Banks and credit unions agree: regulate fintech


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Banks and credit unions agreed on a main theme of a House hearing on Wednesday: Some fintechs offering banking-like services need more federal regulation to ensure consumer protection and remove unfair competitive advantages of their limited regulation.

Jim Reuter, CEO of First Bank of Denver, spoke on behalf of the American Bankers Association at the webcast hearing. Credit unions did not have a guest speaker among the five invited witnesses, but CUNA and NAFCU sent written comments.

The Consumer and Financial Institutions Protection Subcommittee, who called the hearing, set out some facts about the issues he wished to address:

  • The total number of federally insured banks increased from 17,811 in 1984 to 4,951 as of June 30, while federally insured credit unions increased from about 15,000 in 2004 to 5,029 as of June 30. .
  • U.S. bank branches have grown from a high of 85,566 in 2009 to 74,935 in 2020, with the four largest banks cutting more than 3,600 branches during that period. The number of branches of credit unions increased slightly, from 19,247 in 2004 to 21,566 in December 2020. (NCUA data shows that the number of branches of credit unions decreased by 551 in 2020, but declined increased by 73 this year, to 21,639 in June.)
  • The subcommittee also cited the small number of charters for entirely new banks or credit unions. The FDIC has issued only 35 charters for de novo banks since 2012. The NCUA has approved five since 2019.

US Representative Ed Perlmutter (D-Colo.), Chairman of the subcommittee, asked Reuter about barriers to entry for de novo financial institutions.

Reuter mentioned the costs of regulation, but pointed to the rapidly rising costs of technology.

Reuter described FirstBank as a “community bank”. It has $ 26.8 billion in assets, with 91 branches in Colorado, 14 in Arizona, and four in California.

He said FirstBank now employs 400 people in its information technology unit, up from 250 five years ago. Its spending on information technology has grown from $ 53 million in 2017 to over $ 110 million this year.

He noted a study which found that the minimum asset size for an effective bank had increased from $ 350 million in 2000 to $ 3.2 billion in 2018. “When you think of someone who sets up a bank of novo to one or two branches, these barriers important. “

But Reuter’s main argument was the threat of fintechs taking action in their business model, such as not taking deposits, to avoid FDIC regulation.

“We see this most clearly in the rise of payment charters or national special-purpose banking charters which would aim to provide access to the payment system to businesses but not be subject to the same regulations as banks,” Reuter said. .

“The strict rules in place for banks should be applied to others looking to offer banking-like services,” he said. “Anything below a level playing field will put consumers and financial systems at risk,” he said, adding later that it “would lead to further bank consolidation.”

CUNA President / CEO Jim Nussle made a similar point about the need for tighter regulation of fintechs capable of exploiting consumers in a letter he sent to the subcommittee.

“These so-called ‘bank-lease relationships’ allow non-bank providers to operate under the guise of a regulated entity while avoiding the regulations that would normally be in place, often at the state level, for products. and services they offer, “Nussle wrote

“Consumer protection can be very different when a product or service is offered by a non-financial institution, and consumers don’t always appreciate this difference,” he wrote.

Nussle wrote that credit unions are also concerned about the expansion of the use of cryptocurrency and other digital currencies, “which allow banking-like products and services outside the scope of regulations. on consumer protection “.

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