Bank or No Bank, Fintech Must Be Regulated

The media makes much of a brewing conflict between the fintech sector and the banking industry, citing, for example, a marketplace lending chief executive who says he wants to "kill banks." Drama makes for better headlines.

Conflict isn't the right word for the innovations taking place in the way customers and businesses handle their money. Instead, along with these changes come remarkable creativity and the seeds of cooperation.

Yet some issues regarding how banks and fintech firms operate cohesively need to be addressed. Principally, consumers still face potential confusion when dealing with two sectors that have differing regulatory regimes.

As enthusiastic participants in an economy that uniquely and dynamically supports innovation, bankers have always welcomed creative new ways to serve their customers. From interactive teller machines to remote deposit capture, banks have been at the forefront of convenience. Today, innovation — both from within and beyond the bank charter — is making it easier for the unbanked to access financial services, for entrepreneurs to get loans and for individuals to send money or make payments.

It's important to realize that banks are fully engaged in these efforts. Some banks have created innovation labs to develop new apps and technologies. And it's not just big banks that are doing this. Eastern Bank, a nearly 200-year-old, $9.5 billion-asset mutual institution in Boston, has its own lab to incubate promising new solutions and to partner with fintech companies, for example.

Innovation from outside banking triggers innovation inside banks. Firms are leveraging technologies like social networks and drawing on new ideas and talent from outside the industry. Indeed, the convergence of banking and technology requires skills that may need to come from outside our industry.

Ultimately, many of these innovations will make our customers' financial lives better. Banks and nonbanks alike share the same goals: make it easier for people to save, spend and borrow money.

But this is where the confusion lies. For customers, a loan is a loan and a payment is a payment. They don't care whether a bank provides the service. Because of some regulatory gaps and uncertainty, they should. For example — as Slate reported last year — customers of the popular peer-to-peer payment company Venmo have found themselves subject to lapses in data security and transparency that a bank regulator would never allow.

The features may be the same regardless of whether the company has a charter or not, but the confusion about who regulates whom — and in what ways — is leading to gaps in consumer protection. Will privacy be respected? Will data be protected? Are fintech startups cybersecurity ready? Customers need clarity. Many nonbank fintech firms also crave a clearer regulatory environment so they can show investors that their growth won't be erased if the regulatory environment sees sudden shifts.

U.K. regulators have offered a promising new approach which, if emulated here, could address some of these consumer protection shortcomings. Last month they created a bank startup unit that reaches out to fintech firms and other financial startups. The regulators help nonbanks think strategically about whether they should become banks or not. Through Project Innovate, the regulators offer a regulatory sandbox to road-test new ideas and to make sure firms understand the rules they are subject to, regardless of charter.

With tens of billions in investor capital pouring into U.S. fintech but a nearly nonexistent trickle of new bank charters, our regulators can learn much from Britain about how to stimulate new ideas from outside banking and to integrate them under a common set of regulatory expectations.

Whatever regulatory environment emerges to shape fintech must focus on activity, not charter type. Payments should be subject to a consistent supervisory treatment, regardless of what entity handles them — and likewise for loans, deposits and any other financial product. Bank compliance with consumer protection laws is enhanced by the supervisory relationship with regulators, which nonbanks — even though subject to many of the same laws — do not have. Without regular examinations, nonbanks that have consumer protection lapses are usually dealt with only after some harm has already occurred.

When we address regulatory confusion, we will see more robust cooperation. Banks are eager to work with fintech providers. Many already are. For example, some banks license person-to-person payment platforms. Other banks refer borrowers to online marketplace lenders, collaborate in originating loans or purchase completed loans. Fintech firms can keep up with the latest technological advances and inject new ideas; banks can continue to provide core competencies in compliance, risk management, funding, trust and cybersecurity.

All the hype about a fintech-bank battle may generate page views, but the reality is more complex. The two industries aren't interested in mutual destruction. Both are looking for regulatory certainty and healthy cooperation — all to the good of our customers.

Rob Nichols is president and chief executive of the American Bankers Association.