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Fed hesitates with licenses – Fintechs are reversing the US banking industry

The Federal Reserve is reluctant to grant companies a license that would allow them, like banks, direct access to the Fed’s systems.

Among the young technology companies that are active in, for example, payments or lending, consumer protection and risk management left much to be desired, is the criticism of many Fed officials. With their concerns, the central bank faces the US banking supervision OCC and the deposit insurance FDIC, which are more open to the industry and a new fintech license.

“I’m afraid the next crisis will come from Fintechs,” said James Bullard, president of the Fed of St. Louis, Reuters. “They probably want access to the payment system, but they do not want to submit to the regulation that goes with it.” The lack of risk awareness in the industry is driving worry-stricken Fed Atlanta Fed President Raphael Bostic. “Atlanta wants to become a fintech hub, so I have the opportunity to talk to a lot of entrepreneurs in this area,” Bostic said at a banking conference in late 2018. Hardly anyone has an eye on risks as an important issue. “And that makes me nervous.”

The industry is growing rapidly – between 2010 and 2017, according to data from the US Treasury, more than 3300 fintechs emerged. Companies such as Paypal or Lending Club have reclaimed banks from millions of customers thanks to lower fees and greater convenience.

Already half of the Americans use the services of Fintechs for transfers, according to a study by the consulting firm EY. The US Banking Supervision OCC proposed a special license for fintechs in July, with which they can do business across the country, provided they meet capital and liquidity requirements and have contingency plans.

So far companies such as the credit brokers OnDeck Capital or Kabbage use different licenses of the individual states. The overseers have their eyes on consumer protection, for example, and stipulate that lending rates may not exceed a certain ceiling. Some states also require that they comply with anti-money laundering rules or allow on-the-spot checks.

By contrast, almost all banking business is tightly regulated. The financial institutions must comply with capital and liquidity regulations, keep bank secrecy and make provisions for money laundering.

For some fintechs, the new OCC license is only attractive if it gives them direct access to the Fed’s payment system. This would allow them to avoid certain bank charges – one of the biggest cost blocks for young companies. However, the license proposed by the OCC does not allow fintechs to collect deposits guaranteed by the FDIC, which until now has been a prerequisite for access to the Fed’s payment system.

Critics defend themselves against a softening of the conditions – not least the banks, to which the new competition is a thorn in the eye. Some Fed officials also fear that direct access to the payment system could damage the system as a result of a fintech collapse, major IT problem or cyberattack.

Fintech companies countered, they already met many requirements of the states. The rapid growth is not due to a lax regulation but to high demand for their financial services. Only if they also had access to the Fed’s payment system would national expansion be attractive with the help of the OCC license.

“It’s hard to judge whether it’s worth applying for the license if you do not know how to access the Fed system,” said Jason Oxman of the Electronic Transactions Association, which represents fintech and banks. “It would help if the Fed clears up.”

Also published on Medium.

Published inFintech

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