Recently, fintech companies have started using different strategies that sidestep federal financial regulation as they seek to expand their reach to consumers and access to the financial system. In doing so, they are creating additional systemic risk.
One strategy involves applying for the Office of the Comptroller of the Currency’s (OCC) payment charter. In its application, the fintech company may set up its bank to offer loans to consumers but refrain from offering deposit accounts.
Fintech companies can also leverage state law to acquire a special purpose charter, which might serve as a platform to obtain a national charter from the OCC.
Why does this matter?
By setting up a bank charter application to forgo offering deposit accounts, the owner of a newly chartered fintech bank could avoid the supervisory requirements of the Bank Holding Company Act and consolidated federal supervision by the Federal Reserve.
Despite this lack of oversight, which is typical for national banks, the payments charter recipient could also apply for a master account at the Federal Reserve and be granted access to the nation’s payment systems. In addition, because the fintech bank would not be offering deposit accounts, it would not be bound to the same capital and liquidity requirements that credit unions, banks and insured institutions must follow. These regulations exist to maintain safety and soundness and they protect taxpayers in the event of a crisis.
Lack of consolidated federal supervision could result in comparatively less supervisory oversight of the fintech bank and elevate overall financial stability risks if its holding company cannot be counted on as a source of transparent strength.
NAFCU has flagged these concerns to policymakers, recognizing the need for competitive equality between traditional financial institutions, such as credit unions and fintech companies, as well as the opportunity for credit unions to access tools to better serve their communities.
Closing the loopholes: What needs to be done?
It is up to federal policymakers to close loopholes that permit novel banking entities to engage in the type of regulatory arbitrage which is bound to result in financial stability risks. Here’s what NAFCU is advocating for:
- Rules and regulations that apply to traditional financial institutions must apply across the board in order to protect our nation from a financial crisis.
- Efforts by regulators to explore new chartering should occur through open and transparent rulemaking processes — not through interpretive letters or agency decree.
- Federal regulators must commit to transparent discussions about what the future of chartering will look like.
- Federal regulators must ensure that new models of banking are held to the same high standards that exist for credit unions and banks.
- Consumers must receive clear and concise disclosures when they transfer money to a fintech product that is not guaranteed or insured.
A fair and level playing field is needed to ensure that market risk is minimized and that consumers are protected. NAFCU believes that regulators should adopt a more coordinated approach for addressing the risks and opportunities that accompany fintech disruption.