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Joann Barefoot of Alliance for Innovative Regulation and Jason Henrichs of Alloy Labs Alliance join Dara Tarkowski to discuss innovation and regulation in 2020 and 2021.

  • The top takeaway of 2020 was the acceleration of technology adoption –– both in the industry and by regulators themselves. 
  • “I feel like we packed a decade’s worth of innovation into a few months this year,” says Alliance for Innovative Regulation CEO Joann Barefoot. 
  • In 2021, we can expect an embrace of AI and data-driven finance tools and a renewed focus on cybersecurity and privacy.

To wrap our heads around a truly unprecedented year, I invited two like-minded friends on 2020’s last episode of Tech on Reg: Joann Barefoot, CEO of Alliance for Innovative Regulation and Alloy Labs Alliance CEO Jason Henrichs. We break down the biggest takeaways from our annus horribilis as well as what’s to come in 2021. 

To address the elephant in the room: 

“Obviously, COVID has dominated everything,” says Joann. “But I think in the regulatory arena, the biggest impact the pandemic made was the acceleration of technology adoption –– both in the industry and by regulators themselves. I feel like we packed a decade’s worth of innovation into a few months this year.”

That’s why 2021 promises an even greater focus on everything digital, both for the finance industry and for its regulators.

“2020 was the year we went from we can’t to we must,” says Jason. 

A ‘COVID hangover’ or innovation momentum?

Unlike the banking crisis of ’08–’09, our current crisis is accelerating both the acceptance and adoption of finance technology. 

Jason wonders whether it’s just too much for our traditionally conservative industry, whether innovation will slow or we’ll backpedal toward pre-COVID thinking.

“Will 2021 feel like a giant COVID hangover around digital transformation?” he asks. “Or will we be able to maintain the momentum? I hope it’s the latter.”

Joann thinks regtech will continue “full speed ahead,” while fintech may lose ground due to skepticism in Congress and the incoming administration about its value and benefits to consumers. 

“It’s a mistake for the fintech world to feel complacent, like everybody knows fintechs are the good guys trying to do the right thing,” she says. “There’s a lot of deep skepticism that innovation is not necessarily good because it can mask predatory practices. I think fintech is really going to have a make-or-break year from a regulatory standpoint.”

Rethinking risk with next-gen underwriting

“[We’re] on the cusp of a real breakthrough in how to do credit underwriting in a smarter way, which is not about making loans to people who can’t repay them. It’s about making loans to people who can,” Joann says. “We can’t tell that using traditional credit history and scoring tools.”

The online lending model itself is another way to level the playing field.

“Granted, there are lots of issues,” she points out. “Some models are abusive, there are problems with higher fraud, and so on. But the fact remains: It’s so much less expensive to serve people that way.” 

She thinks innovation also means regulated finance businesses will look at risk differently.

“Better and greater adaptability will enable risks that are risks worth taking.”

Diversity and renewed focus at the CFPB

The Consumer Financial Protection Bureau had a busy year, and I suspect its momentum will continue well into 2021. What might we expect from its new director and Biden’s picks for other financial regulatory agency heads?

Overall, they’re going to look different because “they’re going to be much, much more diverse than we’ve had in the past,” says Joann. 

She also forecasts a tremendous focus on racial equity in all aspects of the industry. “The killing of George Floyd is still very much top of mind … it’s not an issue that blew over,” she says.

Joann adds that, after a Trump-era “round-robin of interim directors and a general lack of focus,” we should expect leadership that takes an “aggressive posture on enforcement.”

Neither of us would be surprised to see a director in the mold of original CFPB head Mitch Cordray, the former Attorney General of Ohio, who came to the role with an enforcement background. 

Sprinting toward AI regulation

2020 saw massive adoption of AI-driven tools in banking and finance. Are regulators –– from the CFPB to the SEC and FTC –– equipped with sufficient information and expertise to supervise and audit their use? Can they accurately assess whether or not these tools are good for the industry? 

The bad news is, well, no, says Joann, who is a former bank regulator herself. 

“But the good news is they realize it and they’re working on how to collaborate with the private sector…There has been such an embrace of technology and innovation that a few years back would have taken courage to even try.”

She cites some promising trends: The CFPB completed its first tech sprint in October 2020; the U.S. Treasury is planning one on financial crime. But she says we need “rapid clarification of standards” from regulators, especially around AI. 

“And there are questions about how we permit data to be used, as well as privacy issues vis a-vis the benefits of using data in new ways,” Joann says. “These are tough issues, and regulators have to scramble to get on board.”

Even without a crystal ball, I see a number of revisions to protocols in supervisory manuals happening in the near future. When they were originally drafted, we didn’t even have these questions to ask.

Regulatory agencies: Restructure or reconnect? 

One of the silver linings of the COVID crisis is that it might reshape how we think about structuring the regulatory agencies themselves, says Jason. If we can centralize cutting edge tech expertise, we won’t need every examiner in the field to deal with the thorny issues of our era. 

“Imagine them pulling some of the best minds from the Googles and the Amazons and academia to do hot-shot AI things,” he says. 

Joann likes the sound of that. 

“We do need new models,” she says. But she has been in and around Washington long enough to have doubts that restructuring will happen without more crises.

Instead, she suggests we think of “creating connective tissue among these agencies without changing their official setups.”

Security and privacy: ‘Data is the issue of our age’

Joann thinks the issue of our age is data: how it will be used, should be used and should not be used. 

Rapid innovation means cybersecurity and privacy questions percolate right to the top. And as of right now, we have no single federal agency to help answer them. In a Biden administration, will we see a federal privacy regulator?

Joann is skeptical about the likelihood of that. 

“It’s not anybody’s fault, but the government’s not designed to keep up with change at this pace,” she says. “We’re going to have to reinvent those regulatory models. If I had to bet money, I don’t think we’re going to see a privacy agency enacted in the next year or 18 months.” 

But she does predict Democrats will make a concerted effort to get a handle on privacy and data use issues.

“We do need to get our act together,” Jason adds. “If you need any more proof, look at the recent infiltration of the U.S. government [by Russian cyberattacks]. We need a concerted effort to think about it from a regulatory point of view, from a consumer-benefit point of view, from a protection point of view.” 

And, in light of the Solar Winds hack, apparently a national security point of view, too.

“It’s so complex,” Jason adds. “It does speak to the need to be more collaborative across oceans, and even within the United States.”

Let’s get proactive, not reactive

Innovation offers us a competitive advantage, a way to solve a host of issues we face around inclusion and discrimination. Fintech lets us make sure more Americans have access to building wealth –– and plenty of consumer protection. 

To sum up our wishlist for 2021: A proactive approach to meeting innovation with thoughtful regulation, smart legislation and interagency operability. 

Either we make it happen now, or the next crisis will force us to do so “in a shotgun marriage, to clean it up as fast as we can, à la 2008.

At least half of Americans have had their data compromised in breaches at some of the largest financial institutions in our country. The federal government’s cyberinfrastructure has been hacked. I don’t even want to think about what else could go wrong. 

That’s why we want lawmakers and policymakers to realize that some of these problems have promising new solutions, including privacy-enhancing technologies like homomorphic encryption that can limit the amount of data that gets exposed. 

If we learned anything in 2020, it’s that the only constant is change. Let’s hope our industry can do the same.


This is based on an episode of Tech on Reg, a podcast that explores all things at the intersection of law, technology and highly regulated industries. Be sure to subscribe for future episodes.

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Dara Tarkowski
I'm Dara Tarkowski. Innovator, entrepreneur, attorney and podcast host. I am FinTech and RegTech enthusiast passionate about responsible innovation and exploring the intersection of law, technology and highly regulated industry. I'm the Managing Partner at Actuate Law, Chief Innovation Strategist at quointec, and the Host of the Tech on Reg podcast, recently named one of the top 10 RegTech podcasts. I was also named to the 2019 Women in FinTech powerlist by Innovate Finance.

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