US banks state that they have become ‘quasi-regulators’ of the country’s fintech sector and argue that the actual regulators need to up their game.
Responding to a request for information on the relationship between banks and fintechs from three major US financial regulators, the Bank Policy Institute and The Clearing House Association have called for authorities to take a more direct role in overseeing fintech.
Putting it simply in a press statement, the associations asserted that ‘regulators should regulate fintech’. Regulators have the right tools and authority, the duo’s open letter read, to govern compliance and ‘demand greater accountability’ from fintechs.
The associations believe that in the current state of affairs, banks are being effectively required to independently govern fintechs, which they are also pursuing B2B partnerships with.
“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 fintech.”
A further two areas have also been highlighted. Firstly, the associations argue that there are regulatory loopholes used by fintechs to avoid arbitrage, such as entering partnerships with smaller institutions with less than $10bn in assets.
Secondly, the pair are concerned about blurring lines between banks and fintechs. Many fintechs look like banks but ‘lack protections and benefits’ like federal deposit insurance, they argue, and so banking agencies need to educate consumers about ‘what makes a bank a bank’.
This concern may be influenced by the emergence of some prominent fintechs into traditional banking areas. For example, British firm Revolut became Europe’s highest valued fintech this year whilst also securing a long-awaited UK banking licence.
Of course, banks are also keen to engage with the fintech sector despite elements of competition between the two. The initiatives and products fintechs work on in areas like Open Banking, Artificial Intelligence (AI), blockchain and crypto and embedded finance, can enhance a traditional bank’s offering and widen its customer reach.
“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 Bank Policy Institute and The Clearing House Association.
“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.”
