Banks & Credit Unions Agree: Regulate Fintechs More

Banks and credit unions agreed on a main theme of a House hearing Wednesday: Some fintechs offering bank-like services need more federal regulation to ensure consumers are protected and remove the unfair competitive advantages from their scant 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 speaker among the five invited witnesses, but both CUNA and NAFCU sent written comments.

The Subcommittee on Consumer Protection and Financial Institutions, which called the hearing, laid out some facts on issues it wanted addressed:

• The total number of federally-insured banks has fallen from 17,811 in 1984 to 4,951 as of June 30, while federally-insured credit unions fell from about 15,000 in 2004 to 5,029 as of June 30.
• U.S. bank branches fell from a peak of 85,566 in 2009 to 74,935 in 2020, with the four largest banks cutting over 3,600 branches in that time. The number of credit union branches has risen slightly from 19,247 in 2004 to 21,566 in December 2020. (NCUA data shows the number of credit union branches fell by 551 in 2020, but has risen by 73 this year, standing at 21,639 in June.)
• The subcommittee also cited the scant 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 chartered five since 2019.

U.S. Rep. Ed Perlmutter (D-Colo.), chair of the subcommittee, asked Reuter about the barriers to entry for de novo financial institutions.

Reuter mentioned the costs of regulation, but emphasized 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 risen from $53 million in 2017 to more than $110 million this year.

He noted a study that found the minimum asset size for an efficient bank had risen from $350 million in 2000 to $3.2 billion by 2018. “When you think of someone starting a one- or two-branch de novo bank, those barriers to entry are significant.”

But Reuter’s main argument was the threat of fintechs that take steps 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 special-purpose national bank charters that would aim to provide payment system access to companies but would not be subject to the same regulations as banks,” Reuter said.

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

CUNA President/CEO Jim Nussle made a similar argument about the need for greater regulation of fintechs that can exploit consumers in a letter he sent to the subcommittee.

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

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

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