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The U.S. Treasury and the Office of the Comptroller of the Currency (OCC) both hit the headlines last week with fintech-related announcements. Treasury released a 222-page report on the subject of Nonbank Financials, Fintech, and Innovation, while the OCC almost immediately followed with the news that it would finally begin accepting National Bank Charter applications from fintechs, in line with Treasury recommendations.
As I’m sure everyone with even a passing interest in fintech knows by now, both the U.S. Treasury report and the OCC’s decision were greeted with a mixed response from the industry. The general consensus is that it’s a step in the right direction but barely scratches the surface in terms of what needs to be done to smooth the path for startups in the financial services sector in the U.S.
I read Treasury’s report so you don’t have to
This whopper of a report from Treasury reviews the U.S.’ current regulatory framework for "nonbank financial institutions," assesses the impact on innovation and makes recommendations designed to bring regulation inline with a set of core principles set by the Trump Administration. Those principles are, broadly, designed to: improve consumers’ financial health, strengthen the industry domestically and on the international stage and stimulate economic growth. The recommendations, broadly, address hurdles standing in the way of these goals being achieved, largely by finding ways to streamline the regulatory framework and harmonize different regimes.
But, and it’s a huge but, they are simply recommendations. There are many obstacles still to be overcome, such as federal and state regulators agreeing to the proposals in the first place, before you even get to a stage where they agree to work together and implement them.
There is also the fact that some of the recommendations, while being good for businesses, are not so great for consumers. For example, rescinding the so-called "Payday Rule," which requires lenders to assess whether borrowers can afford a loan and cap the number of loans that can be extended to one borrower, without ensuring there is adequate protection for vulnerable consumers, would likely be damaging to both individuals and the economy in the longer run.
In summary, the U.S. Treasury’s report looks positive and supportive on paper, but it will be a seriously long time before much comes of it directly. In the meantime, U.S. fintechs will continue to struggle with the country’s complex and convoluted regulatory system which prevents many good ideas coming to fruition because entrepreneurs are simply too scared to try. The successful firms will remain few and largely be dominated by the tech firms for the foreseeable future.
The OCC faces an uphill struggle
So, onto the OCC’s announcement. The decision to allow fintechs to apply for Special Purpose National Bank (SPNB) licenses has been a long time coming. The idea was first mooted two years ago and the OCC has faced serious resistance from both state regulators and bank lobbying groups ever since. One of the most vocal opponents remains New York DFS’ superintendent Maria T. Vullo who almost immediately after Treasury and the OCC made their announcements issued her own, saying the charter:
“...is clearly not authorized under the National Bank Act…[and] will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape”.
Such opposition is probably to be expected from groups who feel threatened either by federal regulators stepping onto their turf, or by the potential for fintechs to grow and steal their customers.
What do the fintechs think?
Those I spoke to are cautiously optimistic but believe there’s still a lot of work to be done when it comes to the creation of a more competitive landscape that enables innovation to flourish. U.K.-headquartered money transfer service
“While we are pleased with the OCC's decision at the federal level, a charter that does not offer Fintech companies access to payments systems (ACH, FedWire, and systems developed in the future) does not go far enough. TransferWise favors policies that level the playing field between Fintech companies and traditional banks.”
TransferWise is in a relatively unusual position for a fintech as it has significant operations in multiple countries giving it the benefit of knowing what other regulators are doing first hand. Boyajian told me that as far as he’s concerned, the OCC’s initiatives “stop short of some of the other initiatives we’ve seen around the world”. In particular, serious gaps remain when it comes to giving fintechs access to infrastructure such as payment schemes (e.g. the Federal Reserve in the U.S.) and providing clearly defined frameworks for different types of startups (e.g. lenders vs payment service providers).
When it comes to Treasury’s vision of harmony between regulators Boyajian is also somewhat skeptical. He believes there are benefits to a central player having a mandate to enforce and foster competition in the industry. And while some groups are making efforts to simplify and centralise rules, it doesn’t seem likely it will come from the top in the US any time soon.
“I have not seen either the Fed or the Treasury express that they have a mandate to do this so instead what we do see is this tension between different regulators….The situation that we are in due to our regulatory structures is that now all the other state regulators and the various committees need to all be convinced that this is the best way forward [so] when we think about financial services in the US, while there is a lot of effort, there is also the competing states and everyone seems to have their own agenda at this point”
Bank account provider Chime, a firm one might think is a prime candidate for the OCC’s charter takes a similar perspective when it comes to the state of regulation in the U.S. Chris Britt, Chime CEO said:
"Overall, I think these developments are good first steps and likely to be positive for consumers. Hopefully, they’ll help pave the way for other consumer-friendly fintechs to scale without as much regulatory red tape. Unfortunately, our fragmented banking regulatory regimes here in the U.S. will always make innovation in financial services somewhat challenging.”
We are a long, long way off the U.S. being a Utopia for fintech
The problem is, for fintech to truly flourish we need lots and lots of startups, and for those firms to feel confident they can operate legally nationwide to attract investment while avoiding ridiculous compliance costs. Right now, the regulatory environment is a huge barrier to this and is causing the U.S. to fall behind other countries when it comes to developing a truly thriving fintech sector which even Treasury acknowledges, stating:
“As the rest of the world takes measures to enable innovative financial products and services, the United States risks losing out by failing to provide regulatory clarity and remove unnecessary barriers to innovation”.
Meanwhile the OCC and its comptroller will need nerves of steel and buckets of determination — and time — in order to actually start issuing licenses that are recognised everywhere. And that’s just the first step towards the Utopian environment startups, and government, are hoping for.
In the meantime, regulatory expert Dr Sian Lewin's view that fintech regulation has become a “political football” in some places, used to attract votes and score points rather than enact any practical change, remains apt.
