Acting Comptroller of the Currency Michael Hsu is calling on Congress to mandate increased supervision of nonbank players seeking shortcuts into banking through novel charters or bank partnerships by creating a federal money transmitter licensing regime.
The supervision of digital payment companies currently relies on a patchwork of varying state-by-state standards, Hsu noted in a speech on Feb. 21. A nonbank player that wants to process payments nationally has to either apply for various state money transmitter licenses or shop around for a "bank-lite kind of charter," which Hsu called a contortion of the national bank charter.
Those bank-lite charters have attracted various fintechs that seek such benefits as cheaper funding and access to a Federal Reserve master account but in a way that they could avoid burdens like heightened regulatory requirements and supervisory expectations, Hsu noted. It is a clear indication of regulatory gaps, and it can be tackled by a federal supervision framework, he said.
"Rather than try to bend other things to fill the gap, let's just fill the gap," Hsu said in the Q&A session of an event at Vanderbilt University.
Some state chartering authorities have accommodated novel activities like cryptocurrency by creating new charter categories, such as the Special Purpose Depository Institution charter in Wyoming or the BitLicense in New York. Conversely, the Office of the Comptroller of the Currency (OCC) will not lower its standards and create a special regime to entice new entrants or cater to novel activities, Hsu said.
"As Acting Comptroller, my approach to national bank charters has been clear: We don't chase," Hsu said in prepared remarks.
In addition, many fintech companies have been working with sponsor banks to provide deposit-like products. Most of those types of offerings eventually lead to a bank partner supervised by a federal regulator, and some of the nonbank players are supervised at the federal level by the Consumer Financial Protection Bureau or bank regulators. However, a federal supervisory approach could improve regulatory consistency, and "would provide a clearer path for innovation and growth in payments with less risk of blurring and to financial stability," Hsu said.
Hsu's comments on enhancing supervision on the fintech side of the equation came as federal regulators, including the OCC, have heightened scrutiny into banking as a service (BaaS) and held banks accountable for omissions in regulatory compliance in BaaS. The OCC expects banks to prudently manage credit, liquidity, lending, compliance and operational risks in third-party arrangements in order to mitigate risks posed by nonbanks to the safety and soundness of the banking system, Hsu said.
Hsu also warned that agencies also have other legal tools in regulating innovative deposit-like products, notably the Glass-Steagall Act administered by the Department of Justice, but it generally has not been used in practice.