A Fintech Fight: Regulatory Turf War?

Fintech continues to captivate investors, bankers, regulators, and consumers. Funding has boomed in the past few years, growing 62% year-over-year and from 1,000 companies in 2005 to over 8,000 in 2016.

And while most consumers pay little heed to what a regulator has to say about the fintech world (as do some entrepreneurs), an interesting development occurred recently that did not generate significant headlines. Somewhat surprisingly, one group of US regulators are taking another group of US regulators to court over issues related to fintech.

Back in late April, the Conference of State Bank Supervisors (CSBS), which describes itself as “the nationwide organization of banking regulators from all 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands” supervising over 4,800 financial institutions, sued the federal financial services regulator, the Office of the Comptroller of Currency (OCC). In essence, the state regulators feel that the OCC over-reached in offering to create its special fintech charter that has been under discussion for many months now. The CSBS argued that that the OCC “has acted beyond its statutory authority” and “has created this sweeping new nonbank charter without following proper notice and comment procedures.”

In the exhibits that the CSBS attached to their complaint, they call out their specific opposition to the idea of a fintech charter, explaining “State regulators are firmly opposed to any expansion of the Comptroller’s chartering authority that would enable wholesale preemption of State oversight and consumer protection laws for a group of entities conducting activities that are only loosely related to banking.” The CSBS even goes so far as to argue that “The OCC has intentionally structured the special purpose nonbank charter to evade the application of certain federal banking laws.”

So what’s going on here?

• First, this appears to be a classic example of the states coming together to push for their rights as a way of standing up to the federal government. This theme has a long history in our country and will not be immediately resolved overnight with this lawsuit. In fact, if you read the documents closely, you will see that the CSBS and OCC have been locking horns over these issues since at least 2003.
• Second, there is a lot of emphasis on consumer protection and consumer rights. Despite the ongoing uncertainty around the CFPB’s future, the theme of protecting consumers is mentioned numerous times. According to CSBS President and CEO John W. Ryan, “To protect consumers and taxpayers, to promote innovation, and to ensure fair and open competition, CSBS was forced to take legal action against the OCC charter.”
• Third, innovation is also a key tenet of both sides’ arguments. Neither group wants to find itself perceived as somehow slowing down the incredible innovation that has come out of fintech space in the past decade. Each one therefore will continue to tout their innovation bona fides in this debate.
• Issues related to financial crime were barely mentioned and are not truly part of this debate. While one might place those items under the broader rubric of consumer protection, etc., the fact remains that BSA/AML, fraud, and information security issues are only mentioned a mere handful of times by CSBS and don’t have a significant role to play in this debate.

While it may be comforting to view this through the lens of Democrats vs. Republicans, I would caution against such an approach. What we may have here quite simply is a good old-fashioned turf war having to do with states (regardless of which party is in charge) attempting to exert their own control in the face of a massive onslaught of innovation and change in financial services. The ways that we pay for things, move money between accounts, buy and sell equities, and budget for our personal lives are changing quite rapidly due to the intersection of the broader secular trends of mobile + social + cloud. These 3 forces alone (not to mention open source, blockchain, and IoT) are driving such significant change in financial services that it should come as little surprise that regulators are arguing amongst themselves.