A U.S. House committee this week began reviewing the idea of allowing the likes of Amazon or Facebook to receive charters to operate as banks — an idea that’s already gotten plenty of pushback from traditional financial institutions (FIs).
The House committee held a hearing on the idea after Acting Comptroller of the Currency Brian Brooks in July proposed a new special purpose national banking charter for payments companies.
Overseen by the Office of the Comptroller of the Currency (OCC), the charter would allow firms like Facebook, Google or Amazon to bypass the process by which they need to collect money transmitter licenses state by state. It would instead offer payment companies a national servicing platform to replace the regime of state regulations such firms would be subject to under existing laws.
However, the banking industry doesn’t like that one bit.
“We oppose the OCC’s effort to grant commercial companies like Amazon or Facebook a national payments charter to access to the Federal Reserve payments system and safety net, [the] most critical part of our country’s financial infrastructure … without protecting the financial system and consumers from the concomitant increase in systemic risk,” industry leaders wrote in a recent letter to key lawmakers.
Co-signed by the American Bankers Association, Bank Policy Institute, Independent Community Bankers of America and The Clearing House, the letter argues that banks and non-bank technology firms are both already embracing innovation in customer service offerings. The groups argue that such efforts are secured under the current regulatory regime, and that allowing innovation at the expense of the financial system’s stability isn’t beneficial.
“Commercial companies accessing a payments charter would avoid oversight and regulations that protect the financial system and consumers,” the bank industry leaders wrote.
This isn’t the OCC’s first attempt to create a special banking charter that would benefit tech firms. The agency first proposed a special banking charter for FinTechs in 2014 that would limit pushback from the Federal Deposit Insurance Corp. (FDIC), the states and the courts.
But last fall, a federal appeals court questioned the OCC’s authority to issue such a charter. And as the banking industry’s letter shows, FIs are still displeased with the idea as well.
Among the issues the industry has raised are concerns that special purpose payment banks won’t be subject to the federal Bank Holding Company Act (BHCA) and other relevant statutes.
The industry claims that means payments banks wouldn’t be subject to the same capital liquidity requirements that regular banks are. Nor would they be required to develop plans for recovery or restitution of funds in the event of a catastrophic situation, FIs claim.
Moreover, the industry’s letter to House members noted that there’s no framework in place to make sure that these “narrowly chartered” banks would be subject to the Federal Deposit Insurance Act or the Community Reinvestment Act. That last measure aims to ensure that banks lend money and provide banking services to underserved and minority consumers.
“The potential for asymmetries in regulation across companies with different banking charters could produce regulatory arbitrage and undermine safety and soundness and consumer protection,” the bankers wrote. “A lack of safety and soundness rules will expose the financial system to significant vulnerabilities.”
The letter urges caution in putting these licenses out into the market, arguing in favor of a transparent process that brings various financial services stakeholders in. The industry also wants Congress to determine if a federal money transmitter license that would preempt today’s patchwork of state licensing laws actually represents an improvement.
Some critics also argue that allowing Big Tech firms like Google or Facebook to access special service licenses and placing them under national charters would give the firms an easy out from state consumer protection laws. They argue that the OCC would oversee the new charter holders — but not as rigorously as state regulators would. Moreover, critics claim the new charters would erase the distinction between banking and commerce — a separation typically justified as minimizing risks to the banking system, preventing anti-competitive behavior and averting concentration of economic power.
Given the historically contentious nature of this proposal, we imagine the idea of special banking charters for payments companies will continue to face a bumpy ride. The banking industry insists it’s not hostile in principle to opening up the playing field to FinTechs, and that traditional FIs are open to doing something new. But according to the industry’s letter, bankers insist that something new also be something right for the system.
“The benefits of financial innovation are only realized when they are delivered responsibly, in a way that does right by customers,” the bankers wrote. “This means getting regulation right is critical. We look forward to a continued discussion around these important issues and stand ready as policymakers look to help promote responsible innovation in banking.”