Treasury calls for more fintech oversight

Dive card:

• More oversight of the fintech sector and bank-fintech partnerships is needed to protect consumers and enable sustainable competition in the financial services industry, the Ministry of Finance said in a The report was published on Wednesday.
• While a growing number of fintechs provide consumers with innovative services, they also create new risks, the Treasury Department said, highlighting privacy and regulatory arbitrage as examples.
• The Ministry of Finance’s report follows last year’s report White House Executive Order aimed at promoting competition in the US economy and comes as the Office of the Comptroller of the Currency (OCC) has signaled plans to increase scrutiny of bank-fintech relationships.

Diving Insights:

In its 122-page report, the finance ministry said non-banksspecial fintechsregroups core banking services outside the bank’s regulatory perimeter and contributes to competitive pressure in the banking industry.

“Innovation and competition must work hand in hand in a healthy economy,” Treasury Secretary Janet Yellen said in a statement Wednesday. “While the entry of non-bank firms into core consumer finance markets has increased competition and innovation, it has not come without additional risks to consumer protection and market integrity.”

The Treasury Department’s report lays out actions that will maintain fair, transparent and competitive markets while encouraging responsible innovation that benefits consumers, Yellen said.

“With existing authorities, regulators can encourage competition and innovation while further safeguarding and protecting consumers,” she said.

The agency highlighted the growth of the fintech sector in the years following the 2007-08 global financial crisis.

Over 1,200 fintech firms, focused on consumer deposits, lending and payments, were formed in the decade after the crisis, according to the finance ministry.

“In the mortgage market, fintech and other non-bank initiatives rose from approximately 30% of the market in 2007 to 50% by 2015,” the agency said. “Additionally, fintech funding has grown, with an average of 1,200 general fintech funding deals completed each year between 2015 and 2021.”

While fintechs have managed to fill the gaps in the traditional financial market, new uses of data and artificial intelligence pose data protection risks and the potential for new forms of surveillance and discrimination, the department said.

“New non-bank entrants may be able to continue to help improve core consumer finance markets, but to do so sustainably, further steps need to be taken to monitor and address risks to consumers, market integrity and safety and soundness,” the agency said in the report.

The agency also warned of “commingling of commerce and banking.” As bank-fintech partnerships become more intertwined, there is a risk of competitive asymmetries and concentration of market power, the agency said.

To manage bank-fintech risks, the Treasury Department recommends that regulators provide a clear and consistently applied supervisory framework for bank-fintech relationships.

“A bank-fintech relationship providing financial services to consumers provided by an insured depository institution (IDI) must operate in accordance with laws, regulations and risk management standards applicable to the IDI,” the agency said.

The department said regulators should also increase oversight of bank-fintech lending relationships to ensure they comply with consumer protection laws and their impact on consumers’ financial well-being.

A banking regulator has already indicated that it is looking into the fintech space and its ties to the banking industry.

OCC Acting Comptroller Michael Hsu discussed the complex nature of bank-fintech partnerships in a speech in Septemberand said the ventures could put the financial system at risk of a crisis if not properly monitored.

And in an effort to strengthen the agency’s fintech expertise regulator announced plans to launch a fintech office next year.