Fintechs are Gaming a Fragmented Regulatory System

B. Dan Berger, NAFCU President and CEO

NAFCU tirelessly advocates for regulatory relief that supports innovation and growth because our dynamic member credit unions refuse to settle for the status quo. However, experienced leaders know that unrestrained growth fueled by innovation can quickly turn dissolute. Two such events happened back-to-back just 20 years ago: the dot-com boom and bust, and a real estate bubble that burst the entire global economy.

In both instances, it wasn’t technology itself that doomed these ventures, but rather a lack of infrastructure to support the fast growth that technology enabled. Existing regulations and accounting standards were modified in the spirit of American capitalism to support growth and innovation. But in the process, it was American taxpayers on the hook for Wall Street bad actors and, in some cases, their lack of regulatory oversight.

Today, we are amid a new technology-fueled crisis led by fintech companies that have launched innovative new ways to move money, make payments and invest. Fueled by accelerated adoption of digital account access during the coronavirus pandemic, these fintechs are gaming the system by taking advantage of regulatory loopholes and makeshift chartering options to sidestep financial regulation. Some have applauded the creative use of existing chartering options to meet the rapidly growing fintech market, but it allows these firms to masquerade as banks without the same capital requirements.

Fintechs have an advantage in the marketplace because they’re playing by a different rulebook, or no rulebook at all. But the problem is much larger than that. This unprecedented liberalization of bank chartering standards has created a flight away from safety and soundness that is creating systemic risk in the financial system. As we discovered during the financial crisis, that risk lands squarely on the shoulders of Main Street America.

It is imperative that federal banking agencies work together to mend and reinforce the fragmented regulatory environment that is encouraging reckless growth. Specifically, NAFCU has advocated for the CFPB to exercise its “larger participants” authority to regulate and supervise fintech companies. NAFCU has also met with the Office of the Comptroller of the Currency (OCC) to encourage fintech-friendly chartering options that follow transparent rulemaking procedures with public comment. Our nation’s rulemaking procedure is a tried-and-true way to find a common ground between the drive for innovation and growth, and the need for safety, soundness and sustainability.

If regulators fail to act quickly, Congress should step in to support regulators by granting the CFPB explicit authority over fintech companies not already supervised by a federal banking regulator. Lawmakers should also require the OCC to present new chartering options that have been vetted through full notice and comment rulemakings. I encourage you to review NAFCU’s issue brief on the topic, which details the troublesome charters and provides suggested legislative solutions that protect consumers, ensure a level playing field and allows for sustainable innovation.

NAFCU members feel strongly about this issue and we’ve been leading advocacy efforts on fintech regulation for several years. Thankfully, we took a bold position before the coronavirus pandemic created a perfect storm of systemic risk, and it’s allowed us to build the momentum needed to address this critical issue. We will continue to meet with regulators and lawmakers on this important issue and protect credit unions and their members from this avoidable financial disaster.

Connect with Dan Berger on Twitter @BDanBerger.