James Bullard: “FINTECH could be the source of the next crisis”

US regulatory agencies - the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are exploring the possibility of providing federal banking licenses for technology companies that provide financial services, such as remittances and lending.

The presence of a federal license will allow FINTECH companies to reduce costs and develop new regions and products. However, they do not intend to invest heavily in expansion without having access to payment systems, settlement services and other tools of the US Federal Reserve (Fed).

The Central Bank still has to resolve the issue of providing access to "poorly regulated players" to this market, as its representatives fear that financial companies lack the reliable risk management and consumer protection mechanisms that banks have.

"They probably do want access to the payments system, but they don't want the regulation that would come with that access," St. Louis Fed President James Bullard told Reuters in November. "I am concerned that FINTECH will be the source of the next crisis," he added.

FINTECH companies attract millions of customers by offering more convenient or better prices than traditional banks. OCC and FDIC believe that they can expand the provision of access to financial services, because their low-cost models can cover poorly served areas and offer small loans that are too expensive for large banks.

However, FINTECH companies are not willing to spend time and resources on submitting applications and supporting a new FINTECH license OCC, unless the Fed gives them access to the payment system, which will make them independent of the banks that will send them money. Direct access would exclude payment for banking routing, which is among the top five operating expenses for many FINTECH companies, and would allow them to compete more effectively with traditional lenders.

"It's hard to know if it's worthwhile applying if you don't know what access you'd have to the Fed services," said Jason Oxman, CEO of the Electronic Transactions Association, which represents FINTECHs and banks. "It would be helpful for the Fed to clarify."

According to representatives of banks, FINTECH companies should get access to the Fed system only if they follow the same rules as financial organizations.

FINTECH companies operate on the basis of a single license, under which they satisfy liquidity, capital, and contingency planning requirements, while almost every aspect of banking is subject to strict controls and a multitude of federal and state laws.

Under the OCC law, FINTECH companies are not allowed to provide deposits insured at the federal level, which is a prerequisite for access to the Fed's payment system.

According to EY, some officials are concerned about the rapid growth of Fintech companies, whose services are used by half of US consumers to transfer money. According to the Treasury, from 2010 to 2017, more than 3,330 new FINTECH companies were created, and their funding grew thirteen times during this period to $ 22 billion.

Some officials are concerned that direct access to the payment network will mean that the collapse of FINTECH companies, a downturn in IT or cybercrime will cause serious damage to consumers in particular and the system as a whole.

Representatives of FINTECH companies claim that their rapid growth reflects the high demand for their services and that many already comply with a number of government regulations.

According to OCC spokesperson Bryan Hubbard, the charter still offers many benefits for FINTECH companies that continue to work with banks that can access the services of the Fed.

The regulator is negotiating with dozens of companies and expects to provide the first national license in accordance with the new charter in early 2019. 

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