The growing fintech lending industry has finally received Washington’s regulatory seal of approval. This week, the U.S. Treasury Department released its final regulatory report embracing the growing fintech industry and endorsing a national bank charter for several firms.
The move by Treasury is the latest sign of how the regulatory landscape has changed since the 2008 financial crisis. Traditional banks, hit by new and burdensome regulatory requirements, pulled back from personal finance lending. This created a new opportunity for technology-based lenders.
Lending by such tech firms now makes up more than 36 percent of all personal finance loans, up from 1 percent in 2010. In addition, financing by these firms has grown rapidly, reaching $22 billion globally in 2017. Yet fintech lacked federal oversight, and the industry has operated on an uneven state-by-state regulatory playing field. That is, until now.
This week’s Treasury report endorsed giving fintech firms a “sandbox” approach to regulation and largely supported the Office of Comptroller of the Currency’s (OCC) “special purpose” national bank charter. This plan allows for federal and state regulators to establish a unified solution that coordinates and expedites regulatory relief for fintech firms. Treasury said the OCC’s special purpose national bank charter “presents an attractive option” for fintech firms looking for a single federal regulator.
The OCC outlined its special purpose charter and said fintech firms should receive supervision similar to national banks, including rules involving capital retention, liquidity, financial inclusion commitments and orderly liquidation plans.
“Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale,” noted Comptroller Joseph Otting in the report. The OCC charter will immediately be accepting charter applications, and the industry is already lining up.
Not everyone is a fan of Treasury’s “sandbox” approach. New York Department of Financial Services Superintendent Maria Vullo chided Treasury’s support with a tweet: “Toddlers play in sandboxes. Adults play by the rules.” State banking regulators are expected to once again challenge the federal regulation with a lawsuit. And consumer groups and Democratic lawmakers also are resisting what they see as an effort to evade state consumer protection rules.
With the highly anticipated report finally released, fintechs have tough decisions to make on how to move into the federally supervised space. However, federal supervision is not achievable for every firm and many smaller firms will likely continue to rely on relationships with existing banks, allowing them to operate in the digital space. But for larger fintech firms, the federal report offers a new opportunity.
But this opportunity comes with potential challenges. Applying for a charter with the OCC is more than checking a regulatory box. It requires establishment of a brand and narrative inside the Beltway with influencers, policymakers, lawmakers and regulators. These companies need to show influencers and policymakers that they can handle the added federal regulation and financial inclusion requirements, while still protecting consumers and creating innovative financial solutions.
Firms that have shied away from Washington in the past must now embrace the Beltway. It’s a new era for the growing fintech industry and one that Washington influencers and communicators are ready to help them navigate. Change will come slowly for the fintech industry, but establishing roots in Washington is one step on this new regulatory landscape.
Cheyenne Hopkins is a senior vice president, Financial Services sector, Washington, D.C.