CFPB wants US Congress to authorize agency for fintech regulation

In a recent report, the Consumer Financial Protection Bureau (CFPB) recommended that it be authorized to grant charters to non-depository fintech companies, payments processors, and other financial service providers that operate in inherently interstate markets, or for the US Congress to clarify the authority of the Office of the Comptroller of the Currency (OCC).

Innovation advances competition and in turn benefits consumers through greater choice, improved products, lower prices, and greater financial inclusion. Technology-enabled financial services, or fintech, is at the center of innovation today.

Fintechs provide or support a wide array of consumer financial services, including payments, savings, peer-to-peer lending, and financial management. By using digital technology, fintechs can provide these services in new ways, allowing consumers to transfer funds through mobile devices, automate savings decisions, obtain loans without stepping foot inside a bank, and receive credit decisions and budgeting recommendations that consider a vast amount of data.

Regulatory uncertainty and unnecessary regulatory costs threaten to inhibit fintech-based innovation, however. In particular, non-bank fintech companies engaged in payments, remittances, or lending services are generally subject to state law and must register or acquire a license from each state in which they operate. A company with a nationwide footprint thus may need 50 separate licenses and adjust its practices to conform with each state’s laws.

As a result, a non-bank fintech lender would be subject to different maximum-allowable interest rates depending on the state, whereas a federally chartered bank providing the same service could charge the interest rate that its home state allows, regardless of the consumer’s location. These costs, and the competitive disadvantages from a segmented regulatory regime, are significant.

Charters or licenses should provide that these institutions are governed by the regulations of their home states, even when providing services to consumers located in other states, similar to the National Bank Act’s treatment of federally chartered banks. The Dodd-Frank Act created in the Bureau a unique agency well-situated to regulate entities engaged in interstate activities. By making the Bureau the licensing agency, Congress would assure that consumer protection concerns are at the forefront.

If Congress elects not to authorize the CFPB to issue federal licenses, it should clarify that the OCC has that authority. This alternative option would ensure that fintechs operating nationwide companies are subject to a single set of laws.

The OCC has significant expertise in fintech generally and in these services specifically, and it may be well-positioned to supervise non-bank fintechs with multistate operations. Regardless of which agency charters the fintechs, the agency exercising that authority should pay careful attention to any capital requirements and other unnecessary or excessive regulatory burdens.

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