The U.S. Federal Reserve is wary of giving fintech firms such as OnDeck Capital Inc or Kabbage Inc access to the country's financial infrastructure, putting the central bank at odds with other regulators looking to bring them into the fold.
The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are exploring granting federal bank-like licenses to tech-driven firms that offer financial services such as money transfers and lending. The plan is part of a broader push by President Donald Trump's administration to boost small businesses and promote job growth.
Federal licenses would allow fintech firms which currently operate under a patchwork of state rules to reduce their regulatory costs and expand into new regions and products. However, fintech firms say they are reluctant to invest heavily in nationwide expansion without access to the payment systems, settlement services, and other Fed tools and the central bank has yet to decide whether to let those lightly-regulated players in.
Many Fed officials fear these firms lack robust risk-management controls and consumer protections that banks have in place.
"They probably do want access to the payments system, but they don't want the regulation that would come with that access. I am concerned that fintech will be the source of the next crisis," said St. Louis Fed President James Bullard in November.
Companies such as PayPal and LendingClub Corp have attracted millions of customers by offering greater convenience or better prices than traditional banks. The OCC and the FDIC say such firms can broaden access to financial services because their low-cost models allow them to reach poorly served areas and offer small loans that are uneconomical for bigger banks.
But some fintech firms say they would be reluctant to invest the time and resources in applying for and maintaining the new OCC fintech license unless the Fed gives them access to the payment system. So, they will not have to depend on banks to route money for them. Direct access would eliminate bank routing fees, a top-five operating cost for many fintech firms and would allow them to compete more effectively with traditional lenders.
"It's hard to know if it's worthwhile applying if you don't know what access you'd have to the Fed services. It would be helpful for the Fed to clarify," said Jason Oxman, CEO of the Electronic Transactions Association which represents fintechs and banks.
Banks are pushing back, arguing fintech firms should access the Fed system only if they comply with the same rules banks face.
"You don't want a new charter that skirts existing rules and regulations and call that innovation," said Paul Merski, executive vice president for the Independent Community Bankers of America.