WASHINGTON (Reuters) – The U.S. Federal Reserve is wary of the “fintech” companies, such as ondeck Capital Inc (ONDK.N) or Kabbage Inc. the access to the country’s financial infrastructure, which the central bank is in conflict with other regulators looking to bring them into the fold.
FILE PHOTO: St. Louis Federal Reserve Bank President James Bullard speaks during a public lecture in Singapore 8 October 2018. REUTERS/Edgar Su/Photo File
The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are exploring the allocation of the federal bank-like licensing for the technology-driven companies that offer financial services such as wire transfers and credit.
The plan is part of a broader push by President Donald Trump of the administration to increase small businesses and promote job growth. Federal licenses would permit fintech companies, which currently operate under a patchwork of state, to reduce their regulatory costs and expand into new regions and products.
However, fintech companies say they are reluctant to invest in rural expansion without the access to payment systems, settlement, and other Powered tools and the central bank, however, has not yet decided whether to let this light-regulated players in.
Many Fed officials fear these companies lack robust risk-management measures and consumers that banks have in place.
“They probably want to have access to the payments system, but they don’t want the regulation that would come with that to make it accessible,” St. Louis Fed President James Bullard told Reuters in November. “I’m afraid that fintech will be the source of the next crisis,” he added.
Companies such as PayPal (PYPL.D) and LendingClub Corp.(LC.N) have attracted millions of customers by offering more convenience or a better price than the traditional banks. The OCC and the FDIC say that such companies can broaden access to financial services, because their low-cost models can reach them poorly served areas and offer small loans that are uneconomical for larger banks.
However, some fintech companies say that they would be reluctant to invest time and resources in the application and enforcement of the new OCC fintech license, unless the Fed gives them access to the payments system, so they are not depending on banks to route money for them. Direct access would eliminate the bank routing costs, a top-five operating expenses for a lot of fintech companies, and would enable them to better compete with the traditional lenders.
“It is difficult to know whether it’s worth applying if you don’t know what access you could use the Fed’s services,” said Jason Oxman, CEO, Electronic Transactions Association, which stands for fintechs and banks. “It would be useful to the Fed to clarify.”
Banks have pushed back, arguing fintech companies have Fed system only if they conform to the same rules banks face.”You don’t want a new charter that skirts the existing laws and regulations and that innovation,” said Paul Merski, executive vice president of the Independent Community Bankers of America.
Unveiled in July, the OCC special charter can fintechs to operate nationwide under a single license, provided that they comply with a number of liquidity, capital and contingency planning requirements.
Currently, state regulators who oversee fintechs focus on consumers, such as capping of interest rates of the lending products, the privacy safeguard, and to prevent unfair and deceptive practices. Some states may also, companies must comply with anti-money laundering rules, the submission of business plans, or allow on-the-spot examinations.
By comparison, almost every aspect of the banking activity is subject to a strict supervision and multiple federal and state laws. These include a range of capital and liquidity requirements, operational risk, cyber risk, the seller has the risk of money laundering and banking secrecy rules, fair lending and anti-discrimination lending laws.
The OCC fintech charter is not possible for businesses to collect federally insured deposits, is now a condition for the opening of the Fed’s payment system.
In the personal interviews, officials in Washington are divided on the issue, with many reluctant to offer any guarantees or even advice on how fintechs should proceed, said fintech executives.
“It is not a two-way street, it is a one-way radio transmitter now,” said Sam Taussig, Atlanta-based Kabbage, the head of the global policy of the communication with the Fed. “We don’t know what’s going on.”
Some officials are being undermined by the rapid growth of fintech companies, of which half of AMERICAN consumers now use to make money, according to consultancy firm ernst & young.
From 2010 to 2017, more than 3,330 new fintech companies were created, according to the Treasury, with the financing of such companies, increasing thirteen-fold over that period of $22 billion.
The civil servants provide these young players the advantage of growth on risk-management and regulations know-how – a concern reinforced this month as fintech Robinhood falsely claimed in the new checking and savings accounts were federally insured. [L1N1YK03E]
“Atlanta’s trying to be a fintech hub, so I get the chance to do many of the entrepreneurs in this space,” said Atlanta Fed President Raphael Bostic, on a bank conference at the end of last year. “Almost none of them has the risk in the top of what they are thinking, and that makes me nervous.”
Some officials worry that direct access to the payment network would mean that a fintech company collapse, a large IT stumble or cyber breach, it can spread the risks within the system or hurt consumers.
FILE PHOTO: The PayPal and Pay Android apps on a mobile phone in this illustration picture October 16, 2017. REUTERS/Thomas White/Image/File Photo
Fintech companies claim their rapid growth simply reflects the strong demand for their services and that many are already in compliance with many state regulations. A spokeswoman for the Federal Reserve Board in Washington refused to comment, but Lael Brainard, one of the governors who leads the Fed to think about the issue, has also urged caution about fintechs in the Fed system.
OCC spokesman Bryan Hubbard said that the proposed charter still offers many benefits for fintech companies, which can continue to work together with banks that have access to Fed services.
The regulator is in discussions with dozens of companies and expects that the award of the first national license in the framework of the new charter early this year, a development fintechs hope that will put pressure on the Fed to formally clarify its position.
Reporting by Pete Schroeder; additional reporting by Howard Schneider and Jonathan Spicer; editing by Michelle Price and Tomasz Janowski