Fast-growing financial technology companies have been confined, largely by law, to geographical and market niches as they nibble away at the business of major U.S. banks.
Breaking the Status Quo
But that could change dramatically. The Office of the Comptroller of the Currency (OCC) will soon begin granting bank charters to nonbank fintech firms in the new year, expanding their ability to operate nationally, according to the Wall Street Journal. The charters would give fintech firms some of the same privileges currently reserved for the traditional banking and financial services sector, the Journal says.
For major fintech firms such as Stripe Inc., LendingClub Corp. (LC), and Square Inc. (SQ), which currently offer services like peer-to-peer lending, online payments and other financial technology products, having a license that provides similar powers as traditional banks would help reduce costs and the complexities of doing business. (To read more, see: 10 FinTech Companies to Watch in 2016.) The new regulation could also aid newer fintech start-ups, many of which have complained that, in order to offer their services under existing rules, they must partner with a traditional bank.
Fintech company Circle, which offers a smartphone payment app, is currently required to hold customers’ deposit accounts with a partner bank and use the bank’s system anytime money is transferred between customers. Having its own banking licence would allow Circle to offer such services independently, according to the New York Times.
Even with these gains, chartered fintechs may not have all of the protections offered by big banks. For example, deposit accounts at fintech firms that obtained the new charter would not be federally insured without approval from the Federal Deposit Insurance Corp. (FDIC).
$24 Billion in Investments
The new regulation, by facilitating the ease at which fintech firms operate their businesses, is aimed at taking advantage of the rapid growth in fintech innovation over the past several years. According to the Wall Street Journal, more than 4,000 fintech companies now operate in the U.S. and U.K. alone, and investment in the sector has increased from $1.8 billion to $24 billion globally in the past five years.
While fintech has the potential to provide a number of efficiency and cost benefits, there remain a number of unanswered questions on the specific requirements that companies will need to meet in order to obtain a charter. Such unanswered questions are a source of concern for some. (To read more, see: How Fintech Advances Are Improving Finance for All.)
Camden Fine, chief executive of the Independent Community Bankers of America, for example, expressed concern that if fintech startups were offering banking services without having to abide by the same regulatory requirements, this could pose “risks to taxpayers and the financial system.”
The OCC has addressed these fears, according to the New York Times, saying that companies receiving one of the new licenses would likely be held to a higher standard than traditional banks.