‘We are not financial institutions’ has traditionally been the primary slogan of the fintech industry. Unrestrained by many financial service compliance and regulatory standards common to banks and other financial institutions, Fintechs prides itself on building deep consumer interactions, agile industry dynamics, and disrupting conventional competitors.
Many fintechs have successfully achieved these results by offering innovative solutions that change payments, lending, wealth management, and more. However, recent financial regulatory compliance and industrial changes indicate a possible blurring of fintech and other financial institutions’ boundaries. The financial regulatory compliance community acknowledges that fintech provides services close to those offered by conventional institutions.
As a result, some fintechs are dropping the ‘non-financial institutions’ mantra to consider or pursue bank charters to compete more widely and avoid having to meet disparate financial service compliance’s regulatory criteria at the individual state level where they perform business.
Around the same time, banks are courting—and, in some cases, are already partnering with—fintechs to harness their disruptive competencies and meet the demands of tech-savvy customers.
As the future brings new risks associated with growing financial service compliance’s regulatory requirements, along with possible fines and legal proceedings for non-compliance, fintechs can no longer maintain that they are different from conventional financial companies when providing goods.
At present, financial service compliance regulatory authorities have various approaches for fintech and banking institutions, but most are making progress towards supervision. In March 2016, the Office of the Currency Controller (OCC) released a white paper on its vision for accountable/responsible innovation in the banking system.
As a consequence of this initiative, the door opened for fintechs to continue to expand by collaborating collaboratively with regulators to build solutions unique to the regulation of their product offerings. In October 2016, the OCC announced the establishment of an
Innovation procedure intended to be a ‘central point of contact and clearing-house for requests and information related to innovation’ and to set up an ‘outreach and technical assistance program for banks and non-banks.’
In December 2016, the OCC advanced this initiative when the Currency Accountant Tom Curry declared that the Organization ‘will move forward with the chartering of financial technology companies offering banking products and services and meeting [its] high standards and chartering requirements.’
In particular, the decision to apply for a charter – defined by the OCC as a special function of a national bank charter – will be an option for fintech companies rather than a new necessity (i.e., they could go on operating without a federal charter and remain subject to specific state supervision and regulations).
On July 19, 2017, speaking at the Exchequer Club in Washington, DC, the Acting Comptroller of the Currency, Keith Noreika, conferred the responsible innovation initiative, marking the first major remarks on the issue under the agency’s new leadership. However, there was previously some uncertainty. The present political environment voiced strong support for it, describing the proposal to grant special purpose national bank charters to fintech companies as’ a good idea that merits a thorough analysis and the careful consideration [OCC is] giving it.’
Besides, he noted that ‘hundreds of fintechs are currently competing against banks without the strict regulation and regulations faced by national banks and federal savings associations, concluding that charters’ issuance to fintech firms would ‘help to level the playing field in substantive ways.’ However, he also emphasized that the OCC ‘did not decide if it would actually approve or act in regards to these financial service compliance matters.
At the same time, six days after the Acting Comptroller’s comments, Varo Money, a mobile-only Fintech firm, decided not to wait for the OCC to conclude its deliberation on the special purpose of the national bank charter. The business lodged an application with the OCC for a full national bank charter and a supplemental application for deposit insurance with the Federal Deposit Insurance Corporation (FDIC).
While dispensing with brick-and-mortar branches, the bank would model conventional bank functions in important ways such as holding deposits, cashing checks, and providing loans. Due to its application to the FDIC, Varo became the second fintech company to pursue FDIC insurance. The FDIC’s ruling to grant new ILC charters could have major consequences for the fintech industry. (In early September 2017, press reports suggested that Square, Inc., a payment processing fintech company, will also apply for an ILC charter.) Singly, other financial service compliance regulatory agencies have voiced their interests and intentions concerning fintechs. For instance, the CTFC formed LabCFTC as part of its dedication to understanding ‘the changing landscape of the market and its impact on policy and ultimately the Commission’s regulations’ specific to fintechs involved with capital market futures products.
Regardless of how fintech companies tackle controlled markets and the financial services regulatory compliance – whether they become a chartered institution or stay as they are – they can maximize their capacity for success by having strong risk management controls in place. Given the growing regulatory scrutiny and the need to have safeguards in place to both know and handle consumers well, a compliant business could well be more appealing to the public.
This distinction could open the door to market share and revenue growth. It can also provide a degree of comfort to several stakeholders, including customers with whom the company deals, the board, and management of the company, financial services compliance consultants or analysts (both rating agencies and equity). It concerns anyone who respects the transparency of corporate risk management activities, and any regulatory organizations involved in the company.
At TRC Corporate Consulting, our financial services compliance consultants offer end to end advisory services for critical regulatory functions such as financial regulatory compliance and governance while focusing on enhancing the overall operational performance and not simply a part of it. Our financial services compliance consultants understand the clients’ requirements first and advocate an excellent standard of ethics and trust to preserve confidence and confidentiality.
Our ideology at TRC Corporate Consulting is to consider doing business as a collaboration to drive your business performance to its optimum level. For an understanding of our financial service compliance assistance models or a basic understanding of what is financial compliance and how it affects your business, contact us. We would be happy to answer your queries!