If history is a guide, the results of the US presidential election in November can dramatically shift the regulatory landscape regarding financial technology companies.
Between the Trump and Biden administrations, regulators have shown different risk appetites when it comes to connecting fintechs with banks. Granting fintechs bank charters is one clear difference.
While turning a fintech into a bank adds a source of complication to the safety and soundness of the banking system, regulators appointed by Donald Trump during his presidency were inclined to emphasize the benefits of promoting competition and serving the underbanked. They had been more experimental with developing special charters or issuing interpretive rules catering to fintechs and cryptocurrency companies' needs and actively approved fintechs' applications for charters and fintechs' acquisitions of banks, according to industry experts.
In comparison, current bank regulators tend to hold any bank charter applicants to the same standards under the existing regulatory framework.
"I do think this is an area where there's likely to be some change between the administrations. It's quite clear that there have been very few bank charters issued under the current administration," said Jonah Crane, a partner at advisory firm Klaros Group.
However, it remains to be seen if fintech interest in bank charters ramps up again. To a large extent, fintechs' previous zeal for a bank charter is now more rationalized. The proliferation of banking as a service makes it easier for many fintechs to capitalize on deposit and card products by partnering with a bank instead of being a bank.
"A lot of these fintechs have learned that buying a bank, being regulated is something for which they are woefully unprepared," said David Sandler, co-head of investment banking in the financial services group at Piper Sandler.
Who gets appointed at the agencies will also be a deciding factor, Crane said. In 2017, Joseph Otting was the comptroller of the currency appointed by then-President Trump. Otting has a background as a traditional community banker and did not seem to be very focused on fintech issues, Crane noted. However, during the tenure of Brian Brooks, appointed by Trump as an acting comptroller in 2020, fintechs were active in pursuing charters. And without precedent, three crypto companies were granted conditional approvals to be a national trust bank.
Innovation vs. consumer protection
If Trump were to be reelected, bank regulators appointed by his administration would likely develop policies or interpret laws to support fintechs' greater access to the banking system and loosen enforcement actions aimed at consumer protection, industry experts said.
"I think you're likely to see less stringent regulation or application of regulation," Sandler said. "And as a result, we're going to see innovation at a broader pace, but we're also going to see the byproduct, which are problems, at a broader pace."
In particular, regulators' approach to consumer protection would likely revert. While Democrats typically advocate for stronger government regulation and oversight to protect consumers and investors, Republicans tend to let the market play itself out with less regulatory intervention.
If Trump wins and the Republicans win both houses of Congress, there would likely be an all-out change in leadership at the banking regulatory agencies, said Todd Baker, a senior fellow at the Richard Paul Richman Center for Business, Law and Public Policy at Columbia Business School and Columbia Law School.
"That will be beneficial for the interest of traditional financial players but will also take the regulatory focus off of fintech. Consumer-focused enforcement has been a highlight of the Biden administration, and that will just basically stop," Baker said.
Credit Card Competition Act at stake
In payments, a possible Trump administration will suggest that the proposed law to cap interchange fees on credit card transactions via the Credit Card Competition Act will be tentative. The bill was reintroduced in 2023 by Sen. Dick Durbin (D-Ill).
"Historically, the Democrats have been more focused on capping interchange," said Moshe Katri, a managing director at Wedbush Securities. "If it's a Republican-led administration and Congress, it will be less likely to pass."
While Trump's running mate Sen. J.D. Vance (R-Ohio) is one of the co-sponsors of the bill, he has not been a vocal supporter, and Vance's staff has reportedly told lobbyists that he will not advocate for it, Capital Alpha Partners' policy analyst Ian Katz wrote in a research note, citing a Politico report.
Vice presidents usually are not very influential, and he may not choose to focus on "esoteric financial subjects on which he would stand in opposition to most Republicans," Katz wrote.
The crypto banking question
Regulators under the Trump administration also allowed banks to work with companies in such riskier segments as cryptocurrency. It effectively expanded activities in the established banking sector, said Adam Cohen, a partner at Skadden Arps Slate Meagher & Flom.
At the time, banks' engagement with crypto and blockchain were viewed as positive and necessary steps for US financial institutions to remain competitive worldwide, said Alston & Bird's Hanchey. The Biden administration has rolled back most, if not all, of these initiatives, rightly or wrongly, with the motivation to prioritize consumer protection and maintain the stability in banking, Hanchey said.
The Biden administration did give banks the liberty to explore digital assets in 2021 and 2022, which incubated crypto-friendly banks. But the market dynamics changed sharply amid the so-called crypto winter, leading to a more cautionary regulatory stance to guard banks from novel risks that may be contagious.
The crypto industry has alleged a concerted effort by the Biden administration, "operation choke point 2.0," to cut the crypto industry off from the banking sector. For banks, they should be wary of the opposite if it were to be a Trump administration again, Klaros Group's Crane said.
In January 2021, the Office of the Comptroller of the Currency (OCC) under then-acting Comptroller Brooks pushed through the fair access rule, prohibiting banks from rejecting classes of customers. In other words, banks were not allowed to decide not to work with businesses in a sector, whether it is crypto or gun manufacturing, Crane explained.
"And I think that makes banks quite nervous about their ability to manage their legal, compliance, regulatory and reputational risk," Crane said.
The possibility of reviving the fair access rule will depend on the individual appointed to lead the OCC, Skadden's Cohen said. Notably, OCC leadership can change more quickly than other federal agencies, partly due to the use of an acting position, he added.
"If there was a change in administration, one could imagine a fairly quick change in leadership there, and whoever holds that seat would determine the regulatory priorities of the agency, including whether or not they want to consider bringing back policies like fair access," Cohen said.