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Can fintech revolution preserve consumer protections?

Fred Williams

At a daylong forum about new banking technology, one question electrified the audience.

“Do consumers still need a bank?” asked Grovetta Gardineer, a senior staffer at the Office of the Comptroller of the Currency, the 153-year-old regulator of national banks.

For now, the answer is still yes. But just asking that question at a banking agency that was founded in the Lincoln administration shows how times are changing.

The forum, “Supporting Responsible Innovation in the Federal Banking System,” brought bank regulators together with financial technology companies and consumer advocates. The subject: how to streamline bank regulation for the fast-moving digital age, without weakening protections for consumers and the economy.

It may seem like high-tech innovation has swept finance. Digital wallets are everywhere you turn, though they’re sparsely used. Peer-to-peer payments are gaining ground, and peer-to-peer lending is gaining a toehold.

But most of the advances are overlays on a banking system that remains fundamentally unchanged. And despite the talk of technology “disrupting” banking, the road ahead looks daunting for technology companies, who see a high barrier of regulation blocking their innovations.

“Tech companies can get totally flummoxed when they realize what they’ve stepped into,” said Erin Fonte, a lawyer in Austin, Texas, who works with fintech companies. Fonte, who attended the forum, said companies argue with her, certain that the voluminous rules around banking can’t possibly apply to their little firms. “I feel like I’m counseling them through the five stages of fintech startup grief,” she said.

If their business involves something basic like taking money from one person or company and handing it over to another, they’ll need a money transfer license in just about every state. Unless, that is, they become a full-fledged bank – meaning a charter application and, if that is successful, periodic visits from bank examiners.

As a consumer, part of me says tough cookies. The rules around finance are there for a reason. They’re designed to insure your money won’t vanish when you entrust it to a company. The rules also protect against being tricked into high rates and fees for a loan, or being denied credit unfairly. Living in an unregulated financial environment would be a nightmare of scams and financial crashes.

That said, there are a few ideas getting traction in Washington that could deliver financial innovation more quickly to your iPhone, Android or old-fashioned PC, without trashing the Truth in Lending Act and other decades-old protections:

  • One-stop regulatory shopping. Companies with a new financial service may need to understand rules enforced by the OCC, the Consumer Financial Protection Bureau, and the Federal Deposit Insurance Corp. They may also come under the jurisdiction of the Federal Trade Commission. The agencies aren’t going to merge, but they could coordinate to offer a single point of contact and guidance, an idea that has been tried with some success by Britain’s Financial Services Authority.
  • Niche charters. Applying for a full-fledged bank charter means a serious amount of work. There has been discussion of limited purpose charters with easier requirements for fintechs. Many, for example, don’t take deposits as a source of funding, the safety of which is a big concern of regulators. Comptroller of the Currency Tom Curry did not voice much support for this idea, however, saying it “presents legal and policy issues we are trying to address.”
  • Pilot projects. Being able to test a piece of software before full launch is fundamental, but if the software delivers a financial service, it needs to comply with the array of fair lending, community reinvestment and credit reporting standards from day one. OCC officials discussed creating a so-called “sandbox” for testing of ideas that haven’t been fully worked out yet, without giving companies free rein either.

“My parents had a sandbox – that sandbox had rules,” Deputy Comptroller for Public Affairs Bryan Hubbard said. “It was not a free-for-all.”

For all its stature as a hub of technological innovation, the U.S. lags in levering its new ideas into improved financial products and services. Regulators in Australia, Singapore and even stodgy Britain have scored higher marks for building flexibility into the rules to accommodate new ideas.

In that context, the OCC’s forum was an important beginning. “I give them credit for broaching the subject,” said Jeanne Hogarth, vice president of the Center for Financial Services Innovation. “It needs to happen.”

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