US regulator considers new framework for fintechs

A key US banking regulator is set to develop a framework for governing new fintech startups, according to the Wall Street Journal (WSJ).

The Office of the Comptroller of the Currency (OCC), which oversees the national bank chartering system in the US, is to issue a white paper this week, subtitled 'Responsible Innovation', as the first step in its plan to develop a mechanism for approving new fintech business ideas.

Although the fintech market continues to grow, it has been largely unadressed by specific regulations in the US leaving both traditional banks and new startups unsure as to the compliance status of their new ventures. In contrast the UK watchdog the Financial Conduct Authority launched Project Innovate in 2015 which is designed to offer regulatory guidance to companies launching new fintech products.

The OCC hopes that it can develop a framework whereby companies can have a single point of entry to submit new business ideas and the regulator can itself establish a clear policy on how to assess these applications. "What we're talking about is understanding these different models rather than saying 'no' right off the bat," said Amy Friend, chief counsel for the OCC in an interview with the WSJ.

Elsewhere Japan's Financial Services Authority is easing the restrictions on investing in financial ventures in order to boost its lagging fintech market which attracted just $44m in investment in the first nine months of 2015. By comparison, China and the US raised $2.7bn and $7.4bn respectively during 2015.

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Office of the Comptroller of the Currency Financial Conduct Authority (FCA)

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Comments: (7)

Gerard Hergenroeder - Payments Shark - Millersvile 29 March, 2016, 14:25

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I believe in innovation. But, I also believe in a level playing field. Some of today's Fintech's are being unfairly rewarded by the market in terms of higher market values since they do not have the capital and regulatory requirements of traditional banks. It is tough to free up funds for innovation when capital and regulatory costs are taking over 50% of the available funding. Fintechs are not emcumbered by this 50% tax. Now, this is not fair.

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Debbie Williams - FinTech Market Strategy - Sherborn 29 March, 2016, 16:40

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This is certainly a fact and we know that banks are not good at innovating as a group (though I'm not sure we can blame it all on funding constraints). If the goal is to innovate, however, i think we will see a slow down in progress if the OCC clamps down too much, which fair or not, is really important to the overall success of the industry. We will also be disadvantaged versus other financial centers where the government is encouraging innovation, such as the UK. Some oversight is probably a good idea but would love to see the regulators funding and supporting (and getting some control that way) rather than just creating bureaucracy and 'oversight'...

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 29 March, 2016, 17:15

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On their own, banks wouldn't sign acquirer contracts with the typical SQUARE merchant but via SQUARE, they get to earn interchange revenues from such merchants. On their own, banks won't make loans of the type made on online P2P fintechs. Now that online P2P fintechs make them, banks can buy those loans, package them as bonds and sell them for big bucks in fees. What's the point in regulating fintechs and preventing banks from earning such risk-free incremental revenues? I'm a major fan of "unfair advantage", whether by technology or lack of regulation or whatever legal means. If fintechs haven't used their unfair advantage arising from lack of regulation so far, I wonder what they'll do after getting regulated. End of the day, regulating fintechs will starve banks of additional source of revenues. Tch tch...

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A Finextra member 29 March, 2016, 23:21

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I think a key question would be for the examples cited above, is it regulatory constraint that held the bank back (for example, signing up a Square merchant) or is it risk adversity, or something unique to Square's innovation?

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 30 March, 2016, 09:45

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@ChrisYaldezian:

AFAIK, banks have refrained from signing up SQUARE merchants due to Risk Aversion; and from giving loans to typical target customer of Online P2P Fintechs due to Regulatory Constraint.

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A Finextra member 30 March, 2016, 17:42

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Do you think that KYC regs might also have an impact with Square (and similar) sign-ups?

I remember that we had to go through a lot of steps to sign-up merchants; some of which was for risk based pricing, but also for KYC.

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 30 March, 2016, 18:41

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Now that you've mentioned it, yes. KYC => finding out how legit a business is. AFAIK, banks can't extend card processing service to illegal businesses like drugs and prostitution, which, according to many rumors and insinuations floating around, are two of the key customer segments of SQUARE, although its founder Jack Dorsey has gone on record saying "exactly zero drug or prostitution transactions have been completed through Square".