BPInsights: November 07, 2020

BPInsights: November 07, 2020

FinTechs Could Avert Consolidated Supervision in Three Ways, Posing Dangers to Financial System 

Recently, some FinTech companies, from the smallest startups to the largest international firms, have looked to gain access the banking system through various methods, including through three kinds of  “bank” charters in particular. But those charters share a core weakness: they allow tech companies to use regulatory loopholes to avoid the consolidated supervision that governs banks at their highest parent company levels. Federal consolidated supervision keeps banking stable and fair and should apply to all FinTech companies engaged in banking, argues a BPI blog post published on Nov. 6. 

The three charter options – Industrial Loan Companies (ILCs), the OCC’s payment charter proposal and state-chartered special purpose depository institutions – give tech companies the chance at regulatory arbitrage, where they could get the benefits of being a bank without maintaining a bank’s stability. When companies engage in banking without this comprehensive oversight at their parent company, we know what happens: fraud festers in the cracks of the fragmented pseudo-bank company until it leaches into the regulated banking entity. The crumbling of German payments company Wirecard AG should serve as a lesson to the U.S. as it considers allowing FinTechs a lightly supervised entry into the banking system.  Read More >>

Waiting is the Hardest Part

Former Vice President Biden is leading in the electoral count for President, as all eyes remain focused on results in Pennsylvania, Arizona, Georgia and Nevada. Democrats will retain a narrower majority in the House of Representatives, and control of the Senate will ultimately be decided by two runoff elections in Georgia this January, which are expected to favor Republicans. If all current election trends and expectations hold, the banking industry could face a more liberal slate of regulatory policymakers, but legislation would be more difficult to pass than under unified Democratic control. In the meantime, Congress returns next week to debate the passage of the National Defense Authorization Act, a government funding bill and potential COVID relief. 

CFPB Gives Green Light to Bank of America’s Small-Dollar Credit Product

On Nov. 5, the Consumer Financial Protection Bureau issued a no-action letter (NAL) to Bank of America for a small-dollar credit product called Balance Assist, which would offer Bank of America checking account holders a small-dollar installment loan in increments of $100 up to $500 with fixed minimum payments over three months with a $5 flat fee. The NAL is intended to provide the bank with no-action relief to provide this product without risking regulatory or supervisory action from the agency.  To seek its NAL, Bank of America based its application for the letter on the CFPB No-Action Template that was issued to the Bank Policy Institute on May 22, 2020 for a small-dollar line of credit and installment product. Learn More >>

Agencies Release Paper on Operational Resilience

The federal banking regulators released sound practices on Oct. 30 designed to assist large banks in improving their resilience and ability to continue to operate in the face of natural disasters, pandemics, cyberattacks and other major risks. The Federal Reserve, FDIC and OCC paper encourages large banks to mitigate risks by focusing on effective practices in areas such as governance, risk management, third party risk management and scenario analysis and testing. In particular, the paper highlights that managing cybersecurity risks underpins a firm’s operational resilience and cites the sector cybersecurity profile managed by the Cyber Risk Institute. Importantly, the paper notes that it does not include new requirements but weaves together existing guidelines to assist firms in maturing their programs. The sound practices apply to domestic banks with more than $250 billion in total consolidated assets or banks with more than $100 billion in total assets and “other risk characteristics” but does not apply to U.S. intermediate holding companies.  
BPI and the American Bankers Association issued a comment letter Nov. 6 in response to the Basel Committee on Banking Supervision’s proposal on the same topic, expressing appreciation for the organization’s flexible approach and use of existing guidance to strengthen operational resilience. BPI also commented on Oct. 1 on the U.K. banking authorities’ proposals and recommended that their standards for resilience ensure flexibility for banks as they strengthen their safeguards. Learn More >>

Washington Post: Federal Reserve Widens Terms of Main Street Lending Program Amid a Murky Timeline on Stimulus

The Federal Reserve broadened the terms of its Main Street Lending Program amid unlikely government action on stimulus payments, according to an Oct. 30 Washington Post article. The central bank reduced the minimum loan size to $100,000 from $250,000. Additional changes were also made to the fees associated with the program in an effort to make smaller loans more attractive. However, Federal Reserve Chairman Jerome Powell recently told Congress that PPP grants would address small business shortfalls more efficiently than Main Street loans given many businesses do not need more debt at this point in the cycle. Furthermore, the Fed has noted that the program has seen little demand for loans below $1 million. Learn More >>

Reuters: Big Tech’s Stablecoins May Hurt Privacy and Innovation: ECB

The European Central Bank warned that “stablecoins” from big tech companies, such as Facebook’s Libra, could threaten data privacy and financial innovation, according to a Nov. 4 Reuters article. “The issues at stake range from data security and compliance with EU data protection law to cutting off the lifeblood of European financial innovation,” said ECB board member Fabio Panetta. A stablecoin is a programmable electronic currency redeemable at par with a U.S. dollar. Learn More >>

Bloomberg Details Everything You Need to Know About Ant’s Pulled IPO 

Ant Group Co.’s derailed IPO, scrapped at the eleventh hour after Chinese regulators met with billionaire founder Jack Ma, could revamp the way China’s state-dominated financial system treats FinTechs, according to a Nov. 4 Bloomberg article. The regulators said there had been “significant change” in the regulatory environment that will require Ant to make changes before it can go public – notably, a new requirement that Ant Group must register as a financial holding company and become subject to consolidated supervision by the Chinese central bank as well as adhere to new capital and risk management requirements. In addition, Ant must beef up capital in its micro-lending units and apply for nationwide licenses for them. The delay, which could have massive implications for China’s banking regime and financial markets, came after Ma publicly critiqued the Chinese financial regulatory framework, saying it stifles innovation. Learn More >>

In Case You Missed It

Financial Times: The Virus Has Crushed the Challenger Bank Dream

The work-from-home world of the coronavirus pandemic should have been a FinTech boon, but instead, it’s revealing the sector’s weakness, wrote Jemima Kelly in a Nov. 1 Financial Times column. Consumer FinTech companies, such as Monzo and Revolut, are particularly floundering, with valuations inching lower and customers that can’t access their money. This weak performance undercuts the notion that tech companies can do what banks do but faster and smoother, Kelly argued.

Department of Justice Puts Visa’s Plaid Acquisition on Pause

Visa’s efforts to acquire FinTech company Plaid are temporarily on hold after the Department of Justice (DoJ) filed an anti-trust complaint in the San Francsico federal court. In its complaint, the DoJ alleges Visa violated the Sherman Act and the Clayton Act and that Visa on numerous occasions acknowledged the existential threat that Plaid would have on the company’s business model and knowingly acquired the company to eliminate “a nascent but significant competitive threat.” Visa issued a response to the complaint stating that the complaint is “legally flawed and contradicted by the facts,” while also accusing the DoJ of having a “lack of understanding of Plaid’s business.”

Financial Times: FinTechs Take on Banks at Their Own Game

FinTech companies seeking a national bank charter should not get a light-touch version of banking regulation, BPI President and CEO Greg Baer told the Financial Times in a Nov. 2 article. He further shared how the Office of the Comptroller of the Currency’s proposal to grant FinTech payment companies banking charters could open a back door for tech giants like Amazon and Facebook to get banking licenses.

Covington Publishes “A Short Primer on the Administrative Law of Bank Regulation”

Jeremy Newell and the team at Covington & Burling LLP published a useful resource earlier this week for anyone looking to brush up on the Administrative Procedure Act titled “A Short Primer on the Administrative Law of Bank Regulation.” The primer provides a thorough explanation of agency rulemaking, agency guidance — importantly noting that guidance issued by an agency does “not have the force and effect of law” — and supervisory and examination activities. To access the document, please click here.

Consilient and Intel Release White Paper on “Federated Learning” to Improve AML/CFT Effectiveness

Consilient in collaboration with Intel published a new white paper earlier this week evaluating the potential for “Federated Learning” to further enhance the effectiveness of AML/CFT efforts through the application of behavioral-based machine learning models. The paper highlights sophisticated methods criminals are using, including obscuring their activity by moving transactions between institutions, which has allowed criminals to evade detection because of shortcomings with the existing AML/CFT framework and restrictions on information sharing between institutions. According to the paper, Federated Learning has the potential to help alleviate these problems by applying algorithms that securely travel between banks without moving sensitive customer data or implicating privacy laws.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.