Who regulates fintechs?
Monday, 4 November 2019
Fintech firms have made a splash in recent years, attracting consumers looking for new ways to find loans, handle their checking, savings, direct deposits, pay for products or transfer money to friends.
Others present alternatives to traditional banks, offering low-cost checking accounts, higher interest rates on savings, money-management tools and simple apps. Fintechs focused on lending often promise lower interest rates and a streamlined online process.
What are the regulations?
Various federal and state agencies oversee traditional banks, with the exact regulator based on the type of institution. The Office of the Comptroller of the Currency (OCC) regulates national banks, which are part of the Federal Reserve System. The Federal Reserve regulates bank holding companies and state-chartered member banks, among others.
The Federal Deposit Insurance Corp. (FDIC), meanwhile, monitors more than half the institutions in the U.S. banking system and insures bank and thrift deposits. It's the main regulator for state-chartered banks that don't join the Federal Reserve. State-chartered banks also are subject to oversight from state banking agencies.
Consumers may wonder who, exactly, regulates fintech firms. The answer here also depends on the specific fintech and the type of services it offers. With the landscape quickly changing, it's worth knowing who keeps an eye on these newer players.
The Federal Reserve lists several agencies that might work with a fintech firm or its partners. These may include the same players as discussed above — the OCC, the FDIC, state banking agencies — and the Consumer Financial Protection Bureau (CFPB), charged with enforcing U.S. consumer laws.
That's not to say that all those offices, or any of them, oversee any particular fintech firm. Nor is that list comprehensive.
Where do neobanks fit in?
Many banking fintechs — digital-only players known as neobanks — aren't traditional banks themselves, but partner with chartered banks so they can offer FDIC-insured checking and savings accounts. Some traditional, regulated banks operate their own neobank businesses under distinct brand names. (As Bankrate notes, chartered banks must meet minimum capital requirements.)
Fintechs that don't offer deposit accounts require their own oversight. PayPal, for instance, lists regulators in all 50 states, plus Washington, D.C, Puerto Rico and the U.S. Virgin Islands, that oversee its activities. The firm holds state money transmitter licenses, each with its own reporting, bonding and inspection requirements, among others, and says the CFPB also had authority over its business.
What about oversight?
Last year, the OCC announced it would allow fintechs that don't take customer deposits to apply for special purpose national bank charters. With that move, the office aimed to establish uniform standards and oversight for fintechs that provide loans and other services. The agency also hoped to encourage innovation that provides consumers greater access to financial services.
State regulators who oversee fintechs challenged the OCC's plan in court to conflicting results. One lawsuit against the OCC was dismissed in September 2019; however, in another case, final judgment was entered against the OCC in October 2019 by a U.S. District Court in New York, creating uncertainty about the future of special purpose national bank charters. In early 2019, meanwhile, the Conference of State Bank Supervisors approved recommendations aimed at unifying state laws and standards for lending and payments fintechs.
Consumers who want to know which agencies oversee a particular fintech should check with the firm, which may provide the information on its website. A fintech that trades on a stock exchange is likely to disclose the details in its annual reports.
Stay tuned — as the fintech landscape shifts, the rules governing these firms are likely to evolve as well.
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