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Disrupter, Interrupted

By Toni Lapp

Following the Office of the Comptroller of the Currency’s proposal in December 2016 to grant national bank charters to fintech companies, a Federal Reserve president recently said more oversight would help the fledgling industry. This development comes after a year in which many fintechs struggled.

The timing is also a challenge in that Comptroller Thomas Curry is expected to depart the OCC when his term ends next month. Given the uncertainty over who will lead the regulator, the fate of a national fintech charter is unknown as well. Would a President Trump appointee be inclined to recommend regulations?

The OCC invited public comment on the proposed charter, and responses were as varied as one might expect:

The Americans for Financial Reform, a coalition of more than 200 national, state and local groups representing consumers and businesses alike, suggested that the OCC lacked standing to grant a charter to nondepository firms, and further warned that such charters would undermine state consumer protections.

The Independent Community Bankers of America concurred that OCC lacks “authority for establishing a special-purpose national bank charter that engages exclusively in non-depository core banking functions,” but nonetheless said there should be a level playing field in which fintech entities “are subject to the same supervision and regulation as a community bank is subject to.”

The response of a United Kingdom-based fintech executive suggested a tailored approach that was curiously reminiscent of ICBA’s proposal for regulations that differentiate between small and large banks. Given “the high failure rate of new businesses, a tiered-risk approach could be implemented which would allow fintech businesses to experiment whilst controlling for risks to the market,” Juan Andrade wrote, suggesting an approach determined by market share or number of customers, so “new business would not need to reserve large amounts of capital if their addressable market never grows beyond a few thousand.”

He went on to write that established banks “have been protected from competition by fair, but now, convoluted state and federal regulations. The lack of competition has nurtured a market that can sustain inefficient and outdated infrastructure and business models.”

The proposed national charter comes as fintechs have experienced a downturn, and the regulatory front seems to favor established banks. President Trump’s promises to roll back regulations look to benefit big banks, and the would-be disrupters – fintechs – will lose the advantage they once had when they were unregulated.

It’s interesting to note that the Wall Street Journal last month reported that China’s Lufax, the world’s most valuable P2P lender, is shifting its focus to wealth management.

Sidebar: Defining and Investing in Fintech

Defining fintech as “those that apply technological innovation to financial functions and systems,” Patrick T. Harker, president of the Federal Reserve of Philadelphia, speaking at a recent conference spoke in favor of regulatory oversight. “It’s in their best interest to have an established framework in which to operate,” he said. “In part because the trust it engenders will underpin their essential role in the financial system.”

Despite — or because of — the lack of established framework, fintechs have attracted investors.

According to Bloomberg Business News, venture-capital firms invested more than $17 billion into fintech startups in 2016, increasing sixfold from 2012. But in 2016, China overtook the United States as the top destination for fintech investment.


Toni Lapp is senior editor of BankNews.

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