FinTech and Big Tech Want Access to the Banking System

Keeping the US banking system safe and stable has been a persistent challenge for policymakers. Over the past 150 years, Congress has enacted several measures to strengthen the legal and regulatory framework for banks in response to episodic banking crises, and through its actions, deepened the social compact with banks.

Through the passage of laws like the

  • National Bank Act (1864);
  • Federal Reserve Act (1913);
  • Federal Deposit Insurance Act (1950); and
  • Bank Holding Company Act (1956)

Congress articulated a clear view that to enjoy the benefits of being a bank – the right to accept deposits, lend and process payments with the benefit of the federal safety net (FDIC insurance or access to the discount window) – banks are expected to act prudently and comply with a meaningful regulatory and supervisory framework. 

This framework has been significantly strengthened over the years, most recently through the Gramm-Leach-Bliley Act (1999) and the Dodd-Frank Act (2010), to ensure that banks are and remain sound and that their customers’ money, privacy and data are protected. In totality, this framework — commonly referred to as the prudential regulatory framework or prudential regulation — provides the bedrock for a safe and stable banking system in the United States, where banks focus on financing the real economy, keeping customer money safe, and helping Americans secure their financial futures.

Keeping the US banking system safe and stable has been a persistent challenge for policymakers. Over the past 150 years, Congress has enacted several measures to strengthen the legal and regulatory framework for banks in response to episodic banking crises, and through its actions, deepened the social compact with banks.

Through the passage of laws like the

  • National Bank Act (1864);
  • Federal Reserve Act (1913);
  • Federal Deposit Insurance Act (1950); and
  • Bank Holding Company Act (1956)

Congress articulated a clear view that to enjoy the benefits of being a bank – the right to accept deposits, lend and process payments with the benefit of the federal safety net (FDIC insurance or access to the discount window) – banks are expected to act prudently and comply with a meaningful regulatory and supervisory framework. 

This framework has been significantly strengthened over the years, most recently through the Gramm-Leach-Bliley Act (1999) and the Dodd-Frank Act (2010), to ensure that banks are and remain sound and that their customers’ money, privacy and data are protected. In totality, this framework — commonly referred to as the prudential regulatory framework or prudential regulation — provides the bedrock for a safe and stable banking system in the United States, where banks focus on financing the real economy, keeping customer money safe, and helping Americans secure their financial futures.

Unfortunately, the safety and stability of our system is at risk as technology companies seek to act more and more like banks, but without adhering to a prudential framework. They seek all the benefits of being a bank without taking on the duties and responsibilities that come along with it.

Why do tech firms want in?​

These tech firms are essentially after two things: revenues and profits attributed to banking activities, like payments and lending; and sensitive customer data they can monetize (read: sell in one form or another).

Technology companies could go through the more difficult process of getting an ordinary bank license and be subject to the prudential framework. And admittedly, some chose this route, but those firms are the exception to the rule. Rather, most of these tech companies are taking the easier route by exploiting loopholes or cracks in the existing framework. They do so by pursuing novel or special types of charters offered by certain States competing for business through a charter race-to-the-bottom or by the OCC.

What are these novel and special charters?

This charter would allow tech companies that do not accept insured deposits, but either pay checks or lend money to enjoy the benefits of a national banking charter, without being subject to the many supervisory requirements applicable to insured depository institutions.

This charter would allow tech companies that process payments, but don’t accept deposits, to forgo FDIC deposit insurance, but be able to access the Fed’s payment system.

Banks by another name, essentially. Some cannot offer checking accounts, but they otherwise do what commercial banks do. The ILC parent company lacks the necessary Fed supervision and capital requirements as well as consumer and data privacy protections.

Some states have been moving towards charters for crypto companies, and other tech firms, that would not require being FDIC insured.  As an example, the Wyoming State Banking Board has in place a novel charter known as a Special Purpose Depository Institution (SPDI), which permits institutions to accept customer deposits, without FDIC deposit insurance and the obligation to meet federal bank minimum capital requirements.

How are they able to operate without bank regulations?

The common element among each of these charters is that they are not treated like an ordinary bank under federal law and therefore avoid the vast majority of (or all of) the prudential regulatory framework established by Congress and federal regulators. By doing so, they operate outside of the safety perimeter in which ordinary banks operate. Importantly, these special charters also allow tech companies to skirt federal requirements that they support the communities in which they operate, like the Community Reinvestment Act. These charters also escape federal measures designed to keep banking and commerce separate, a long-standing U.S. policy. Where FinTech is leading, Big Tech is sure to follow.

And until policymakers patch the cracks and close the loopholes, these tech companies will continue to pursue the creation of a “banking wild west,” where they can shirk responsibility, avoid the rules that require everyone else to act prudently, and put at risk our otherwise safe and stable banking system. The “move fast and break stuff” mentality of Silicon Valley should not be given a free pass when it comes to the banking system and Americans’ financial health.

What should policymakers do?

Policymakers must decide whether the prudential regulatory framework that currently provides for a safe and stable banking system continues to make sense and, if so, then consider whether it should apply only to traditional banks or also be extended to tech companies that engage in banking activities by examining the cracks and loopholes that create very real regulatory arbitrage opportunities.

Unfortunately, absent urgent action from policymakers, the existing social compact is quickly unraveling. Each time a technology company is approved for a new special bank charter that allows them to operate outside the regulatory perimeter, the safety and stability of the U.S. banking system is eroding. In the near term, only significant and expeditious action to address the existing cracks and loopholes can ensure the continued safety and stability of the banking system.

Banking is Safe, Strong and Stable. Keep It That Way.

3/4

of adults trust banks to protect their personal data, compared to 62 percent who trust tech companies to do so and 44 percent who trust FinTech firms with their information.1

2/3+

of adults say large tech companies should be regulated the same as or more than banks if they offer a full range of banking services. Nearly two thirds (66 percent) say the same of FinTech firms.2

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