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Fintechs Seek Answers on Charters, Open Banking, Crypto in 2020

Dec. 30, 2019, 10:46 AM

Financial technology companies notched a few policy wins in 2019, including regulatory approval to use alternative data in loan underwriting and much-needed clarity on loan interest rates in bank-fintech partnerships.

Many other top-line fintech industry concerns remain unaddressed heading into 2020. Facebook will continue to push for adoption and approval of its Libra cryptocurrency while a number of fintech companies hope to gain charter approvals that would give them a foothold in traditional banking. The Federal Reserve, meanwhile, hopes to join the ranks of real-time payment providers.

Below are the top issues to watch in the year ahead:

Fintech Chartering

2020 seems likely to be another “wait and see” year for fintech companies looking to win bank charters, even as several new applicants are expected to join the queue. San Francisco-based Square’s current application for federal deposit insurance, a key component of its plans to form an industrial bank in Utah, has been pending for more than a year at the Federal Deposit Insurance Corp.

Four other non-bank companies—AmeriNat, Interactive Bank, NelNet and Rakuten— are also seeking industrial loan company (ILC) charters in Utah or Nevada, as well as deposit insurance from the FDIC.

Varo, an online-only bank seeking a traditional national bank charter, is similarly in limbo as the FDIC considers its deposit insurance application. Varo received conditional approval for a bank charter from the Office of the Comptroller of the Currency in 2018.

A decision on Varo’s application is an important bellwether for the fate of fintech banking, said Jonah Crane, a fintech industry advisor and former Treasury Department official. “If Varo is not approved, there is little hope for more controversial ILC applications,” Crane said.

A green light on deposit insurance would indicate that regulators are willing to allow new competitors into the U.S. banking ecosystem, potentially sparking more charter applications from fintech firms. Or regulators could choose to stay on the sidelines, as the prospect of tech companies like Facebook and Google expanding into financial services draws continued skepticism from lawmakers and the banking industry.

What About Libra?

The fervor over Facebook’s bid to launch a global payments network backed by its own cryptocurrency has ebbed in recent months. But if the endeavor’s backers stick to their 2020 launch timeline, policymakers’ focus could return to the project.

More details are likely to emerge in the year ahead on the Libra project’s planned regulatory workings, such as whether the digital currency might be classified as a security, commodity, or something else, and how the group can meet anti-money laundering and know-your-customer requirements.

If the Libra project’s 21 members—drawn from the venture capital, tech, and non-profit sectors—make significant progress launching a currency, it could spur a number of countries to move forward with their own sovereign digital currencies.

Payments Evolution

The Federal Reserve approved a plan in August to launch a real-time payments system by 2024. But the Fed’s high-level plan was critiqued for lacking details on network architecture, fees, and other details necessary to understanding the scope of work ahead.

The Fed is “up against the ropes right now” given the short time frame it has to launch the system, said Jackson Mueller, associate director for the Milken Institute Center for Financial Markets.

Expect the central bank in 2020 to start working out the specifics on network infrastructure and other details necessary to launch a competitor to the real-time payments network already operated by The Clearing House, a consortium of the largest U.S. banks.

Mueller said that concerns remain about costs and the pricing of the FedNow system for participating banks, the status of an additional settlement window, and how the central bank’s network would work with The Clearing House’s system to process payments.

“I would imagine that Fed officials will be pressed further by lawmakers,” he said.

Open Banking

The success of the fintech app industry depends upon open access to consumer financial data held by banks and others. The lack of regularity clarity about open banking has allowed both financial institutions and data aggregators to point the finger at the other side when consumers get locked out of their favorite apps, such as PayPal’s peer-to-peer payments app Venmo.

While some of the largest banks continue to sign data sharing agreements with aggregators, there’s still broad disagreement over security standards for how consumer bank account information should be accessed.

Banks wants consumers to understand exactly how their account data is being accessed and stored by third-party apps, while fintechs and data aggregators would like policymakers to add more heft to the notion that consumers have a right to control and access their financial data.

The Consumer Financial Protection Bureau hasn’t signaled whether it will revise its principles for open banking in 2020. Both sides of the dispute may become more active in trying to make the public aware of the issue if they continue to be at loggerheads. A policy debate around the subject could resonate with broader federal and state efforts to shore up consumer data privacy rights as well.

Early Wage Access

One of the fastest growing sectors of the fintech industry bridges the world of payroll and finance. Several companies have emerged with services that provide workers immediate access to wages as they’re earned, rather than waiting for the end of the customary two-week pay cycle.

Supporters view such startups as less costly alternatives to high-interest payday loans, but some consumer advocates have raised concerns that the new products bear some similar risks.

A California bill to put a more defined regulatory structure around the early wage industry stalled in 2019, amid debate over whether the pay advance products should be categorized as loans. California’s legislature may take the issue up again in the next session, which begins Jan. 6.

Meanwhile, New York and more than 10 other states continue to investigate the industry’s practices. The New York Department of Financial Services announced a probe into early wage access providers in August, saying some firms appear to be collecting unlawful interest rates under the the guise of “tips” or monthly membership fees for their services. The results of that investigation, and possibly policy recommendations, could follow in 2020.

Other states are likely to see how policy for the growing industry shapes up in California and New York before embarking on their own regulatory efforts.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com

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