Pub. 1 2021 Issue 2

34 | The Show-Me Banker Magazine By Carl White, Federal Reserve Bank of St. Louis REGULATING FINTECH: ONE SIZE DOES NOT FIT ALL Just as with banks, there is no single licensing or regulatory agency that oversees fintech companies. Depending on their activities, they can be licensed or supervised by local, state or federal regula- tors on a functional or activity-based basis. Prudential (safety and soundness) regulation and licensing are generally handled at the state level for services such as lending, money transmission and insurance. For example, PayPal, one of the oldest fintech firms, has money transmission licenses in all 50 states and has a regulator for each state or territory in which it operates. Because it offers consumers financial services, PayPal is also subject to regulation by the Consumer Financial Protection Bureau (CFPB). The consumer protection laws most applicable to fintech firms relate to rules regarding lending and discrimination; the CFPB also has the authority to level civil penalties against fintech firms that engage in unfair, deceptive or abusive acts and practices. The Federal Trade Commission also has some oversight of these firms. Fintech companies that offer automated financial planning services and sell investment products — dubbed robo-advisers —may be required to register with the Securities and Exchange Commission or the U.S. Department of the Treasury’s Financial Crimes Enforcement Network. Enter Banks An increasing number of fintech firms have chosen to partner with banks to offer traditional banking services, and several have gone the extra step and obtained a bank charter. Fintech firms that part- ner with banks need to meet the required licensing requirements and submit to supervision from state regulatory authorities; their bank partners are still supervised by federal and state banking agencies, depending on the charter type. In cases where fintech firms provide services to a bank or its cus- tomers, there may be third-party risk management guidelines with which banks must comply, such as auditing and monitoring their fintech partners. Federal banking regulators thus have an indirect role in supervising the bank-related activities of fintech firms. The partnerships go the other way too. The shift toward digi- tal banking has led many community banks without adequate in-house resources to contract with fintech firms for back-office support, such as software, loan servicing and accounting. These arrangements can increase banks’ operational risk, so regulators hold banks responsible for meeting regulatory requirements for in-house and outsourced technology needs. 1 Fintech firms that obtain traditional bank charters and become known as challenger banks, like Varo, generally get all the bene- fits of being banks — access to deposit insurance, the payments system and the Federal Reserve’s discount window, among others. 2 But with those benefits comes more stringent oversight by federal or state banking supervisors and consolidated supervision by the Federal Reserve if the new bank is part of a bank holding company. Alternate Charters Partnering with a bank or obtaining a bank charter are not the only ways fintech firms can offer banking services. The decision by the Federal Deposit Insurance Corporation (FDIC) to grant deposit insurance to some fintech companies that have applied for an industrial loan company charter gives many of them the option to provide a full array of banking products without the ILC’s parent company being subject to consolidated supervision by the Federal Reserve, as banks are. 3 The FDIC finalized a rule in December 2020 mandating that an ILC which was granted deposit insurance and its parent company must enter into a written agreement with the FDIC outlining safety and soundness and financial support expectations for any such compa- ny not subject to oversight by the Federal Reserve. Special-purpose charters represent a novel way for fintech com- panies to offer banking services without partnering with a bank or obtaining a banking charter. In 2018 and again in 2020, the Office of the Comptroller of the Currency (OCC) announced fintech firms could apply for special-purpose national bank charters; the charter proposed in 2018 was geared toward lenders, while the 2020 version was targeted to payment companies. The OCC’s authority to issue these charters has been challenged, and cases are winding their way through the court system.