Second, it would provide helpful and necessary regulatory scrutiny. The creation of national standards and safeguards – at the heart of the OCC’s approach – is a necessity as fintech companies continue to proliferate and reshape the industry. Those receiving a charter would get regulatory scrutiny to ensure they meet OCC standards. And bringing clarity to the national regulatory framework, along with the federal government’s seal of approval, would spur greater capital formation and liquidity for the benefit of the entire ecosystem. The current regulatory uncertainty at the federal and state levels is not sustainable and ultimately damaging to all stakeholders, particularly consumers.
Third, it would benefit consumers. We believe this is good for the industry and great for consumers and small businesses. This is good for the industry as the OCC charter will create more competition, challenge the status quo and compel established stakeholders to innovate. This is also great for consumers as financial inclusion is a clear objective of the OCC guidance.
This very point of financial inclusion and easier access to credit is also highlighted in the Treasury report, which notes the importance of the Bank Partnership Model. This has enabled and led to the dramatic increase in access to unsecured consumer credit, small business lending, auto finance etc. The Treasury report notes that “early evidence indicates that these new lending channels have provided opportunities to expand credit to underserved segments.”
The Bank Partnership Model is an excellent alternative to the OCC fintech charter as it provides the adequate regulatory guardrails to ensure adherence to all federal and state consumer protection and anti-money laundering laws, and more banks have begun to embrace it.
Tangentially, the Treasury Department recommends that the federal banking regulators take prompt action to solidify adequate third-party lending guidance that reaffirms that banks are the true lenders of these partnerships. The FDIC took important steps in this direction in 2016 with its third-party lending guidance known as FIL-50. Federal banking regulators ought to take a hard look at clarifying the banks’ position in the true lender discussion and help preserve the “valid when made” doctrine.
Which brings us back to disruption and democratization. Neither disruption nor democratization are benign forces – change rarely is. It can be uncomfortable and unsettling – even scary. The historian and professor Melvin Kranzberg, best known for his laws of technology, famously wrote: “Technology is neither good nor bad; nor is it neutral.”
The modern interpretation of Kranzberg is: make technology your friend or it will be your enemy. Industry leaders with true foresight recognize that fintechs are the future of banking – most likely alongside, not in place of traditional banks.
In a press briefing shortly after becoming comptroller of the OCC last year, Mr. Otting pointed out that online lenders had played a meaningful role in providing “small-dollar” loans to consumers that banks had chosen to ignore. Fintechs, he said, are “coming into a space that they see as unfulfilled” and are fulfilling unmet needs. More recently he noted that fintech companies, “promote(s) innovation, gives consumers and businesses greater choice and creates economic growth and opportunity.”
There are significant headwinds for fintech charter applicants such as establishing a regulatory framework up to the OCC’s standards, clarification on capital adequacy, liquidity, risk management and potential state legal challenges to the OCC authority. Once the dust settles, all will realize that the threat made us better and the consumer better served. The space is certainly big enough for all.
If history teaches us anything, it’s that progress will not be denied – it’s an immutable force that may be impeded but not defeated. Like the all-female dinosaurs in “Jurassic Park” – thought incapable of breeding and thus controllable – “life finds a way.” It’s time we recognize that fintechs play a critical role in the future of financial services and do our part as enlightened business leaders and policymakers to help them “find a way,” or we’ll end up like Blockbuster.Like This Post