How Can I Sign Iowa Banking Permission Slip

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we're going to get started everybody thanks for coming today today's topic as you know is working in the FinTech area while you know this is a complex and interesting issue it could take take a day or more to delve into all the issues but we wanted to to at least provide a starting point and the perspectives of some lawyers who work in this area and each of each of them today will identify legal issues involved in syntax based on their own experience we have four speakers today Jenny Lee is a partner in our Washington DC office she's a partner in our trial group and she focuses on financial services and consumer financial matters as many of you know Jenny spent some years at the Consumer Financial Protection Bureau as an enforcement attorney we also have Stewart Hemphill was a partner in the Minneapolis office and the intellectual property and Technology Group where he works on intellectual property patent trademark copyright and trade secret rights issues Kevin mailer is a Minneapolis based partner he's a member of the firm's technology commerce Practice Group he helps clients with their technology assets and fourth is Joe Linney AK Joe is a partner in our DC and Southern California offices he's a partner in our finance and restructuring group where he focuses on financial services regulatory matters and without further ado here's the panel good afternoon everyone and good afternoon everyone who is out in the ether LAN listening to us and I hope this is coming across all right I'm going to try to set the stage for our other panelists who we're dealing with and we could go on for literally days about the issues but we thought it may be better to talk a little bit about some basic concepts and how individual perspectives and expertise are applied to to the FinTech issue whether you're representing a bank or whether you're representing a thin tech company itself and in in in my role because the fact I'm an old grouch I'm going to be kind of grouchy about this because I remember the old dot-com issues and all of the nonsense that went on in terms of people arguing about you know calm we're taking over the world and the answer was no we really didn't there's just a couple of numbers to think about and again as we're rolling around through these issues think about things as event at the end of last year there were supposedly about a thousand FinTech companies with over a hundred billion dollars worth of valuations and rather of capital but theoretically 900 billion dollars of valuations in those companies which seems kind of absurd but that's what some of the reports have been according to the American Banker about 2% of FinTech companies actually succeed the rest of them fail and that number of varies between 2% and 5% for an established company doing innovation the number rises to about 16% so there probably is some value of an old state company doing the work because they know what it is they're doing what we are clearly talking about here though is alternative facts and alternative facts are not only in DC they're also in the thin tech world and we'll try to sort through some of those for you we're going to talk a little bit about what the concept of FinTech is we're going to talk about the opportunities presented to the banks but then also quickly the challenges to banks to regulators and to fin tech companies themselves then my colleague is going to talk about their disciplines and how they apply them to fin tech fin fin tech legal issues and I'm going to end up with the 400-pound gorilla the FinTech national bank charter that OCC head curry has has indicated is is high on his priority let's try to define the concept a little bit it's a messy buzzword that relates to electronic applications and systems used by financial intermediaries but I guess you have to ask the question is it a panacea is an all-encompassing reading reason to avoid licensing obligations and that's where I think it's the case because when you talk to some of these yo-yos that have got these new applications a lot of times it's payments and a lot of times it's lending but I don't have a national bank charter they don't have a state bank charter and what does that mean that means they've got to have licenses to end in all 50 state jurisdictions if you man a payment side they've got to have money transmitters license in licenses in all 50 state jurisdictions and many of these jurisdictions are now taking the approach that you may be doing something in New York City but if you are dealing with one of our residents in say Iowa or Minnesota or whatever you you need one of the licenses in our jurisdictions as well and then you've got the overlay depending upon what it is they're doing of state law compliance and state law disclosures and there's a lot of buzzwords that abound here there's the general notion of FinTech some of the things which we've got you know person-to-person money transfers and online offline payment systems that are going to development pressing the press and lending now how does that work now not very well what people are doing right now is they're many of them are using the rent to charter alternative and there's been a lot of problems with person-to-person lending as you may be aware of and then there's things such as authentication security and passwords and verification when that is being transferred from one system to another one of the things that has really come up recently is the concept of FinTech but leg tech and that's providing regulatory compliance within an application which verifies the compliance without needing additional human verification that compliance is available often times and again one of the paradigms is using cloud-based systems and under development a progressive series of artificial artificial intelligence where the actual machines or the systems define themselves and learn as time goes on if I find the opportunity what what does fit does a FinTech application or product to accomplish does it enhance the current delivery of an existing financial service and there we're also toward in particular we're talking about the human food chain I go into the bank I use my card in the back-office it's looked at it may be transferred to someone else another bank may taking be taking a look at my transfer and along the way you've got a series of human beings that are touching the transaction well does it eliminate all of those transactions without having to worry about human interference or maybe one what does it do there's also the issue of bots or chat robots and some of you have had the occasion I guess of making a telephone call whether it's to the utility company or whatever and having them say I all please push number one push number two push number three and there's varying degrees of intelligence that's being built into these things with the ultimate idea of eventually creating something that is truly artificially intelligent can learn from its mistakes and the ultimate paradigm is smart contracts in particular categories where once a contract is signed you really do not need any more human intervention in order for the contract to succeed in order for the process to work in order for transfers and funds and security to be working through the system and again one the paradigms that people are looking at for the purposes of banks certainly the most important thing that people need to think about or full-time employees is there something that can be put in place that are going to make the bank more profitable eliminate the need for full-time employees and at the same time give us verification and also doesn't provide us with any additional cost course advantages so for an it for example if you've got a verification that works invited by the fact that the application itself verifies compliance does that mean in the relationship with another party a counterparty you're relieved of liability for say representations and warranties and obligations on the part of the banks some of the reputational risks that are considered that we concern ourselves with legacy systems the reason why we have legacy systems is because they work and if you don't have legacy systems is a 1% error weight rate good if you're substituting in a new a new system that's the reason why you've got five serve this reason why you have John Henry they may be clunky but they continue to work and the performance levels is very very important and that's one of the things that banks have got to concern themselves with the economic viability of FinTech companies how do you control them where is their money coming from and will they remain viable or where they go buy themselves a boat and paddle off into the sunset with your money vendor management we're going to talk a little bit more about that extraordinarily difficult issue for banks to have to deal with when you're partnering with a fin tech company intellectual property which steward is going to be talking about who owns the property privacy which Jennie is going to talk about and then the negotiation of of contracts challenges this is absolutely stupid document that the Obama administration came out just before the the end of the administration the framework for FinTech and it's got a bunch of probably idiotic little phrases about what it is we need to do when we're doing FinTech keep the consumer in mind recognize potential technological bias build in cybersecurity data security privacy protections from the start continue in strength strengthen cross sector engagement and of course world peace these are the principles that the court that the Obama administration came up with before they were leaving the White House and thankfully I think that this was one of the first documents torn up by the Trump administration from the bank regulators perspective and this is what we're getting back into banking it's safety and soundness perspective and that's really what counts now one of the things interesting that I think we need to be aware of from the bank perspective is we've talked with the federal Prudential regulators and we've said well look these new FinTech companies they cannot they cannot comply the way we want them to comply we want them we have to do vendor management but they simply can't do it and the answer from the regulator's perspective is yes we know that but we're going to make sure that you you've you forced them to do it anyway which is not a really good result which means that somehow when banks are partnering with FinTech companies they realize that they may not be able to comply but you can have to figure out a way to do it for them a couple of position papers which are interesting the CFPB's project catalyst which theoretically gives new FinTech companies some some room to be able to experiment and the OCC's recommendations which we'll get into a little bit later and by the way the OCC has been doing a excellent job in terms of dealing with FinTech and developing products and services in the banking sectors for the FinTech companies the issues are will this startup survive are they solutions looking for problems and I think this is something which I think a lot of FinTech companies are not necessarily focusing in on is the solution a viable solution for the banking sector developing standards in the marketplace and with a couple of things here you've got our three utility settlement coin Global Payments steering committee they're setting up standards under blockchain but in some cases people have decided to resign from these organizations because they're not really so much interested the standards being developed as opposed to whether or not there's some innovation taking place and there's definitely attention there which we have to look at as to whether or not these things are going to be helpful compliance capabilities again a very very big issue which I believe that ultimately the banking industry is going to have to be doing in intellectual property concerns which which Stewart is going to be talking about and so there's a lot of things there that we have to sort through as we're as we're doing as we're representing banks we'll representing the FinTech companies now what we are going to do is that we're going to have three of our colleagues talked about FinTech from their perspective and the discipline that they come from and then we'll turn around and talk about some of the things docc has in mind so Jenny why don't you go ahead thank you Joe good afternoon just to elaborate a bit further Joe provided a very good overview about what exactly are we speaking about when we refer to the terms in tech and in my world of consumer protection and CFPB issues some of the more common categories of businesses that would be encompassed by the word syntek are listed here on this slide so we're talking about as Joe had mentioned peer-to-peer lending which is also called marketplace lending companies out in Silicon Valley like lending club or prosper alternative payment systems mobile payments consumer lending including a some unique innovation going on in the student loan space and education financing cash advance products short term small dollar loans blockchain which is is not only the technology that undergirded Bitcoin but is also as you know a broader technology that has many promising applications in different areas distributed ledger virtual currencies and personal finance management and the different structures in which FinTech companies could establish their business could include offering standalone consumer credit products or partnering with with banks themselves I think last week I just heard about a thin tech company out in Silicon Valley that secured a contract with one of the top 10 national banks to enable the financial institution to begin issuing consumer personal loans through the use of the sim tech company's unique underwriting algorithms that previously did not exist so partnering with existing financial institutions or also with community banks and credit unions connecting capital from institutional investors to individual borrowers or selling securities or investment opportunities to financial institutions the F Suk wrote an annual report in 2016 and noted at multiple places throughout the report that financial innovation is an area that merits special attention from regulators who need to be vigilant to ensure that the new products do not blunt the effectiveness of existing regulations this is a great quote because it dovetails nicely with one of the thesis statements that I'll have for this afternoon the pace of innovation and advances in in the pioneering thin tech world is much faster than the pace at which regulators like the CFPB and other the Prudential regulators and the states are using to keep up to keep up to ensure measured and accurate scrutiny and oversight over these industries and that'll be a theme that comes up and I think that this F supp quote is telling because it admits to that reality a little bit of further background I think it's important to note that syntek isn't just a DC or Silicon Valley or New York City phenomenon it is of course a global phenomenon and in one of the letters that the Senate Banking Committee had sent to several of the bank regulators and the CFPB last year it was suggested that perhaps there should be international coordination with different governments and the European Central Bank the World Economic Forum others to coordinate the regulation of syntek and developments in that industry of course across the pond the financial conduct authority in the UK also implemented a quote unquote regulatory sandbox which is very similar to what Joe was talking about earlier which is the CFPB project catalyst and its accompanying and never the no action letter procedures these regulatory endeavors are intended to permit innovation to occur and for different FinTech companies to experiment with pioneering technologies without immediately feeling the brunt of regulatory scrutiny or penalties and to work collaboratively with regulators to try out different technologies for customers the regulatory landscape is truly a hodgepodge so there are of course the the Prudential bank regulators that examine and oversee financial institutions and and potentially sim tech com anies there's of course the CFPB who can act pursuant to its Frank authority and there are also other federal agencies such as the Department of Treasury since and which issues of course the money transmission licenses as well as the York Department of Financial Services that began to issue virtual currency licenses recently and here on this next slide is just a list of the various regulations that would be potentially applicable to FinTech companies on their businesses the evolving landscape of government and legal enforcement of syntek companies has been manifested mentally an agency guidance but also through the courts some of the more recent cases that have an implication for FinTech companies include the case of Madden V versus Midland which was a case that came down in the Second Circuit which called into question the funding structures are used by many consumer marketplace lenders to establish exemptions from state usury laws and the Treasury Department had issued a request for information to solicit comments a couple years back on marketplace lending in the state of California the dbo also launched an inquiry into online programs to assess the proper scope of its licensing authority as related to online businesses and of course as Joe will get into more later on this section the OCC had published a white paper and solicited public comment in connection with its proposal to issue of syntek charters actually one regulatory development that's not on the slide is a CFPB request for information that was published in the fall of last year the public comment period for that was closed today as of this afternoon there are 40 comments submitted and this was a request for information regarding the practices involving financial institutions and data aggregators and other business entities in so far as how consumers should be given access to their information in in financial accounts and other accounts there are a few additional court cases and developments that are listed on the next slide that I'll allow everybody to review at their leisure in the interest of time and moving on now to privacy and security just to give an overview that there there truly are multiple governmental agencies that regulate privacy and security depending on the product at issue the SEC FINRA the CFTC National Futures Association the DOJ of course the FTC under Section 5 Authority the CFPB and also all of the state attorneys general the bank regulator certainly also imposed expectations indirectly on to some tech companies what we've seen are situations in the context of examinations where Silicon Valley companies that are providing say new consumer underwriting algorithms or scoring products or say data identity theft protection products that they they themselves are not directly regulated by the bank's production regulators but there's a constant pressure and appropriate pressure perhaps whereby the financial institutions that do business with these some tech companies are pushing down the regulatory expectations that they're hearing from examiner's and their their vendors and in particular areas like fair lending which will which we'll discuss in a little bit more detail so although there may not be directly GLE authority as a practical business issue what we see are that thin tech companies are constantly called upon to ensure that their scores procedures practices and rings are compliant with the Consumer Financial Protection regulations and then last of all of course the gramm-leach-bliley Act both in terms of the annual notices that are required to be provided to consumers and also the gramm-leach-bliley safeguards rule that establishes the protocols policies for safe handling of consumer data those are also areas in which we see that sim tech companies are subject to regulation in addition to GLB which I just talked about the Fair Credit Reporting Act also contains provisions that govern how consumer information is used in so far as situations where consumer reports are handled by CRA s or data furnishers and then last but not least of course the you deaf authority under Section 5 of the FTC S or the you Det app for you DEP + abusive authority in the dodd-frank act that the CFPB enforces are the particularly GLE standards by which and tech companies are feeling the the pressures to comply last year last screen March of 2016 we saw the first CFPB enforcement action involving data security and as many of you saw that was the consent order with the Dwolla company which is an online payments company and what was particularly interesting about that case is that the alleged violation of that matter was not necessarily the substance of the data privacy policy at issue but rather the the the manner in which the company was alleged to have described their data security policies to consumers so it was just a vanilla classic you'd app deception sort of advertising substantiation case which was you have marketed yourself to be a leading Vanguard in protecting consumer information when in fact your policies do not actually substantiate what you're telling consumers about your product so that was the first foray that we saw in the CFPB delving into data security practices and then last of all just touch upon the fair lending issue so here we're sitting today and in 2017 I think dating back to probably 2012 the regulator's at the federal level have been talking about fair lending and syntek concerns forever and it's an area that the regulator's are still grappling with and one of the ways in which this comes up is this tension between increased opportunity to underwrite credit decisioning in a manner to expand access to credit so so for example using alternative data sources like utility bills or cell phone bills or even in some cases social media I will judge your creditworthiness based upon what your facebook feed shows or your LinkedIn profile shows about who you are these are sort of the innovations that were a twinkle in the eye of various pioneering entrepreneurs in places like Asia Europe Silicon Valley beginning five to six years ago and at that time the CFPB and others were grappling with how disparate impact analyses under a cola or FHA would apply to those sorts of technologies to the extent that there's a legal violation that emerges if there's a statistical practice or pattern that may demonstrate that certain subsets of consumers minorities or other subclasses of consumers are treated differently based upon a certain characteristic the question was raised as to how these technologies that are intended to be consumer friendly that would expand access to credit would then run afoul of any fair lending or disparate impact analysis based violations and I think this is still an area that the CFPB is is grappling with and that's that's a brief overview and I think that at this point I'll turn it over now to colleague Stuart Thank You Jenny intellectual property seems like sort of an outlier issue but it's involved here and I'll try to explain why when you put up the slide here that has the basic list of what intellectual property is and I think generally you've heard of all these kinds of intellectual property it's useful to divide them I think into two large categories the first three primarily touch on the technology the software the hardware the the magic that's done by the computer programmers primarily data analysts and then the last two are the marketing areas because of course when you have something that's exciting that you're doing new you want to have a marketing program built around it too and that's not the technology but it can be important as well when you talk about intellectual property and you talk about startups in particular one of the most important things that you're trying to do is to figure out what the intellectual property is which category it fits into and what exactly within that category might be be claimed for exclusive rights you're also talking about trying to figure out exactly who is the owner of the intellectual property that's involved as in most fields the people that innovate expect to be able to own and control what they innovate but they can only do that if they have some kind of intellectual property that lets them have possession and control over the things that they have come up with so you have this battle to try to identify that which is exclusive if your company starts out with not a whole lot more than an idea and a bunch of really clever people who can create the software the question is then how do you get ownership of that how do you get people to invest in you an intellectual property often plays a role there so there's an ex-patient expectation of owning and controlling for the purposes of ultimately monetizing the intellectual property that people have and there's the broad concept which I think people believe less perhaps in the FinTech area than in other sorts of technology that when you have that protection available you encourage innovation you encourage investment and we'll see how that as maybe not worked out in the world of patents in just a moment for trademarks and other kinds of marketing intellectual properties it's important and things don't really function all that differently but in terms of the other forms of intellectual property which we'll now take a quick look at what has happened in those areas there are some challenges and some changes caused by the fact that we're operating in the world of financial technology as opposed to machines that make metal or chemicals that go together in some interesting way so patents have been a big area where the world has evolved as far as FinTech is concerned patents are interesting because they are probably the broadest and strongest form of intellectual property protection if you can get them they let you come close to controlling a fairly broad concept and you get to stake out that area with your patent if you get it granted and you can sue people even if they have not copied for the other forms of intellectual property protection copyright trade secrets there have to be some sort of actual taking in some way or the patent if you would created something that you can capture in a patent then anybody who comes in to the area that you've managed to claim is an infringer regardless of their intentions and regardless of where they copied so it can be a very powerful form of protection now patents in the financial world the business world simply didn't exist throughout most of history history being of course the modern times where we've had lots of business activity the innovations that people then when they came up with new business ideas were not seen as technology so people by and large didn't apply for patents or if they did Patent Office would say hey okay so you've figured out some neat way to keep the the waiters honest when they're handling the cash in your organization that's not technology so we're not going to give you protection on that but all that changed with a case called State Street in 1998 where the Court of Appeals for the Federal Circuit decided that hey there's innovations here and I think that's because the bright ideas were being implemented in software now they were being implemented in computers and computer programs and so hey that looks like technology you got engineers working on this not just people thinking up interesting ways to run their business you got people who are actually putting in technical intellectual labor on these things so for a number of years starting with the State Street case things began to open up there weren't many court tests for these things but the Patent Office started issuing patents in the financial technology area but then there came a backlash because these patents that were issued were very broad in part because the patent office didn't really know how to examine them and to shape their school and they had a hard time understanding these inventions in terms of what's an appropriate scope for the patent claims being granted then the patent trolls came along these entities that own patents and they would go around and sue lots of people including people in the financial services industry if they had something basic let's say I'm working with check images or something like that that everybody started to do and so there was a fair amount of litigation then the next thing that came along sort of in parallel to that was the open source movement I don't know whether most of you are familiar with that but basically it's a philosophy out in the world of writing software that says hey software will become better more robust it'll advance faster if we don't have exclusive rights if we don't have patents and we can't avoid copyright so let's build these licenses that sort of use the leverage of copyright to make you want to make your software more available you essentially give it away you get acknowledgment and credit for having been the creator but you don't really get to enforce it to keep other people out of the area that you claim with your copyrights so that was both anti copyright and anti patent so then what came along is a challenge in a couple of cases the Bilski case and the Alice case 2010-2013 and the supreme court looked at these cases after they had various results below and they said wait a second we're not going to outlaw business methods completely but we're going to look at these things and make sure that they are not just abstract ideas because it's been the law in the patent area forever that you just can't claim a broad idea like a law of physics you have to have some concrete implementation or use of that idea so what has happened is that there's been an enormous fall off of the protect ability of financial technology type inventions there's still no complete ban but so many things have been considered abstract idea is that the ratio is probably I'd say 50 to 100 to one in terms of case outcomes and in at various levels of courts for saying that you can protect the financial innovation with a patent and the Patent Office has gotten very strict so it's hard to generalize what their rules is and some people think they don't really have a good set of rules but they are issuing patents only on inventions with a great deal of what's sometimes called tech Nissa t.i technical content and the courts have since the Bilski annales de cision found patentability in a handful of cases for some financial inventions but by and large it's very difficult to get a broadly claimed financial invention protected so an alternative form of protection that we need to think about is copyrights because when the law of copyright was revised and modernized in 1976 it was decided that software would be included as a literary work which to those who understand computer programming seems a bit far-fetched but that's the way they thought about it you got authors that write code you got authors that write prose we're going to protect it all under the copyright law now the problem with copyright it will protect you against protect it'll protect you against copying of your software directly or copying by sort of close paraphrase such as translating into another language but you can't really protect business methods with copyrights you can't protect broad ideas and you can't protect data or facts per se under copyright those are traditional copyright limitations so copyright is there and it's important to protect software against direct copying but it doesn't provide the kind of protection that patents can if you can get them trade secrets has become the other alternative and there have been a couple of cases of theft of trade secrets in the financial world like a Goldman Sachs case maybe a Merrill Lynch case where people who worked at programming have been accused of taking trade secrets when they leave they take their their ideas for certain algorithms or ways of organizing data with them and they get suits so trade secrets can be a potent form of protection for both software and for data the other side of this that we have to think about though in terms of looking into technology we're not going to talk about the trademark side of things here is you have to worry about the IP that other people have because if you're in the financial tec nology world you may not be the first one to think of it so you need to worry about whether you are taking the trade secrets of some party because you've hired some engineer who worked for another company earlier you of course have to worry about whether you might have copyright infringement if somebody has borrowed some code for somewhere so you have to worry about the flipside of being able to claim your technology which is running into somebody else's claim there were lots of financial technology patents issues as I said pre-built key there enforcement is now very uncertain for the reasons that we talked about above but you still have to worry about those so let's talk about one more issue that is a special challenge for intellectual property in the intellectual property world and that is owning it when you're talking about owning Hardware if that happens to be part of your financial technology maybe some kind of mobile platform or something not to our to figure out who the inventor is software you can tell who the authors are they're the people that wrote the code when you're talking about data and data can be extremely valuable as you as you all know who is the author is the party that collects the data from the various sources the the author and the owner are the people providing the data the authors it's difficult to do the analysis and when you talk about AI artificial intelligence AI sometimes is the creator of new data so who is the author of that the computer program the owners of the computer program you get into some very interesting issues is to try to figure out who really owns the intellectual property the reason it's important is that most intellectual property is leveraged by licensing it and if you don't know who owns it it's a little bit hard to license or if you find out that the intellectual property isn't protectable of course you don't have anything to license so let me finish with one thing which is the point that understanding the implications of technologies requires that you understand the technology and that's where we all run into problems I don't see many engineers here maybe there are some this stuff is very complex so to understand how it works and blockchain is a good example you really have to understand something about how the technology works this is important to understand what the implications are in terms of what can be accomplished with the technology it's also important for understanding the risks associated with the technology and by risks I think we need to think of two categories what are the risks of sort of failure of the technology that it just doesn't really do what it's supposed to do for security there are also risks in terms of shifting the risks that exist in financial transactions issues I guess surrounding the word trust and you trust this payment or and so on so if any of you want to take a quick look at blockchain you can either go home and look at this short video six-minute video or we can show it on the screen later if anybody's really interested to see a little sketch of what blockchain technology is it gives you some inkling of what that technology might mean so that's it for IP kevin's going to talk a little bit on other issues that relate to how you exploit technology and other things in the FinTech world all right so my name is Kevin Naylor I am a partner in the corporate group and then my practice is what we call technology commerce and so in that practice what we do is work with our specialists to help either vendors or customers turn these ideas and inventions into a commercial application for the most part so we do work both with vendors and with on the customer side so we understand these issues kind of from both perspectives but for this discussion I thought we would focus a little more from the Bank perspective since for the most part we have Bank counsel here so when we're thinking about technology banks face what I think of as a buy versus lease kind of decision the build-it-yourself approach would be if you what your development teams actually built it in-house if you did that you probably never talked to me because there's not going to be an issue there it's going to be something that happens all internally we usually get involved when it's a license of some sort that you're involved with but I wanted to think through this process because the legal issues that you face depend on which which route you take if you're going to do the build-it-yourself approach then you've got some advantages to that you control the process you control the roll out of it you're the one who makes the decisions about how much we're going to invest in the security of it we've heard a lot already today about data security and the importance of that you get to own the IP we can all struggle with what it means to own the data which we do think about a lot and don't have a great answer for you also control the the branding the disadvantages from the customer side of this equation are the kind of ones you'd expect it tends to be more expensive certainly the initial outlay is probably going to be greater to build this thing in-house and when I say build it in-house of course you're likely to hire developers sometimes outsource you're going to hire consulting firms it tends to be a pretty big ticket item you may also because you're trying to develop something that is new for you speeds market may be a challenge might be faster to go to a vendor who's already developed a solution even if it's not perfect if it's important to be in the market very fast any time you're working in a larger organization you've got many stakeholders and so working through that process of getting alignment among the different groups is burdensome you have implementation risk you always have implementation risk may be a little greater if you're the one developing it because you don't know how you haven't done it before because you have operational risk and you always have operational risk but in this case you've also assumed all the liability for the operational risk whereas if you had a vendor you potentially could be sharing or outsourcing that so then the other side of the equation your if your current bank councils your your business team may come to you with a out-of-the-box solution as they like to say never really is but and sort of pros and cons to that as well so if you're working with the vendor who's done this before then you may well have a lower cash and at least initial cash investment of course they're trying to get you locked in with the lower initial investment but it's some kind of a per transaction fee that's going to be lucrative to them over the long over the longer term if they are truly an experienced vendor then you're off your implementation risk is probably somewhat lower maybe your operational risk is lower as well although you'll have a hard time finding that in the contract and we can we'll talk about that in a bit you may well have the ability to negotiate a predictable fee structure with the vendor that aligns with your own revenue goals and models so that's another advantage you have the potential ability as I said to shift risk to the vendor the disadvantages are the ones that we've already kind of anticipated with our prior discussion so certainly security compliance is a big big risk vendors even very sophisticated vendors are trying to minimize their cost and their liability so they want to do what's required but not more than what's required and frequently Bank Council wants what may be more than what's required because your customers expect it most of the vendors if these are software applications of some sort both the data and the application are hosted by a third party often Amazon Web Services but it could be another vendor those a delay of risk partly not because they're not good vendors but because they don't want to take any risk either and you've got this kind of the supply chain problem where the vendor itself is going to end up absorbing risk because it can't push it down to Amazon Amazon's not going to negotiate those terms you're going to have less control over the development roadmap so what's important to you and your customers may not be what's important to the vendor you've got operational performance questions you know many of these agreements either will have an SLA a service level agreement or they won't and you'll try to get one imposed if they offer a service level agreement in our experience they tend to be pretty soft and weak with minimal remedies frequently sole remedies so your only remedy for these operational failures are our modest service credits ownership of IP as Stuart said is a big issue vendors are clearly trying to build something important to them so they want to own as much of this as they can and that might not be in the interests of the banks that's using it you have questions of vendor and solvency how do you how do you address that how do you get your arms around it and termination transition a different and new issue that you wouldn't have if you built it yourself but you have to think about what happens if the if you decide to go in a different direction either for good or ill how do you get out of this contract and into the next one it is not easy as we've already alluded the vendor contract that you're going to see that will land in your lap is not going to be the one you really want to sign if your bank council it's going to have lots of disclaimers very limited liability short caps on liability and if possible those caps will cover indemnities as well so you if you thought you got good indemnities the cap itself is going to limit the value of that so as we think about kind of the risk profile for you and we're kind of analyzing the agreement we also start thinking about the kinds of technology that's involved here and each of these little components we don't necessarily have to walk through all of them are things that either raise the stakes or lower the stakes Abed you know if the technology is really transformative that's interesting that raises the stakes a bit because you don't know that it's really going to work if it's something that many vendors do it's a good service it's cheaper than what you can do in-house maybe that's a little lower risk I think that whenever something is customer-facing the stakes go up but that's not to say that the back-office stuff is without risk either that frequently ends up being a customer facing issue the categories of data I think matter quite a bit as well as but if the vendor is going to have access to all of the rich customer data then stakes go up quite a bit the type of vendor also affects the way we think about the the contract and we've already alluded to kind of financial insolvency and then finance so you've got a lot of companies out there that are venture backed and they have a decent balance sheet right now but their model is not yet self-sustaining by any means so the burn is high and they are trying to get that first mover advantage trying to get your bank on their platform and then up and then hopefully start making money before the cash goes out the door and so for the bank that so that's got a lot of risk to it frequently not sometimes the vendor also wants you to be the investor so that adds to the complexity here because if your investor as well as the big temir you're the way you think about your remedies against the vendor are going to be different as well just a another comment for counsel is there frequently the licensing model or the service provider model is an RFP driven process that depending on the way the organization works may not involve the compliance and legal functions until late in the game and so there's a lot of talk there are a lot of promises made in the kind of the sales process but they're not finding their way into the agreement and they won't unless you push really hard to get them into the agreement our experience is often the business people bring the agreement really late in the process after the commitment has been kind of made it's hard to turn to the other vendor and even though you're could be a very large organization your ability to negotiate some of these terms gets tougher which is can be a surprise so when you turn to looking at these agreements I want to be respectful for our time so I'm not going to go through all of these you can see we're going to have lots of issues and if you're looking at a five short five page agreement small print many of these things are not going to be addressed yet the operational issues the SLA is it is data offshoring permitted you'll frequently see some kind of squishy language that we won't host your data offshore or we won't access it offshore but what they're trying to say is yeah we do actually have people in India who are going to use this data so but we don't want to tell you that right away the vendor subcontracting issue is one that we've already alluded to this is very tough for the vendors because most of these vendors themselves have a buy versus build analysis many of them are really kind of a face to a lot of vendors bhai them if you're trying to push vendor requirements onto your to this bender they then have to push them on down and that's very tough for them we've already mentioned some of the other big issues but limitations on liability in caps on liability really make your remedies for these various breaches some of which can be quite expensive and damaging to your reputation hard to get a meaningful remedy from the from there of course if you're from the vendor perspective you really need these kinds of caps because otherwise a single bad event can bankrupt you and and that's you know that's their position they can't be bankrupt by a single bad event I'll pause there and turn back over the you Joe thank you only got a couple of moments and we want to talk a little bit about defense at Tech Charter that the National Bank oh the OCC came out with as you may know the cultural curry his term in in office is coming up in April and I think he needs some be appointed to a few FinTech boards so what he did was he came out with this absolutely lunatic proposal on the part of on the part of the OCC responding to the FinTech complaints that we don't want to comply with state law we don't want to be a bank but we want all the bank powers and he came out with this proposal saying well borrowing perhaps from an uninsured National Bank which is a trust bank we're going to think about maybe giving you a thin tech charter as a National Bank which gives you the preemption now immediately the staff decided to to fight back and say all fine we'll give you a FinTech charter but you've got to have capital liquidity recovery consumer protection and limit yourself to bank activities kind of difficult to do because the FinTech companies they don't want to comply with anything they simply want the Charter so they can avoid state laws and one of the things I would suggest to you is as of this date this is now going on about four or five months no one has applied for a FinTech Charter and that's because they really can't get one with maybe one or two exceptions if you are affiliated with a bank or a bank holding company it probably makes sense because this way the bank can do the compliance in back of it and the FinTech activity can take place in a subsidiary and maybe that works but I would also say to you the thing to take a look at when people start talking about the FinTech Charter is it's hard to come up with the scenario with a FinTech National Bank does not begin to accept deposits which then turns it into a Internet Bank which destroys the entire purpose and here we know how those things turned out so it's a very very narrow concept I will say that there are a couple of companies that probably could make use of this but there's not that many of them and then summing up what we did is we gave you in the back a couple of examples of FinTech companies where if they really bring a potential value added to banks and give you a few examples of them some some developments some block King Fannie Mae a Varun who is able to potentially reduce the amount of red flags on AML by upwards of 50 percent pretty remarkable stuff if they get ake a pest proof of concept and so forth that gives a a real running colloquy as to what you need to look at in terms of FinTech we certainly appreciate your time and the bar is open thanks for attending you