A version of this post was previously published on the Federal Financial Analytics blog.
The Office of the Currency Controller recently concluded its controversial decision to authorize a fintech card for special purposes.
Although OCC points out that it is holding these special purpose cards to standards equivalent to those required by national banks, this is only a little true regarding the prudential requirements named, and appears to be completely unfair on critical restrictions on competitive and financial risk. These omissions have significant consumer protection, security and robustness and structural impacts. Absent violent violations, a card granted can not be revoked. The OCC should be sure it is not a shadow bank activator before it distributes these high-potential cards.
If other regulators in the United States follow the example of the OCC and grant licenses or authorize revolutionary activities before these policy questions are fully taken into account, many embedded risks could quickly address both consumers and consumers. general financial system. The OCC says it is for "responsible innovation". But to stimulate this kind of innovation, agencies need to deepen the issues of structural policy, not to decide them on a case-by-case basis in the dark corners of each card's approval.
The first structural problem we have identified concerns the fact that bank capital and liquidity standards (not to mention other structurally meaningful prudentials) can not be applied in a similar way to fintech, because most part of the fintech the charter will not be anything like most of the national banks. For all the work around the borders of Fintech, national banks are first and foremost financial intermediaries. This means that most of the risk comes from credit extensions or, for larger ones, from trading exposures and most of the funding comes from the deposit or debt market. All post-crisis rules are based on this basic proposition.
Yet the risk of fintech is different. An example: very few fintech are capital-intensive. Instead, they manage transactions or interfaces, making money through cross selling, advertising, add-on commissions or other strategies. As a result, the most important risk for many fintech is operational. Should the operational capital framework based on the operational risk of the big bank work here? It does not even work for the banks for which it was designed. The Basel brush-up – which is retrospective – is even worse designed for the fintech companies. Is capital also the right way to guarantee Fintech's operational resilience? It would be nice to know before there are a lot of specialized banks. Computer risk, for example, is not exactly an afterthought here.
Secondly, what exactly do these fintechs do in relation to parent companies and / or partner institutions? Banks have many restrictions here, starting with all the information that customers need to have to make sure they know that a non-traditional product is not supported by the Federal Deposit Insurance Corp. I know that fintechs are not allowed to take insured deposits, but any company with "bank" in its name could easily be understood to do so. Bank holdings are also prevented from tying up products so that individual and business customers are forced to get something they do not want to get a desired service. Bank holding companies can not offer a heavily subsidized price on a product to encourage customers to make others available without ties on the open market.
Banks stand up to these cross-selling bans, but they are banned from them. However, since fintech's parents are unlikely to be bank holding companies, such anti-bind bans do not apply. Given the binding offerings already evident from fintech that seek non-bank banking cards, this market power is clearly desired. Should it be allowed?
Finally, do fintech parents line up with their special purpose banks or throw them to wolves under stress? Banking companies can not do this and the Dodd-Frank Act has extended this requirement of strength to non-traditional cards. The general theory here is that there is a need to ensure that shareholders of the parent company take pain and obtain from the property of an insured depositary, a theory that does not apply to fintech special cards. Are there any other risks that justify a source of strength obligation?
And the competitive power of fintech's parents is not obliged to incur capital or liquidity costs for activities that otherwise consolidate in their earnings? When can fintechs earn upstream since they do not have to be covered by stress testing even if the OCC says its standards are bank? Who loses and what risk of financial stability could derive from fintech operations of different sizes, business models or interconnections? If the OCC does not condition new papers on the responsibilities of the parent company that it considers to be prudent, it can not change its mind retroactively without regulation that will take time and could prove too late.
These questions are critical not only for fintech special purpose cards, but also for the broader push of the OCC policy statement. It establishes a broader principle: the OCC can establish a category of specialized national banks when it thinks that a policy or an advantage in the market would arise. All kinds of initiatives are possible. I like the idea of cards focused on equality, but what about special ones, for example, commercial real estate development that would otherwise be banned from national banks in most circumstances? What about the other activities on the blurry barrier between banks and trade with powerful supporters? If OCC does not develop its charter policy for special purposes, we will achieve much more innovation at the cost of much less responsibility.