Charles Davidson (voiceover): Atlanta's MARTA train is crowded with people staring at their phones as we glide out of the cluster of downtown high-rises.

A guy walks up the aisle selling incense sticks, and the dude sitting next to me shouts, "Do you do Cash App?"

I thought, wow, this financial technology really is everywhere. There are literally thousands of apps you can use to handle your money these days.

This episode was actually timely because my colleagues and I were putting together this podcast about financial technology—fintech, as it's often called.

Now there's no doubt fintech is convenient for most of us, including people looking to buy incense on trains. But fintech is also changing the nation's payments system and raising some pretty profound questions that greatly interest the Federal Reserve Bank of Atlanta. Among those questions:

  • What does it mean to attach thousands of what are basically data pipelines—like the one the guy on the train mentioned—that pour data into the plumbing that handles billions of dollars every hour in electronic retail transactions?
  • Is there a danger of the technology leaving some people behind? On the other hand, can fintech improve financial life for people who historically have lacked bank accounts and otherwise been mostly left out of the mainstream financial system?
  • And finally, what motivates the entrepreneurs who are propelling this fintech boom? And what can the Federal Reserve do to help keep our payments safe amid this upheaval?

Let's start with keeping payments safe. I figured Mary Kepler is the person to consult on this. Mary is head of the Atlanta Fed's Risk and Compliance Office and the Atlanta Fed's Retail Payments Risk Forum. So I asked Mary, along with the convenience, does the proliferation of payments gizmos also increase chances for mischief in the payments system?

Mary Kepler: It does in the sense that you have broadened the entrance to the payment rails. So, sure, more people having access, having access in different ways—that definitely creates a bigger security concern.

Davidson (voiceover): She's not talking about rails that trains run on. Rails are what people in the payments industry call the underlying networks that handle the clearing and the settlement—basically making sure the money—really data about payments—gets to the right places. Those rails have mostly been in place since the 1970s.

A particular concern here at the Atlanta Fed is that many of the fintech firms are small and they're young. While most of them probably don't subscribe to the motto one tech giant made famous—which is move fast and break things—fintechs do have to move fast. And being small and young, they simply don't employ big teams of payments and data security experts. They SIMPLY can't afford it.

Christian Zimmerman, he's lived this stuff. He's the founder and CEO of Qoins—with a Q, Q-O-I-N-S. Qoins has six employees in downtown Atlanta. Zimmerman started the company in 2017 after he graduated from Georgia State University. Here's how he approached payments and data security.

Christian Zimmerman: In the beginning, I'll be quite honest, I didn't really know much about this space, right? So I was kind of learn as I go. But what I did know was, I was not trying to get in trouble. I wanted to create as little risk for myself and for the business model. So I actually took it upon myself to read a lot of legal jargon, whether it be from other companies, in terms of service and privacy policies that they already had and figure out, and work backwards, really just understand how is it that they're doing it and how can I do it, and then do it in a way that is very cost effective.

And then over time, now we've built out our own compliance team. We have a compliance officer and then focusing on building relationships with institutions that can actually manage some of those and mitigate some of those risks.

Davidson (voiceover): What Qoins does is help people pay down debt—about $10 million so far altogether. It's a small company, but it handles thousands of transactions a month. Many of Qoins' customers are younger people who are chipping away at student loan debt, something Zimmerman himself faced, which is one of the reasons he started the company.

The target market of firms like Qoins raises an interesting point about privacy and data security because many of those customers have not typically had deep connections with financial institutions before. So that means they are relatively new to the idea of trusting a company, and in many cases really small companies, with their valuable personal data.

Let's let Sheena Allen tell us about it.

Sheena Allen: For us, why data security was so important was because we understood that we were, and we will be, getting data that pretty much hasn't existed before.

Davidson (voiceover): That's because CapWay, the company that Allen started a few years ago, markets mobile banking and financial education services to a lot of people who don't have traditional bank accounts.

Here's Allen again.

Allen: The data from somebody in rural Alabama, who has been using check cashing places or a prepaid card—they don't have full transactional data from a debit card, because they've never used it.

We knew that having that data was huge, it's really important. But it's also saying you have something that everybody wants, but you got to protect yourself as a company, and you also got to protect the people who was part of your platform.

Davidson: They're putting a lot of trust in CapWay, right?

Allen: Exactly, yes.

Davidson (voiceover): There are thousands more firms like CapWay and Qoins, big and small, that are funneling transactions onto the payment rails. If you wonder why the Atlanta Fed cares, it's because the Atlanta Fed basically wants to keep the payments going to the right places at the right times.

Here's Mary Kepler of the Retail Payments Risk Forum again.

Kepler: Our mission includes payments that have integrity, are confidential and efficient. And in order for us to pursue that mission, we have to focus on who's connecting to those payments. And that's why we're interested in making sure that those innovations that are connecting to payments are safer.

Davidson (voiceover): The Atlanta Fed and the Federal Reserve System recently brought in a couple dozen fintech founders and bankers who work with fintech firms to discuss what some call the fintech revolution. That's where I met Allen and Zimmerman.

At the Atlanta Fed, they met experts who discussed regulation and payments security, but also financial inclusion, which is another focus of the Atlanta Fed and a particular interest of our president, Raphael Bostic.

Now Fintech's impact on financial inclusion can cut two ways. Basically, it can help, but it could also hurt.

The Atlanta Fed is thinking about both sides of that coin. Bostic suggests that people who work in this field broaden the standard definition of financial inclusion.

He recently told a gathering of bankers that financial inclusion should extend beyond simply trying to make sure everyone has a bank account, which is pretty much the standard definition. Today, Bostic figures, we need to make sure, basically, that nobody's left behind by the new ways of doing business in the fintech revolution.

That can be a real concern. An Atlanta Fed research economist, Oz Shy, he's found that cashless stores—stores that don't accept cash—can complicate things for people who lack debit or credit cards. And these tend to be those who are lower income and don't have bank accounts.

So that's a way that fintech can impinge on financial inclusion. So how can it expand financial inclusion? Basically, technology is making it possible for a lot of people to handle their personal finances in a responsible fashion without a traditional bank account. The guy on MARTA didn't ask if he could write a check, after all.

Here's Mary Kepler again.

Kepler: In the past, a lot of research has been done and a lot of statistics and data is gathered as it relates to the underbanked and the unbanked. There are lots of organizations who track that information. We are interested in steering the conversation to financial inclusion, that maybe being banked is not a necessary solution, that being included in the financial system is the more appropriate way to attack the problem. And so we're doing a research paper on that and we hope that when we publish it, it will start a lot of conversation in a different way to look at financial inclusion.

Davidson (voiceover): Sheena Allen would probably agree with that. She's 30 and says she can hardly recall a friend of hers ever mentioning visiting a bank, a physical bank office. She also grew up in a place where many people didn't use banks because they essentially couldn't. That was Terry, Mississippi—population fifteen hundred—there was only one small bank there when Allen was growing up. Many of her friends and relatives used check-cashing stores, title loan shops, and other alternative means of financing that can be an answer for cash-strapped people, but can also be expensive and precarious routes to credit or cash.

In fact, Allen recalls a younger cousin who got $400 for the title to his old Honda. He was working two minimum-wage jobs, but he needed some cash. For a while, the cousin was pretty secretive about what he'd done.

Allen: And so finally he admitted that he had went and got this title loan, and they was calling, because either he'd come and pay the money, or they were going to come pick up his car. Personally, I've seen people get into that cycle, and it's just really, really hard to come out of.

Davidson (voiceover): Allen says she learned about wider financing options beyond alternatives like check-cashing stores after she left Terry mainly. Then she started a tech company when she was a student at the University of Southern Mississippi in Hattiesburg. I wondered what moved her to forsake the typical post-college employment and take the plunge and the risk of starting a second company, this one being Capway obviously.

Allen: I found it super fascinating that you could have an idea in your mind, that you can use technology to get it out to the world. And the finance part of that came actually with the start of CapWay. Seeing people where I was from, in Terry, Mississippi, knowing the struggles financially they were going through. And it clicked to me, it was like a light bulb went off one day. Putting those two together, I know that I can make change.

Davidson (voiceover): Mary Kepler points out that a number of firms incorporate financial inclusion into their business strategies.

Kepler: I know of some prominent companies here in the Atlanta area, Transaction Alley, who have that as an important part of their mission. I think they recognize that the more people that you can include in the financial system, that's more customers for them. So that's a place where this concept of, here's doing good with financial inclusion and also profiting.

Davidson (voiceover): Back on the MARTA train, I'm not sure the guy looking to buy incense is overly concerned about what happens with the data after he taps the app on his phone. But, his thing is he doesn't really need to be as long as the payments system functions as it should. And the Atlanta Fed is working every day to make sure it keeps working safely even as it evolves in fundamental ways. Thank you for listening. I hope we've answered some of those questions I mentioned at the top of this podcast. To learn more about the Atlanta Fed's work in promoting safe payments innovation, visit our website at frbatlanta.org.