How ‘too-big-to-fail’ banking giants limit ways fintech firms can handle your money

Innovative fintech companies let us refinance a loan from home, trade stocks in line at the pharmacy, and buy Girl Scout cookies with a mobile wallet, curbside.

Convenience isn’t the only advantage. Financial technology companies (fintechs) are changing financial behaviors, improving access to credit, increasing savings and investment returns, and providing customized products to meet evolving financial needs. The task of protecting customers and the economy from harm falls to financial regulators who may struggle to differentiate each new business model and the respective risks.

Existing regulatory “roadways” have been redefined by eighteen-wheel, “too-big-to-fail” nationally chartered banks, which dominate the smaller, family-car community banks for which the roads were designed. Innovative, agile fintech products and solutions are now hitting these streets, offering customization and convenience to users, with minimal risk. Flexible new fintech vehicles are increasing the speed of economic traffic, and streamlining services even as they offer expanded access and bring about more transactions.

Read: fintech is ‘resilient’ in a way tech isn’t, says Morgan Stanley

Fintechs want to be regulated  

Guardrails that protect against fraud and money laundering are essential to all types of financial services. But to subject all drivers to the rules governing the most massive vehicles is a mistake of scale. And while safety regulations on fintech firms are necessary, it’s a distortion of scope to govern emerging non-bank fintechs as if they were “too big to fail.”

Indeed, fintechs generally don’t accept FDIC-insured deposits and rarely require extensive collateral, so they don’t pose the macroeconomic crash risks of a mega-bank. Most fintechs don’t even operate as banks, yet narrow regulatory language subjects fintechs to an alphabet soup of federal and state financial regulations under five or six overlapping government agencies. New financial products face an outsized regulatory burden for services they don’t even offer, wasting resources and limiting customer choice.

To increase the pace of economic opportunity, policymakers could designate a lane for fintech start-ups that operates without the heavy rules governing the nations’ biggest financial players. Fintechs cultivate customers by meeting real-time economic needs and offering uncompromising customer protection by allocating relative oversight to realistic risks, and this designated lane would help regulatory agencies modernize accordingly.

In fact, most fintech companies view themselves as “techfins” — offering technology and service platforms to collaborate, not compete, with banks.

Regulatory clarity and predictability reduce compliance costs and incentivize customer centric innovation, but fractured, vague, or overly specific regulations can compound these costs and create confusing or inefficient products.

Fintech firms have sought a variety of relief along the regulatory road. For example, payment processor Square SQ, +4.57%  is eyeing a state-level application for an industrial-loan charter in Utah with FDIC deposit insurance.

Additional lanes in a future regulatory roadway would allow fintech firms to:

1. Offer bank products and services under a single set of national standards through special limited-purpose charters under The Office of the Comptroller of the Currency.

2. Enter platform partnerships with banks of all sizes to help offer tech-forward products and services.

3. Submit to state-level regulators and the FDIC via Industrial Loan Charters.

4. Enjoy federal “sandboxes” like Project Catalyst or the Federal Financial Services Innovation Offices, or statewide development zones like those proposed in Arizona and Illinois.

5. Seek clear and unified multi-state licensing like that led by the Conference of State Bank Supervisors.

With the freedom to navigate regulations that do and don’t apply to their offerings, fintech products can prove themselves quickly, or fail without customer harm or systemic consequences.

Scaling Up Securely

Internationally, financial regulators and innovators are already responding to gaps in conventional banking services while upholding policy goals around financial safety and soundness.

The proposed OCC fintech charter may present an excellent opportunity to increase credit access and inclusion if it allows emerging fintech companies to scale safely.

A tailored set of regulatory lanes would smooth the on-ramp for fintech startups, replacing rigid banking regulation never intended for the digital age with a more dynamic set of risk-appropriate controls. Modern customers demand agile financial products that meet real-time needs — U.S. policymakers must rise to the occasion.

Sam Taussig is head of global policy at Kabbage, a global financial services, technology, and data platform serving small businesses.

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