Viewpoint: Why Fintechs Want More Regulation
By Ian Rubin, ACI
The common understanding in the payments industry is that, as bank regulators gradually inch their way toward regulating financial technology companies that transact banking, lending, and payments, the fintech companies are retreating, trying to move as far from those regulators as possible, for as long as possible. The industry narrative is that, when the regulatory heat eventually gets too high, the fintechs will change business models, or combine with other companies, or seek to be acquired by the very banks they now compete against.
But we are now seeing evidence that this scenario may differ for some fintechs. Some industry participants believe that there actually may be business benefits that come from being regulated. Call it “competitive advantage through regulation.”
Exhibit A is Circle Internet Financial, and it is not the only fintech thinking along these lines.
As reported in the Wall Street Journal, Circle—a Boston-based digital payments company—is seeking a national charter from the Office of the Comptroller of the Currency. Circle’s position, as indicated in the article, is that having a license would actually make it easier for the firm to do business on a national scale.
Circle’s charter request, along with the OCC’s willingness to consider it, marks a meaningful inflection point in the fintech-regulator discourse, which had previously pitted banks and banking associations against fintechs, with each group trying to push the attention of the regulators toward the other.
For some time, banks have presented a detailed argument for increased oversight and regulation of fintechs and other alternate financial services providers. In the banks’ view, while banks and fintechs are subject to regulations established by the Gramm-Leach-Bliley Act, those regulations are administered by two different groups: the Federal Trade Commission for fintechs and myriad regulatory agencies (CFPB, FinCEN, FFIEC, and others) for banks. The bankers argue that both sets of financial service providers collect and transfer sensitive account and personal data, but that the banks are encumbered by privacy and data security regulations much more stringent than those governing fintechs. The result, say the banks, is that fintechs receive a regulatory light touch, which leads to an unfair competitive playing field.
The Journal quotes Circle’s CEO Jeremy Allaire saying that the effort to obtain a federal license “is appealing, both because of our long-term strategy, but also because it takes a lot of the cost and complexity of working with many third-parties out of the equation.” You read that correctly: Regulation as business simplification.
Circle had previously obtained a virtual currency license in New York State and in the U.K.. Receiving an OCC national charter would simplify the company’s effort in having to work state-by-state to obtain a series of licenses.
New York State has been particularly progressive in developing bitcoin transaction licenses for fintechs, having issued its first one (to Circle) last fall. New York’s Department of Financial Services, which has jurisdiction over licensing, has received 26 license applications from fintechs. To date, it has denied two applications and has granted four, including a license to a Ripple subsidiary in June.
The takeaway is that the general fintech community general may be increasingly comfortable with the need to come to terms with banking regulations, with some fintechs taking the progressive stance of seeking out regulation for business advantages. If Circle receives a national charter from the OCC, and other fintechs follow suit, it would meaningfully alter the competitive landscape between banks and fintechs. Stay tuned.
As ACI practice lead, Ian Rubin analyzes the complex and quickly developing transformational changes in the retail financial services industry, assesses their impact to the banking and payments ecosystem, and communicates this information through the development of business models and value propositions to ACI’s strategic clients, and to ACI’s sales and product development teams.
In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.
