States gang up to kill US fintech charter and offer alternative 'Vision 2020'

Neil Ainger, Writer at
Gary Hershorn | Getty Images

John Ryan, president of the Conference of State Bank Supervisors (CSBS), has come out in support of the New York banking regulator's lawsuit filed on Friday against the federal OCC. He called its plans to offer special purpose charters to financial technology (fintech) firms, allowing them to compete with banks nationwide, "unlawful" and "harmful".

"CSBS strongly supports the lawsuit filed by the New York Department of Financial Services against the Office of the Comptroller of the Currency (OCC)," said Ryan in a forcefully worded statement.

"The OCC does not have the authority to issue federal charters to non-banks, and its unlawful attempt to do so will harm markets, innovation and consumers."

Even before New York joined the federal versus state stand-off, the OCC's federal fintech charter was already under threat from CSBS' own lawsuit filed in Washington last month and the departure of its champion Thomas Curry on 5 May at the behest of President Donald Trump.

The turf war over who gets to supervise fintechs is escalating with CSBS's rival 'Vision 2020' regulatory plan appearing to gain ground against the federal fintech charter.

Acting OCC head Keith Noreika, is not known to be a strong supporter of the Special Purpose National Bank (SPNB) fintech charter, which was previously championed by Curry. The OCC is an independent agency within the Treasury and is responsible for overseeing the nation's biggest banks, including Bank of America, JPMorgan and Wells Fargo.

Other countries have nationwide fintech policies and support groups such as the Hong Kong Securities and Futures Commission's (SFC) Fintech Contact Point, unveiled last year, and the Financial Conduct Authority's (FCA) Innovation Hub in the U.K. But the drive to introduce similar initiatives in the U.S. have been stymied by arguments over whether federal or state governments are best placed to encourage fintech innovation, while still providing effective consumer protection.

Ryan called the OCC's SPNB plan, "an unauthorized expansion of its authority" in a statement released late on Friday that went on to claim the federal fintech charter "threatens state sovereignty".

"State regulators already supervise a vibrant financial services marketplace that includes non-banks and banks," he said. "Where there are opportunities to further modernize state regulation of financial services providers, including fintechs, state regulators are committed to doing so through our recently launched 'Vision 2020' initiative."

Vision 2020
The state-backed 'Vision 2020' plan released by CSBS last week aims to make the U.S. state system of financial regulation pre-eminent, while still recognizing standards that can be applied across state lines to enable nationwide fintech innovation.

According to CSBS its rival plan, outlined in a statement released on 10 May, "will create consistent and data-driven solutions" that support innovation "by minimizing friction in the state regulatory system."

By 2020, state regulators plan to adopt an integrated fintech licensing and supervisory system across 50 States that will transform the interaction between industry, regulators and consumers.

"We are committed to a multi-state experience that is as seamless as possible," said CSBS chair and board member, Charles Cooper, in a statement. He is also the Texas Commissioner of Banking.

"Through Vision 2020, state regulators will transform the licensing process, harmonize supervision, engage fintech companies, and assist state banking departments," he said, while adding he wants to, "make it easier for banks to provide services to non-banks" and "make supervision more efficient for third parties."

The key actions under the Vision 2020 plan are to:

  • Redesign the Nationwide Multistate Licensing System (NMLS): CSBS will redesign and expand the NMLS technology stack, so that the common platform for state non-bank regulation is able to use data and analytics more effectively to provide an automated licensing process for new applicants. The NMLS overhaul should streamline multi-state regulation and licensing of fintechs, enabling state resources to be focused on consumer protection and higher-risk cases. Transparency is promised via the NMLS Consumer Access platform. This was viewed 3.7 million times last year.
  • Harmonize multi-state supervision: CSBS has created working groups to establish model approaches to key aspects of non-bank supervision. The groups will work to enhance uniformity in examinations, facilitate best practices, and capture and report non-bank violations at the national level. To further streamline the process, CSBS will create a common technology platform for state examinations.

  • Form an industry advisory panel: CSBS will establish a fintech industry advisory panel to identify points of friction in licensing and multi-state regulation, and provide feedback to state efforts to modernize regulatory regimes. The panel will focus on lending and money transmission, and discuss a wide range of solutions. Individual state regulators have already been engaging the fintech industry in formal dialogue.

  • Assist state banking departments: CSBS education programs will try to make state departments more effective in supervising banks and non-banks. Updated standards and analytics will help U.S. States determine where new expertise is most needed, identify and address weaknesses, update supervisory processes, and compare themselves to others in order to learn from leading state departments. The higher standards will be validated through an enhanced CSBS accreditation program.
  • Make it easier for banks to provide services to non-banks: CSBS is stepping up efforts to address banks' 'de-risking' concerns about dealing with fintechs. At the moment many incumbent banks are cautious about doing business with non-banks due to regulatory uncertainty. CSBS will seek to allay these fears by increasing industry awareness about the strong regulatory regimes that it says already exist for compliance with laws about money laundering, cybersecurity, the Bank Secrecy Act, and so on.

  • Make supervision more efficient for third parties: Banks of all sizes work with a variety of third-party service providers, including fintech companies. CSBS supports federal legislation that would allow state and federal regulators to better coordinate supervision of bank third-party service providers. In other words, they recognize there is a role for federal legislation, but CSBS want to be the ones enforcing and interpreting it.

Follow CNBC International on Twitter and Facebook.