The federal government will soon have to make some interesting decisions that will influence the banking industry. At the heart of the issue is granting federal licenses to tech firms that offer financial services that include money transfers and lending.
Advocates argue that getting permission helps growing small businesses that will help the economy. The federal licenses would help lower regulation costs for the fintech firms and allow for national expansion. Without the licenses, it would be too costly.
However, is this fair to the banking industry without being subject to the same requirements that banks are under in terms of regulation? If not, will lawmakers create the next financial crisis, only this time come from fintech instead?
Either way, organizations such as the American Bankers Association and the Independent Community Bankers of America will certainly weigh in. If the fintech firms offer the same services as banks but they are not under the same federal regulations as a bank, that is not necessarily innovation, unless one considers innovation finding a way around the system that is set up to protect consumers. Banks need to be active in simply making sure that would be competitors are required to compete on a level playing field. Once the market begins using the products available, it will be difficult to stop.
Presently, fintechs are allowed to operate under one license as long as they comply with liquidity and planning regulations. State regulators have more in depth requirements. However, compared with traditional banks, even smaller banks that may soon have similar assets under management as these competitors, the requirements are minimal. As banks continue to invest in cyber risk, lending laws, and fraud prevention under intense regulation they may soon be competing with entities that deliver the similar services that do not have to invest as much. For a small to midsize bank, this can be troubling: they fight economy of scale challenges that large banks have an advantage from, and perhaps in the future fintechs that can provide similar services on the lower end.
Fortunately, the OCC fintech charter does not allow for companies to collect federally insured deposits, which is needed in order to access the Fed’s payment system. But banks need to stay involved in government legislation in order to fight for a fair playing field in the future.