Banking regulators should exercise their authority to regulate and supervise fintechs directly, so banks are not forced to serve as ‘quasi-regulators’, the Bank Policy Institute and the Clearing House Association have urged in a new letter.
Addressing a letter to the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve, the Bank Policy Institute and the Clearing House Association explained that banks should not be expected to independently police fintechs.
While banks should continue to conduct due diligence under third-party risk management frameworks, banking agencies should begin to exercise their regulatory authority to demand greater accountability from fintechs. By exercising the likes of the Bank Services Company Act, regulators would be able to better police fintechs, especially when partnerships between them and banks involve higher-risk activities, such as when a large percentage of the bank’s business is attributable to the fintech’s customers, the authorities explained.
“We believe the combination of direct agency oversight of fintechs and consumer education is imperative to achieve our shared goal of effective fintech risk management,” the associations wrote. “The current approach, in which the agencies place all responsibility for ensuring appropriate fintech risk management on the banks, suggests that compliance is primarily a ‘bank issue’ and need not be a major concern for the fintech.”
Keeping consumers safe
In the letter, the Bank Policy Institute and the Clearing House Association recommend that regulators should focus on eliminating loopholes utilised by various fintechs. They explain that, in many cases, fintechs rely on partnerships with small institutions as a way to avoid regulation.
By partnering with an institution boasting less than $10billion in assets, fintechs fall under a ‘small bank exemption’ under the Dodd-Frank Act. This enables fintechs to bypass limits on what they can charge to process debit and credit card transactions – something the authorities say undermines the purpose of the regulations and should therefore be cracked down on.
The two entities also emphasised the need for more public education to help consumers better understand the potential risks of doing business with a nonbank, such as the potential unavailability of federal deposit insurance.
After introducing more education initiatives, customers should be able to discern whether an institution is a bank or nonbank more easily. Because many fintechs can look like banks but lack the same protections, the authorities recommend that regulators require fintechs to offer clear disclosures and support this effort through public education campaigns.
The Bank Policy Institute is a public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the US.
The Clearing House Association provides informed advocacy and thought leadership on critical payments-related issues.
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