A few years ago, I wrote that when it came to the regulation of payments, America could do worse than adopt something along European lines. By “European lines”, I meant that a regulatory framework which separated systemically risky operations such as lending people money from systemically unrisky operations such as low-value payments would benefit all concerned.
The US has no equivalent of the EU’s Payment Institution (PI) licence, but this would be a practical way to allow new entrants access to the infrastructure needed to deliver great new products and services.
Hence it was rather exciting to read the news that the US regulatory environment is about to change, and about to change significantly. This announcement is, I think, really important.
The Office of the Comptroller of the Currency will start granting limited-purpose bank charters to fintech companies,
These special limited-purpose national bank charters (I can’t think of a snappy name for them yet – I want to call them “near-banking” licences because they allow you to do some of things that banks do) mean that fintech companies can apply for a national licence instead of having to apply for licenses in every state. So if you want to offer some form of payment service, you will no longer have to apply for 50 (different) state money transmission licences.
Fintech firms that can apply for an OCC charter must offer at least one of three financial services: make loans, pay checks or receive deposits. The OCC is currently developing guidelines for a fintech bank charter that will be based on the comments received from the proposed paper.
Were I to comment on the proposed paper, I would focus on the first of these financial services. It is the provision of credit that is the systemically risky service and it is this service that requires strict regulation. I make no comment on the issue of whether this should be dealt with at the federal level or state-by-state, but it does seem to me that if the proposed special fintech banking charter were to exclude this activity then it would create a regulatory category that is much more like the European Union “payment institution” or the Indian “payment bank”. I don’t know what other people think about this but I think that the European Commission’s general drive to separate regulation of payments from the regulation of banking makes a lot of sense and is founded both in sound regulatory strategy and economic theory. It’s the right way to go.
we can see a “back to the future” roadmap where banks go back to savings and loans and the “pooling” functions needed to support a modern economy, non-state actors provide money and — and most importantly in the short term — third-parties provide payment systems. In Europe, the regulatory wind is already in these sails.
To begin with an obvious example, Facebook recently obtained licences in Europe to operate as a Payment Institution (PI) and as an electronic money institution (ELMI). The regulatory burden of complying with these licenses is very limited compared to complying with a full banking licence, which is good for both Facebook and its customers who will be offered innovative new services through the platform (sending people money using Facebook as a front-end to national and international payment networks, allowing people to carry stored value accounts in Whatsapp and who knows what else).
The notion of a special-purpose charter has also drawn concerns from some consumer groups who want to ensure all of the banking and fair-lending laws apply to fintech firms and banks that fear they would lose business to fintech if they had to compete within the same banking system.
I am not an expert on consumer lending but I would have thought that the concerns of consumer groups in this area are perfectly reasonable and that the simplest way to satisfy those concerns is to keep the provision of credit with existing institutions that are tightly regulated in that regard. Therefore I would comment to the OCC that if they want to encourage more competition in lending it should be through a separate kind of special charter.
But back to the rest of the special-purpose charter. As to the concerns of the banks that they will lose business, well, tough. The purpose of the financial services regulatory environment is not to maintain the status quo and to defend incumbents against competition of all kinds across time. If some banks are concerned that the new special-purpose charter “banks” will be able to deliver payment services at a much lower cost (which I sincerely hope will be the case) then the rather obvious strategy is for these banks to form a subsidiary to handle payments and to have that subsidiary regulated through the same special-purpose charter as their competitors.
This may not be enough to save them, by the way. Thomas Watson Jr is often quoted as saying in 1943 (*) that there was a world market for five computers. It turns out that he was right: they are Apple, Amazon, Facebook, Google & Microsoft and everything else is just a window into those. (I think Thomas was wrong – he didn’t forsee WeChat or Alipay – but you get the drift.) When these “internet giants” get their special-purpose charters, they will control both the customer interface and the financial system interface. Why will I ever come out of Facebook and run my bank app ever again? If my Mac’s “Messages” application can send money to your WeChat, what will happen to Transferwise? If I google “PayDay Loan” and the money arrives in my gmail account before you can say “where is the 21st century anti-trust legislation” what will happen to competition in the lending space? What happens why Microsoft asks you add to your bank account to LinkedIn and can then offer both “request to pay” and instant payments on the platform?
On final note, most of the commentary I read about this over the weekend focused on the ability of these “Internet giants” to obtain these charters and deliver payment services. There are, however, plenty of other types of organisations that might want to obtain one of these charters in order to provide financial services that either compete with lazy and fat incumbents or deliver innovation into new or underserved niches. AT&T could get a licence and launch USA-PESA. NetFlix could get a licence, join Visa and then issue its own credit cards. But if I were to grab my crystal balls and get all Nostradamus on your asses, I’d say keep an eye out for the retailers. If I was Walmart, I’d be thinking about getting me one of those special-purpose charters myself so that I could operate my own payment services without having to have a joint venture with banks (e.g., its partnership with GreenDot) or go through the expensive process of getting a subsidiary regulated as a bank.
In the late ’90s and early ’00s the company made numerous attempts to get into banking after it argued that the 1999 Financial Services Modernization Act allowed nonbank commercial operations to acquire financial services companies and operate their own banking operations. It failed to acquire a bank in Broken Arrow, Okla., in 1999, and its attempt to acquire a bank in California led to the state legislature to pass a bill specifically outlawing what is arguably permitted by the controversial banking deregulation bill signed into law by then-President Bill Clinton.
As I said back in 2011 when someone asked me who might become the Walmart of payments, I said Walmart. The OCC move brings this one step closer! My reasoning was obvious: the customer interface. Retailers are where the customers are and is where they make their payments. Right now if you want to use Walmart Pay you have to register a card, but there’s no reason why Walmart Pay couldn’t, as a bank, instruct the transfer of funds directly from your bank account.
Who knows what the result of the OCC consultation process will be, but on the whole I think that the notion of the special-purpose charter that makes it easier for non-banks to come into the space and compete is a good one. With Venmo up and running, the big banks launching Zelle, NACHA going to same day, The Clearing House launching instant payments and others, I’m sure, just around the corner with their blockchains and cybercurrencies and so forth, we are about to see the US landscape transform, much to the benefit of the users of the payment system.
(*) He never said this, but let’s not spoil it for all of the management consultants who like to put this on a slide about innovation.