Trade groups representing U.S. banks criticized an industry regulator’s move to create a special purpose payment charter for nonbank fintechs, arguing that Congress should have a say over the matter.
In a note to Democratic House Speaker Nancy Pelosi and Republican Senate Majority Leader Mitch McConnell, seven banking organizations said they opposed the U.S. Office of the Comptroller of the Currency’s recent proposal, which could give businesses such as Amazon or Facebook access to the U.S. Federal Reserve system and safety net.
The letter was signed by representatives of the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Credit Union National Association, Independent Community Bankers of America, National Association of Federally-Insured Credit Unions, and The Clearing House.
“We oppose any effort by the OCC to offer a payments charter, particularly one that would ultimately grant these companies access to the Federal Reserve payments system — the most critical part of our country’s financial infrastructure — and its corresponding federal safety net without protecting the financial system and consumers from the concomitant increase in systemic risk,” the groups said.
The banking organizations are asking for the government to step in and block the OCC’s plans after reports in September that the regulator was preparing to offer national charters to fintechs that provide payments services.
One of the concerns raised by the groups is whether the nonbank chartered firms should be able to access the Federal Reserve’s payment system. Because there is no existing framework for how to mitigate potential risks that could be introduced by these companies, the organizations argued that these questions must be answered prior to charters being granted by the OCC.
A payments charter for fintechs could raise regulatory issues, such as whether to continue the separation of banking and commerce, the application of traditional banking statutes and regulations governing safety, soundness and consumer protection, and the potential introduction of systemic risk into the payments system, the groups said.
In order for nonbanks to be granted a payments charter, it would also have to be determined whether the parent companies would be subject to the Bank Holding Company Act and other relevant statutes.
If not, the banking groups pointed out that there would be no capital and liquidity requirements on the parent company, no requirement for the parent to act as a source of strength to chartered entities, and no requirement to plan for recovery or resolution in severe financial situations.
“Additionally, there would be potential harm to consumers should these narrowly chartered institutions not be subject to federal laws,” the groups said.
Some of these laws impose liability on directors, have annual audit and reporting requirements, put limits on transactions between a bank and its affiliates and limits on bank loans to insiders and related parties.
“Financial institutions have long pioneered innovations in financial services to better connect with and benefit customers by making credit more inclusive, providing more transparency around products and enhancing user experience,” the banking groups said in Tuesday’s letter.
“Today, both traditional banks, credit unions and nonbank technology firms are embracing innovation, which has allowed financial institutions and technology companies to partner in order to deliver the innovative services that customers seek while also providing for regulatory protections under the banking system,” they said.
The organizations requested that there be an open comment process when granting a new type of bank charter, and that Congress should have a role in these deliberations. They also express uncertainty around the OCC’s authority to issue such charters.
“Innovation cannot come at the cost of ensuring a safe and sound banking and payments system,” the groups said.
“The benefits of financial innovation are only realized when they are delivered responsibly, in a way that does right by customers,” they said.
--Additional reporting by Patrick Hoff