The mysterious battle raging over fintech, or non-bank banks

If it walks like a duck...  Here's a simple question most five year olds can answer: "What is a bank?"  It seems simple, but can you answer it?  Yes, it's pretty obvious if a company has the word "bank" in its name, but what about folks like PayPal and Square, and, and, and...?  Are they banks?  Does it matter? 

It turns out that it matters a lot — at least to quite a few government folks.  The problem is that in our modern world of online financial services — referred to as "fintech" — defining a bank has a special set of problems.  Mired in archaic notions of what constitutes banking, a fierce battle is being waged not only to define a bank, but to regulate all who dare look like any part of the historical image of a bank.

A few years ago, the comptroller of the currency was worried about the ever-expanding role that fintechs were assuming.  So, like all good regulators, these ones explored how to get at the companies leading the way — the "Special Purpose Banking Charter."  Essentially, it's a National Bank charter for entities that aren't really banks — eh, but sorta are.  Rather than requiring a laundry list of services be provided to be a bank, it requires only one from the list.

It was sold to the industry as a solution for nationwide companies like PayPal and Western Union to get one national license and be regulated by just one government agency, rather than by fifty individual state financial services departments.  Sounds good, but why should we be suspicious of a government agency that says it's here to help?  Exactly!

Right on cue, enter the New York State Department of Financial Services.  That agency went after the comptroller by promptly suing in federal court.  Its argument against a national charter system — other than the unstated one of collecting about $100 million last year in fees assessed on financial licensees in the Empire State — was essentially that it usurped states' rights.  You see, a national charter exempts institutions from state banking regulations like usury ceilings and predatory lending laws and the like, while substituting often more business-friendly "one size fits all" comptroller rules.

The case is complex.  It hinges on a pile of legal mumbo-jumbo, and it even drags in the National Bank Act, claiming that to be a bank, and thus to get a banking charter, an entity has to accept deposits.  Well, it turns out the court agreed with New York and ruled against the comptroller.  Now, as with all good government litigants, the case is on appeal.  Of course it is!  In the meantime, the comptroller has attempted to defend its position publicly by arguing that in the 19th century, most banks did not accept deposits, so that shouldn't be a requirement.  Note: In the 19th century, banks did accept slaves as property collateral for loans.  Perhaps the comptroller would have more success with an argument based in the internet age, or at least within the last 200 years!

If you are keeping score, it's time for another player on the field.  While New York and the comptroller are fighting it out in the courts, the Conference of State Bank Supervisors — a chummy club that has only fifty members comprising the bank commissioners from their respective states — released an agreement to jointly regulate fintech.  Their argument is that it accomplishes the comptroller's power-grab for a standardized national system of regulations to ease the burden on industry, while maintaining states' rights.  Wow!

In the meantime, a person can open a PayPal account, have his paycheck automatically deposited to it, receive "pass-thru" FDIC insurance on the balance, make withdrawals and purchases with a PayPal MasterCard, and transfer the money to pretty much anyone in the world.  And if he operates a business, he can also process credit and debit card transactions and even get a loan to tide himself over.  If it walks like a duck...

Kevin Cochrane is a former senior national banking executive and teaches business and economics at Colorado Mesa University.

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