The fintech sector is booming, with venture capital-backed fintech deals surging to $8.9 billion in the third quarter of 2019, “a quarterly record” according to a new report from CB Insights. “As of Q3, fintech has raised $24.6 billion in 2019, already surpassing 2017’s annual total,” the report found.
Part of this surge is due to a lack of regulatory oversight, critics say, and now big banks are starting to push for regulation as fintech companies increasingly encroach on traditional banking territory.
Fintech companies are technology startups specializing in certain aspects of financial services. Lemonade, for example, offers renter’s insurance, SoFi refinances student loans and offers personal loans, and Kabbage provides small business loans.
The Federal Reserve announced a new way for banks and fintech companies to make faster, around the clock payments in August. The new service, called FedNow, will “enable the near-instantaneous transfer of funds day and night, weekend and weekdays, have the potential to become widely used and to yield economic benefits for individuals and businesses by providing them with more flexibility to manage their money and make time-sensitive payments.”
The American Bankers Association (ABA) lobbied the Fed to not allow fintech companies — referred to by the banking community as “nonbanks” — access to FedNow. The Fed clarified that fintechs will not have access to FedNow at the Clearing House/Bank Policy Institute November conference because they do not have federal banking charters.
“Congress has more or less clarified who can have an account at the Fed,” Federal Reserve Board of Governors General Counsel Mark Van Der Weide said. “It’s depository institutions as defined in the Federal Reserve Act, and we will follow that law.”
Federal and state regulators are still working out how fintech companies will be regulated. Many fintech companies want banking charters at the state and national level so they can offer more traditional banking services to consumers and more directly compete with banks.
But a New York federal district court judge ruled in October that the Office of the Comptroller of the Currency cannot grant fintechs banking charters.
Meanwhile, some big banks are nipping competition in the bud by buying up fintech firms.
Blurring the lines is fintech’s overlap with Big Tech. Amazon, Google and Facebook are considering entering the fintech space, but tech companies across the board are under scrutiny from Congress regarding their collection and use of consumers’ personal data.
Community banks fear Big Tech more than Big Banks, and consider companies like Amazon and Google as bigger threats to their business than banks like J.P. Morgan Chase and Citigroup, according to a new survey of 500 community banks from Promontory Interfinancial Network.
Sheila C. Bair, former chairman of the Federal Deposit Insurance Corporation (FDIC) during the Bush administration, told the Senate Banking Committee in September that fintechs should be allowed to participate in FedNow and compete more directly with big banks.
“History has shown the folly of exclusively relying on big Wall Street banks for financial infrastructure,” she said. “As we discovered in 2008, big banks can fail. … Smaller depository institutions and fintechs are understandably wary of a system controlled by big bank competitors.”
Continuing to innovate without much regulatory oversight, fintechs are raking in the dough while often providing cheaper or more accessible financial products and services to American consumers. For big banks and the traditional banking community, that’s a legitimate threat.
Unfortunately, there’s not a whole lot big banks can do about it, which is why the Trump administration’s FDIC wants to start deregulating the financial industry so they can keep up.
“As banks face pressure from nonbanks, credit unions, technology companies and from overseas as well, I just think that we as regulators need to be cognizant of the winds they are facing on their journey,” FDIC Chairwoman Jelena McWilliams said at the Clearing House/Bank Policy Institute conference last week, according to the ABA.
