The OCC worries unregulated fintech firms could lead to a financial crisis

Nothing new: Regulators have previously flagged these problems – and say so loosely regulated fintechs continue to push further into the banking space.

Some fintech firms even present themselves as banks, when in reality they have partnered with a bank that handles all banking-related services.

• Misrepresentation is common in the crypto space. For example crypto broker Voyager Digital misleadingly implied customers’ crypto deposits were FDIC insured. But it has also been on the rise through the spread of neobanks and great apps.
• Consumers aren’t always aware of which entity manages and benefits from their money, and fintechs don’t always make their disclosures clear.

Baby steps: Last week, the Office of the Comptroller of the Currency (OCC) took a small step in “regulation through enforcement” by requiring Virginia-based Blue Ridge Bank to better monitor the risk from its fintech partners. The bank must also obtain approval from the agency before collaborating with new fintechs or offering new products from existing fintech partners. But talk of formal regulation of fintechs has been just that – talk.

• OCC reorganized earlier this year to improve scrutiny of small and medium-sized banks that follow non-traditional business plans or collaborate with fintechs, but they will still only monitor technological change.
• The Consumer Financial Protection Bureau (CFPB) also said it plans to exercise greater supervision of fintechs, but that is not happening yet.
• This week, several regulatory agencies issued conflicting statements regarding crypto regulation. Federal Bank chief Michael Barr vowed to make crypto a top priority of Fedbut Securities and Exchange Commission Chairman Gary Gensler and the OCC’s Hsu both said it is no rush to regulate the digital currencies.

The big takeaway: Hsu’s observations about banks collaborating with fintechs are not wrong. Many banks, especially smaller banks, find it more cost-effective and faster to collaborate with a fintech company than to develop digital capabilities in-house.

But it is confusing and paradoxical that the same agency that patted itself on the back for delay crypto regulation now portends financial crisis due to lack of regulation. It is not unreasonable to assume that a lack of regulation was a contributing factor to the recent crypto crisis. And while the OCC boasts that the crypto fallout is being kept out of traditional asset markets, the lack of momentum at fintech firms could help cause a fintech disaster.