New York and Washington, D.C. — The Bank Policy Institute and The Clearing House Association commented late yesterday on partnerships between banks and fintechs in a letter to the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve. The letter, submitted in response to a request for information, calls for the banking regulators to exercise their authority to regulate and supervise fintechs directly so that banks are not forced to serve as quasi-regulators. It also emphasizes 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.

 

“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.”

 

The letter makes three primary recommendations:

• Regulators should regulate fintechs. Banks recognize their responsibility to conduct due diligence under third-party risk management frameworks. However, banks should not be expected to independently police fintechs. The banking agencies should exercise their regulatory tools and authority – including the Bank Services Company Act – to establish rules, govern compliance and demand greater accountability from fintech companies, especially when the partnership involves higher-risk activities such as when a large percentage of the bank’s business is attributable to the fintech’s customers.
• Loopholes used by fintechs to engage in regulatory arbitrage should be eliminated. Fintechs have come to rely on partnerships with small institutions as an effective way to avoid regulation. For example, by partnering with an institution under $10 billion in assets, fintechs enjoy a “small bank exemption” under Regulation II of the Dodd-Frank Act; this allows fintechs to bypass limits on what they can charge to process debit and credit card transactions. These loopholes undermine the purpose of the regulations and should be eliminated.
• The banking agencies should educate consumers about what makes a bank a bank. Many fintech companies may look like banks but lack protections and benefits such as federal deposit insurance. Consumers should be able to easily discern whether an institution is a bank or a nonbank and should clearly understand the risks of obtaining financial products through nonbanks. Regulators should require fintechs to offer clear disclosures and support this effort through public education campaigns.

While banks increasingly partner with fintech companies to offer a product or service, the existence of these relationships is not always obvious to the end consumer. The letter focuses on circumstances where fintechs enter into arrangements with banks to facilitate providing end users with access to banking products and services. These arrangements enable fintech companies to directly provide end users with access to a range of banking products, such as checking or savings accounts, payments, lending products or digital wallets.

 

The request for information was issued in July 2024, and comments were due on October 30. The Agencies will review submissions and use this information to determine whether additional rules are warranted.

 

To access a copy of the letter, please click here.

 

Media Contacts:

Austin Anton

Bank Policy Institute

austin.anton@bpi.com

 

Greg MacSweeney

The Clearing House Association

gregory.macsweeney@theclearinghouse.org

 

About Bank Policy Institute

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud and other information security issues.

 

About The Clearing House Association

The Clearing House Association L.L.C., the country’s oldest banking trade association, is a nonpartisan organization that provides informed advocacy and thought leadership on critical payments-related issues. Its sister company, The Clearing House Payments Company L.L.C., owns and operates core payments system infrastructure in the United States, clearing and settling more than $2 trillion each business day.