurt Lin 21:52 And to add to that, I would also say like the the example that I like to give to kind of like humanize the problem is, you know, we've already seen within our own data sets today that you have a good teacher or a nurse who has been the same job for four or five years, and their income is super stable, right? Like nothing really changes. It makes them a really reliable borrowers. And so they actually end up performing, even though they have a FICO by 50, and a performing much closer to a 750. Right. But the any lender, who's looking purely at a FICO score can't see that. And so I think, you know, we actually recently did, we commissioned a survey. And we actually saw that, you know, nearly eight and 10 respondents said that they were, you know, that credit scores should not be the only criteria for getting along, which was not surprising. And nearly seven out of 10 said that they would like, and would willingly give their income and employment data to contribute to their credit worthiness, because they realize how much of an impact that it would make as far as helping them on like better financial products as well. And so I think all of that kind of feeds into this idea, especially as we see folks embrace broader datasets to actually be able to build better businesses, frankly, it's really hard to sit here and say that we, you know, gather data on behalf of the consumer and share with the service provider, and then also try to sit there and all spin claim that, you know, we're not responsible for what happens with the data, right. And so, for us, it became not only something that we really strongly believed in, but also I think we took a stand on because the majority of other data providers in the market don't take the stance, right. But it's just really hard to sit there and say, Hey, like, if something, if any sort of adverse action harms this data, that we are furnishing to service providers, the consumer needs to be able to log that and say, Hey, this isn't right, or this is like, in some way inaccurate, and needs to be our job to make sure that we handle that well. And I think that kind of speaks to more broadly, pinnacles mission, which is, you know, empowering consumers to use your data to unlock better financial products, and in turn being that infrastructure layer that allows the leading innovators in financial services, whether you're a big bank, or whether you are a startup, to actually leverage that data and leverage those access to direct deposits to build the parts of the future. Raj Date 24:26 Yeah, you know, obviously, I spend most of my time investing time and money in new ideas in financial services. And I can, I can attest to the fact that it is possible to be totally right about the future and be totally wrong about the timing with which that future arrives. And being wrong and being too early. Both are sort of tantamount to losing all your time. So and losing all your money, so not a great outcome. And so I think it's especially critical, as Kurt and his team continue to move forward to take advantage of this moment in the marketplace. Because there are at least three catalysts making this set of ideas and this set of technology and this set of offerings, especially salient right now. You have the value to customers, and the value to institutions of these technologies being dramatically higher today than arguably they were a year ago. Why because rates are higher and therefore moving your account is worth more to you. And the credit environment is worsening. And therefore for financial services firms, investing more energy in innovative ideas to be able to better decision things is worth more than when basically nobody was ever going bad as recently as 18 months ago. So value is higher, because this data works to make better decisions. When there are problems with that data, the risk is higher, so the value is higher, the risk is higher. And there is a an extant current ongoing rulemaking effort at the CFPB in the form of Dodd Frank section 1033 rulemaking that has the potential to be able to make more safe and catalyze the development of this use of data in a fair and controllable way. That just so happens to be happening exactly right now. Whitney McDonald 26:24 You've been listening to the buzz, a bank automation news podcast, please follow us on Twitter and LinkedIn. And as a reminder, you can rate this podcast on your platform of choice. Thank you for your time and be sure to visit us at Bank automation news.com For more automation news,

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