Treasury advises banking regulators to finalize guidance on bank-fintech relationships
WASHINGTON – The Treasury Department, in a new report on financial technology, urged bank regulators to finalize guidance related to how banks manage third-party risk with fintechs.
The non-bank financial institutions could increase competition in the sector, if properly supervised, the report said, but the lack of regulation compared to insured depository institutions “raises various public policy considerations.”
“Where new non-bank entrants re-aggregate core banking services outside the bank’s regulatory perimeter, there may be risks similar to those posed, for example, by the commingling of commerce and banking,” the finance ministry said in the report, which is part of President Joe Biden’s competitive order. “Some new non-bank entrants or their offerings may pose new or greater risks of reliability or fraud issues.”
Bloomberg News
The topic of bank-fintech partnerships has recently received attention from regulators, particularly at the Office of the Comptroller of the Currency. Acting OCC Chairman Michael Hsu has said he is are increasingly concerned about the increasing complexity of business models which facilitates things such as mobile payments, online lending and deposit activities.
Among a list of recommendations, the Ministry of Finance suggests that banking regulators finalize guidance on risk management of third-party relationships. Under the guidance, banks are “ultimately responsible for managing the risk of their own third-party business arrangements.”
In cases where federal banking regulators do not have the authority to oversee bank-fintech relationships — such as when the fintech, rather than a bank, provides a service to the consumer — the Treasury Department said the Consumer Financial Protection Bureau may need to step in.
“In these cases, the fintech firm’s activities may continue to be subject to federal and state consumer laws, but oversight of those activities may not fall within the jurisdiction of the federal banking regulators,” according to the report. “To help reduce regulatory gaps and maintain a level playing field, the CFPB and other federal agencies (HUD and FTC) may also need to act with respect to the activities of fintech firms and other non-banks that provide services critical to these the business arrangements.”
Treasury is also recommending that the CFPB “review the authorities” to consider how the agency might oversee larger consumer lenders that are not banks, such as buy-now, pay-later companies.
Beyond the report’s official recommendations, Treasury is also touching on updates to the Durbin Amendment, which limits debit card fees for issuers with more than $10 billion in assets.
“Debit card issuers below this threshold are not limited in the interchange fees they can charge merchants, giving them a greater opportunity to derive revenue from such fees as part of their business model,” the report said. “This regulatory difference has been key to many non-bank fintech firms’ business models and strategies.”
These non-bank fintech companies will enter into relationships with insured depository institutions below the $10 billion threshold in order not to be limited in the intermediation fees, according to the report.
This use of the Durbin Amendment’s exemption for smaller debit card issuers “warrants further investigation,” the report said, although the report acknowledges the exemption’s usefulness in helping community banks.
