The financial technology industry—an emerging hybrid of digital companies with service offerings like payments, consumer lending, and credit services—is anticipating word from industry regulators on what’s next.
Since the changing of the guard at the Office of the Comptroller of the Currency, questions remain about the possibility of a fintech charter, as shepherded by the former chairman Thomas Curry. But at the Institute of International Bankers Conference, Craig Phillips, Counselor to U.S. Secretary of the Treasury, hinted at the kind of changes coming for fintech.
Phillips’ response addressed two primary categories of fintech:
"The first are traditional non-bank institutions, such as small-dollar lenders, specialty financial institutions, and mortgage originators and servicers. The second are fintech firms centered around marketplace lending, payments, and settlement activities for securities."
Fintech entry into U.S. markets hasn’t gone unnoticed. The industry is reported by KPMG to have raised $3.5 billion in the first half of 2017. While some attribute fintech’s success to hype, it’s clear that regulators expect it to stick around.
What constitutes a bank and a non-bank is part of what fintech regulators aim to address in coming months. But partnerships between fintechs and banks make this classification a challenge, as retrofitted solutions can create heavily nuanced relationships. While banks maintain the longstanding reputational credibility fintechs need, banks do not typically innovate or move fast in the technology space.
Many fintechs hope that unnecessarily stringent regulations are eased, making way for big leaps forward in progress and innovation. But as most innovators know, the cart often comes before the horse in the march toward progress.
As fintech marches ahead, there are rumblings of a fintech charter (announced mid-2017) that are waiting in the wings. Regulators are regrouping after the new appointment of Joseph Otting to The Office of the Comptroller of the Currency (an independent agency within the Treasury Department).
Phillips again emphasized that the agency has its eye toward balancing inequities between the heavily regulated banking industry, and its relative newcomer fintech:
"On the regulatory side, we’ll be making some observations on some rationalizations of [what] federal versus states require. Obviously, the OCC has spent some time on a fintech charter idea. Many of these companies are right on the edge of crossing over into banking services, so [determining] where banking begins and ends will definitely be part of our work."
Part of the long-anticipated benefit of a fintech charter is that fintech services could unite under a national charter of rules, instead of being subject to state licensing which could present complex hurdles. But how federal regulators will handle the charter is yet unknown.
Federal regulators are proceeding with caution after the banking crisis of 2008 when some nationally chartered financial institutions failed. However, this lag time is creating tension for those fintechs desiring to forge ahead. This may also affect the geographical location of fintechs as they will seek to settle in areas with ease of restrictions on operations, as some predict, in Silicon Valley.
Whatever the outcome, fintechs are taking a breath, curious of the precedents Chairman Otting will set, and enthusiastic to see the maturing of a new set of rules that will set them apart from incumbent banks.