Although much remains opaque, the broad outlines of the Biden Administration’s regulatory handling of fintech are starting to come into view—and so far, it’s less of a dramatic departure from the Trump Administration’s approach than might have been predicted. The strong impression from these early rumblings is that the regulatory approach is less determined by ideology, and more by the fact regulators are genuinely stumped about how to handle the difficult policy issues that fintech thrusts upon them.
First, some background. As FIN has noted in a couple of recent posts, the question of what companies get to call themselves “banks” keeps coming up. Under the Trump appointees—there were three heads of the Office of the Comptroller of the Currency (OCC) between 2017 and early 2021, two of them “acting” comptrollers—the agency was fairly keen to experiment with granting limited bank charters to fintech startups that are not full-fledged banks. Earlier this year, before Biden could get an appointee into OCC, three fintech companies were granted limited OCC charters: Paxos, which is building a set of blockchain-based financial services; Protego Trust, which openly calls itself a bank focused on digital assets; and Anchorage Digital, also a digital assets bank. Many critics sternly opposed this move, charging that it could open the door for predatory lending and that, at a minimum, OCC lacks the resources and expertise to fully regulate these cutting-edge technologies.
Biden finally has someone in charge of OCC, even if only “acting”: Michael Hsu, a longtime government financial technocrat. In his prepared testimony for a House Financial Services Committee hearing this week, Hsu tried to strike a balance:
[S]ome are concerned that providing charters to fintechs will convey the benefits of banking without its responsibilities. Others are concerned that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators. I share both of these concerns. Denying a charter will not make the problem go away, just as granting a charter will not automatically make a fintech safe, sound, and fair. I will expect any fintechs that the OCC charters to address the financial needs of consumers and businesses in a fair and equitable manner and support the important goal of promoting the availability of credit. Recognizing the OCC’s unique authority to grant charters, we must find a way to consider how fintechs and payments platforms fit into the banking system, and we must do it in coordination with the FDIC, Federal Reserve, and the states.
While that’s reasonable as far as it goes, there is ample evidence suggesting that companies who get the OCC charter will use it to trumpet to the world that they are “safe, sound, and fair” whether they are or they aren’t. On the Paxos Web site, for example, the company boasts of its “Cutting-edge technology with bank-level oversight so you can trade, settle and manage assets with confidence.” Paxos, by the way, last month announced a staggering $300 million Series D fundraising round, valuing the company at $2.4 billion; PayPal Ventures is one of its big investors.
Once the hearing got underway, the slippery slope of granting fintech charters became evident. Representative Ted Budd (R-NC) asked Hsu his opinion about blockchain technology which, the Congressman said, “offers the possibility of significantly reducing the cost of mortgage origination and consumer lending.” Budd’s interest in the matter is not strictly intellectual; he referred specifically to the North Carolina-based startup Figure, which has built a blockchain-based platform for different types of consumer loans and has applied for a bank charter.
As might be expected, Hsu dodged the question, saying it required further study. Reading the available signals, it seems likely that Figure will get all or most of what it wants from regulators. Founded by SoFi cofounder Mike Cagney, Figure has created some genuinely innovative technology that could have widespread consumer benefit. Earlier this month, the Securities and Exchange Commission approved Figure as a broker-dealer, allowed to run an alternative trading system of digital securities. Whether one applauds this outcome or not, the point is it seems identical to what would have happened had Trump been re-elected.
That’s less the case with the so-called true lender rule. In October, to howls of criticism, the OCC approved a rule making it generally easier for banks to partner with non-banks to make loans. The agency said it was trying to establish an easily understood, uniform standard; activists like the Center for Responsible Lending argued that this would allow lenders to perform a digital end-run around interest-rate cap laws in many states that were designed to curb predatory lending. In a highly unusual move, the Senate on May 11 held a floor vote and overturned the OCC rule 52-47; the vote was notable because three Republican Senators including Marco Rubio joined the Biden Administration in arguing that the rule should be scrapped.
To at least one Republican in this week’s House hearing, this reversal looks like chaos. “What the hell’s going on at the OCC?” asked Bill Huizenga of Michigan, smiling as he said it. “Is the change in position suggesting that this is a political decision or is the decision based on data and what’s right for consumers?”
Again, Hsu declined to give a straight answer, saying his agency pulled back after the Senate vote and will now await to see if the House takes any action on the rule. It was easy to sympathize with Hsu feeling a bit ambushed. “I just got here,” Hsu told the committee, “this is my tenth day.” And few would fault the Biden White House for making vaccines and the broader economy a higher priority than OCC bank charters. Still, Hsu is right that these issues are not going away, and putting off clear leadership decisions is not going to make tackling them any easier.
This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.