From the U.S. Government Accountability Office, www.gao.gov Transcript for: Big Bite: Financial Technology Description: The digital currency Bitcoin, as well as other financial products and services, are all part of a growing Fintech market. We'll discuss how Fintech, or financial technology, uses these technologies to provide financial services directly to consumers in this longer form podcast. Related GAO Work: GAO-17-361: Financial Technology: Information on Subsectors and Regulatory Oversight Released: April 2017 [ Background Music ] [ Sarah Kaczmarek: ] We've, essentially, entered the age of the Jetsons. [ Lawrance Evans: ] That is the question that you should ask if you're going to engage in this platform. [ Sara Kaczmarek: ] From GAO's Office of Public Affairs, this is the Watchdog Report, Big Bite Edition. We'll really sink our teeth into our nonpartisan reports on federal spending and ways to make the government work better. I'm Sarah Kaczmarek. [ Background Music ] You know, when I said we've essentially entered the age of the Jetsons, I was referring to emerging financial services and technologies like mobile payments, robo advisors, and non-bank online marketplace lenders. In this edition, we're diving into GAO's first in a series of planned GAO reports to Congress on a new industry known as FinTech. FinTech, short for Financial Technology, uses technologies essentially to provide services directly to consumers. [ Lawrance Evans: ] Marketplace lenders are just that, an online marketplace for you to secure loans, mostly in the small business, in consumer loan area. [ Sarah Kaczmarek: ] So, that's Lawrance Evans, a director in GAO's Financial Markets and Community Investment team. It was his team that led GAO's independent investigation into common subsectors of the FinTech industry. And he went on to tell me about some marketplace lenders you might have heard of. [ Lawrance Evans: ] You might have heard of SoFi, OnDeck, Kabbage, Prosper, Lending Club, those are some popular ones. [ Sarah Kaczmarek: ] I have definitely heard of one of those, and have actually used them to refinance my student loans, so, that would be an example of how you could use these marketplace lenders? [ Lawrance Evans: ] That's right. And they operate exclusively online. They'll use different types of information, in some cases, including your traditional credit information, as well as information that they might glean from social media and other unconventional sources of other information. [ Sarah Kaczmarek: ] So, does that make it easier for some people to get access to credit? [ Lawrance Evans: ] It can. You know, I'm always fairly cautious and tell people to shop around and make sure they get the right rate for their situation, or the right term for their situation, but, for sure, you know, it can enhance financial inclusion. So people who can't qualify for a traditional mortgage might find that an alternative to more expensive options, like payday loans. [ Sarah Kaczmarek: ] So you mentioned mortgages, and then we also talked about student loans. Are there other kinds of loans or things that folks or small businesses can get from marketplace lenders? [ Lawrance Evans: ] Right. I mean, so there are -- there are a wide range of products now. Mortgages, auto finance, refinance, student loans, student loan refi, different types of small business lending products, insurance now. So consider now, an online marketplace, where people who need funds are united with those who have a need for profitable investment opportunities. [ Sarah Kaczmarek: ] And why has this sprung up? Is it just the business saw an opening to do this, or it's just the new technology is making this possible? [ Lawrance Evans: ] It's a demand for it. On the part of end users, they want speed, they want other alternatives, and the technology lends itself to this type of marketplace that allows you to divorce yourself from the brick and mortar institution, and potentially lower cost. [ Sarah Kaczmarek: ] So, for consumers then, there's the speed aspect, also more consumers may have access then to getting loans, are there other benefits for consumers with this? [ Lawrance Evans: ] Largely speed. Definitely the speed. I mean, you can get funding decision in 48 to 72 hours according to a recent Treasury report. There's some small business platforms that promise funding in minutes, if they can verify your information. So speed is the major thing. Regarding cost, it depends on your credit and your other alternatives. [ Sarah Kaczmarek: ] You may be able to get like a lower interest rate, for example. [ Lawrance Evans: ] It's possible. And, again, it depends on a number of different factors. [ Sarah Kaczmarek: ] Are other types of organizations or bodies accessing this as well? [ Lawrance Evans: ] On the one end, you have people looking for loans. On the other end, you have people looking for profitable investment opportunities. And those could be individuals, they could be institutional investors, it could also be banks on the other side. [ Background Music ] [ Sarah Kaczmarek: ] That's really interesting to think about, that it could be banks on the other side of that too. [ Lawrance Evans: ] That's right, that's right. So, you know, banks are now moving into this space and partnering with these platforms, as well. [ Background Music ] [ Sarah Kaczmarek: ] As you heard me say earlier, I refinanced my student loans with a marketplace lender. But not on my smartphone. I never considered that possibility. However, I'm using my phone more and more, like when paying for groceries at the store. That got me thinking about whether or not my smartphone fits into the FinTech category. [ Lawrance Evans: ] Absolutely. Mobile payments is one of the commonly-cited subsectors we uncovered when we did our research. [ Sarah Kaczmarek: ] And what did you find there? [ Lawrance Evans: ] So, a lot of interesting things going on in that space. So people are demanding fast service, convenience, and mobile payments offers that. [ Sarah Kaczmarek: ] So what's the technology that enables people to be able to make these mobile payments? [ Lawrance Evans: ] There are applications called, Mobile Wallets, that will do that. So those are your platforms like Apple Pay, Samsung Pay, Google Wallet, those types of things that enable you to enter your information once, and then use it to pay for goods and services. [ Sarah Kaczmarek: ] Your report also looked into digital currencies, like BitCoin. Does this mean I'm going to be able to use my phone to pay with BitCoin at the gas station anytime soon? [ Lawrance Evans: ] You know, when we did the virtual currency work in the past, we found that, you know, there were several outfits that would allow you to use BitCoin. Now, in this particular report, we really only referenced digital or virtual currencies to get at the underlying technology, which has a more general application. And that technology is known as blockchain or distributed ledger technology. [ Sarah Kaczmarek: ] Okay, so distributed ledger technology and blockchain, we're getting a little jargony here, what are these things and how are they different? [ Lawrance Evans: ] So think about distributed ledger technology as solving a problem. And that problem, in the digital space, is how do I transmit value from me to you in a way that establishes you as the exclusive owner of that thing, or there's a ledger that exists in many places that establishes that you are the exclusive owner and the person who sent it to you was the exclusive owner. [ Sarah Kaczmarek: ] Okay, so when you send me some virtual currency, some BitCoin, the distributed ledger technology, that's going to make it clear, you send it to me, you were the owner, and now I'm the owner. So what about blockchain? [ Lawrance Evans: ] Now, typically when that happens, Sarah, when that's processed and made part of that public ledger, so everyone can see, it's processed in blocks. So there are a number of people doing it at the same time. And when that block gets processed, we can see our transaction. When you line those blocks up, you know that ledger becomes a blockchain. [ Sarah Kaczmarek: ] What are some of the broader implications here? [ Lawrance Evans: ] I think the key is that it has broader applications. So you might start to see it in the area of securities transfer, titles transfer, those -- those types of things. I think that's where the great promise is. And, again, we -- we've just scratched the surface. [ Background Music ] [ Sarah Kaczmarek: ] All right. Virtual currency is here, it's available. But is this going to be for everyone? And who do we trust to give advice on how to handle this kind of technology? Or, more importantly, who do we trust to give traditional financial advice? After the break, Lawrance will talk with us about robo advisors. Yes, robo advisors. [ Background Music ] [ Narrator: ] Interested in learning more from the U.S. Government Accountability Office? Be our friend and like us on Facebook. Our Facebook page has the latest information on our reports, blog posts, podcasts, videos, photos, interactive graphics, and much, much more! That's Facebook.com/USGAO. That's Facebook.com/USGAO. [ Background Music ] [ Sarah Kaczmarek: ] All right, so, when it comes to robo advisors, I had to ask Lawrance--are we really talking about robots giving financial advice? [ Lawrance Evans: ] We're not there yet, but -- but check back in 10 or 15 years, you never know where this technology will take you. But, you know, we are talking about a nonhuman interaction. Right? So this is you sitting down with the platform, on the computer, entering information and getting investment advice. Depending on how you define it, it's somewhere on the artificial intelligence spectrum. [ Sarah Kaczmarek: ] And is this robo advisor really going to give advice that's tailored to me and my needs? [ Lawrance Evans: ] Yes. With an important caveat. So you are the information that you provide, so you provide that information, it will tailor investment and financial advice based on that information. Now, garbage in, garbage out. So if you forget something that's pretty important in your life, and you got two beautiful children at home, and you forgot to include the fact that you're going to need money to pay for their college... [ Sarah Kaczmarek: ] I hope not! [ Lawrance Evans: ] Well, that's going to change your, you know, your risk-return profile, it's going to change your investment horizon. [ Sarah Kaczmarek: ] What do you see is the benefit here? Do you think you're going to get better advice than you might get from a traditional in-person financial advisor? [ Lawrance Evans: ] Well, yes, you actually get advice, because the big benefit here is that, in order to engage a traditional wealth management firm, you've got to have about 250,000 dollars in your account. With a robo advisor, sometimes there are no minimums or there's a 500 dollar minimum. [ Sarah Kaczmarek: ] So more people get access because just the service is cheaper and maybe there's just like less up-front barriers to access. We just have to remember not to forget that we want to save for our kids' college. [ Lawrance Evans: ] The platform may not allow you to provide all the information necessary to get a very clear picture of your situation and your short-term investment needs. So that's a limitation. [ Sarah Kaczmarek: ] Do these platforms all cost the same amount of money and work the same way? [ Lawrance Evans: ] It's possible that you can have a variety of costs associated with the platform, but what we know is it's cheaper than engaging a human, both in terms of the money required to engage that human and the cost of the service. [ Sarah Kaczmarek: ] And did these platforms all work the same way? [ Lawrance Evans: ] There can be so many of them. Right? So this was a primer where we just try to get a good understanding of the industry. But that is the -- that is the question that you should ask if you're going to engage in this platform. [ Background Music ] [ Sarah Kaczmarek: ] Okay, so it definitely sounds like a plus that more people have access to financial planning advice. Of course, there have to be risks, right? I knew Lawrance and his team have looked into the risks involved with these financial products, and also the role the government has in regulating this new technology. [ Lawrance Evans: ] Some of the usual risks you see with financial services, their data privacy concerns, their concerns with consistent protections for certain types of loans, concerns about fair lending violations, but the real risk, if you really think about it, is that these products are so new that many of the risks that will ultimately surface have not done so yet. So I'm glad you asked that question, because usually we talk about FinTech and we think about the possibilities and a new economy, but sometimes the vulnerabilities and risk gets lost in the storm. [ Sarah Kaczmarek: ] This really is a new area. What role does the government have to play here in regulation? [ Lawrance Evans: ] You know, the existing regulatory framework does cover these activities, because, at the end of the day, we're talking about payments, we're talking about lending activity, transfer of value, money transmission, wealth management, and so these activities are regulated. Right? But, you know, as we often point out, the regulatory framework is quite fragmented, with responsibilities given to a wide patch of federal and state regulators. And that always raises concerns about effective and consistent regulation. [ Sarah Kaczmarek: ] Well, and also from the consumer's point of view, with how disperse the regulation is, if you run into a problem with somebody in one of these spaces, where do you even turn? [ Lawrance Evans: ] The Consumer Financial Protection Bureau has now established a way for you to lodge complaints in the marketplace lending space. So, you know, there are regulators that are in the space, based on the activity, and those are the type of entities you would turn to for complaints. [ Sarah Kaczmarek: ] But if you didn't know, maybe like which specific entity was regulating the service, you could at least, as a consumer, turn to the Consumer Financial Protection Bureau, and file a complaint, essentially. [ Lawrance Evans: ] And it's such a new area that you will find people that are confused about where to turn to. You'll find financial service providers with FinTech firms that have compliance risk concerns. [ Sarah Kaczmarek: ] And so it's really also just important, at the end of the day then, for consumers to do a lot of their own due diligence before engaging in these services or using the products. [ Lawrance Evans: ] And the regulators are doing work to -- to come together, to collaborate, and think about ways to ensure the appropriate regulation of FinTech services and products. [ Sarah Kaczmarek: ] Finally, Lawrance, what do you see is the bottom line of this report? [ Lawrance Evans: ] So advancements in -- in technology have fueled the growth of FinTech products and services, and this area is constantly evolving, they present a number of opportunities, but also risk for regulators, consumers, and the regulated entities. This is a primer, it's the first in a body of research that we're going to produce on the FinTech industry, so we hope readers will stay tuned as we provide additional information. [ Background Music ] [ Sarah Kaczmarek: ] Absolutely! So there'll be more to come on this. [ Lawrance Evans: ] Absolutely. [ Sarah Kaczmarek: ] Well, Lawrance, thank you so much for taking the time to talk with me today. [ Lawrance Evans: ] My pleasure, Sarah! [ Background Music ] [ Sarah Kaczmarek: ] Well it's definitely a fascinating, new financial service sector for the 21st century. Thank you all for listening to our inaugural Watchdog Report, Big Bite edition podcast. If you'd like to hear more podcasts like this, or if you want to send us a comment or question, shoot us an email at podcasts@gao.gov. And be sure you don't miss an episode by subscribing to our podcast on iTunes. The Watchdog Report, Big Bite Edition is a production of GAO's Office of Public Affairs.