Weekly Fintech Focus
- CSBS launches a streamlined state exam system for fintech companies and other nonbanks.
- FinCEN announces a new Digital Innovation Officer with experience in cryptocurrency.
- Senators seek answers from fintech lenders regarding disparate impact claims related to potential proxies for protected classes used in the lenders’ underwriting processes.
- ESMA evaluates the role of BigTech in financial services.
- Visa gives Coinbase principal status.
- FDIC publishes application procedures for non-bank and non-traditional community banks.
- Varo Money becomes first fintech to receive approval for a full bank charter from the FDIC.
- LendingClub buys Radius Bank for $185 million.
- The NYDFS will host a Financial Innovation & Inclusion Symposium on April 2 in NYC.
- The Brazilian Central Bank announces launch of a “Near-Instant” payment system.
CSBS Launches Fintech and Nonbank Exam Platform
On February 19, 2020, the Conference of State Bank Supervisors (CSBS) announced the launch of an expansion to its State Examination System platform. The expansion provides the ability to streamline examination efforts to regulators that oversee fintech and nonbank financial institutions. Under this new platform, states will be able to conduct multistate exams with the goal of an eventual “one company, one exam” process in the future.
State examination techniques, standards, processes, and procedures are quite varied across the states, with regulated entities responding to exams in many different formats despite large similarities in the types of information that must be provided to the states. The new CSBS platform will help reduce unnecessary work in providing responses to these exams. State regulators will come onboard to the new platform over time, but at launch, at least 30 states are signed on to use the new platform.
FinCEN Announces New Digital Innovation Officer
On February 21, 2020, the Financial Crimes Enforcement Network (FinCEN) announced that Michael Mosier would be FinCEN’s new Deputy Director and Digital Innovation Officer to work with emerging technology companies and other financial innovations to ensure compliance with FinCEN’s mandates. Mr. Mosier comes to FinCEN after working as the Chief Technical Officer for Chainalysis, a company that provides cryptocurrency analytics, compliance, and investigations services. Mr. Mosier has also worked as the Associate Director of the Office of Foreign Assets Control (OFAC) and served as Deputy Chief in the Department of Justice’s Money Laundering and Asset Recovery Section, in addition to other government roles involving national security, money laundering, and organized crime.
Dem Senators Seek Answers on Disparate Impact Claims Against Fintech Lenders
On February 13, 2020, Democratic Senators of the Senate Banking Committee, including Ranking Member Sherrod Brown (D-Ohio), Elizabeth Warren (D-Mass.), Bob Menendez (D-N.J.), Cory Booker (D-N.J.), and Kamala Harris (D-Calif.), reacted to a recent report by the Student Borrower Protection Center by sending letters to Upstart, a fintech lender that develops algorithms to offer loans based on nontraditional credit underwriting factors, and to four other student lenders and two service providers, seeking answers about how the underwriting process uses education and school affiliation.
The report by the Student Borrower Protection Center announced that the organization had found evidence that fintech lenders who consider the school the student borrower attends when making credit decisions could result in a disparate impact on minority borrowers by giving higher interest rates to students attending historically black colleges and universities and Hispanic-serving institutions.
The Senators’ letters require responses by February 28, 2020. The inquiries in the letters include questions about how the companies test for disparate impact and what the results of those tests show. The letters also ask about the company’s underwriting models, including descriptions of how certain information about the applicants is defined and used. For example, when Upstart used filters and categories that make credit decisions based on “educational characteristics” or “economic outcomes,” the letters ask for explanations about how those characteristics are formulated and then factored into the underwriting decisions. The letters then ask for explanations and analysis of the impact these categories have on credit decisions for similarly situated borrowers across demographic groups. For the other recipients of letters that provide lending services, the Senators’ are seeking information more generally about loan approval and denial rates, and interest rate differences related to credit determinations made by considering educational differences.
ESMA Issues Report on BigTech in Financial Services
The European Union’s securities regulator, European Securities and Market Authority (ESMA), recently published a short report that focused on the benefits and risks posed by BigTech’s involvement in the provision of financial services. The report concludes that markets under ESMA’s remit currently face high risk due to high asset valuations, weakening economic growth prospects, and continuing geopolitical uncertainty. Other risks, such as credit risks and consumer risks, are also high due to the weakening economic outlook and continuing geopolitical risks.
In addition to these risks, the report focuses on BigTech companies involved in financial services. BigTech provides benefits and raises risks to consumers and to the market as a whole. The report notes that “ESMA takes a balanced approach to innovation, working to safeguard against the risks associated with innovations without impeding the benefits they may bring. While BigTechs may offer a range of financial services in different ways, and the market continues to evolve, it is possible to identify several benefits and risks and the broad implications these can have for ESMA’s balanced approach to innovation.”
The report lists a set of benefits and risk of BigTech involvement in financial services:
- Reduced costs
- Improved financial inclusion
- Greater diversification of household investments
- Greater transparency
- BigTechs are often outside the existing regulatory sphere, although they may fall under existing regimes for specific activities.
- No immediate concern about financial stability caused by BigTechs, but a structural issue could arise through the interconnection between financial markets and the services provided by BigTechs, including cloud services, data analytics, and credit provision.
- Scale of BigTechs could affect market structure through market dominance by BigTechs through leveraging resources, data, and technology infrastructure.
- Greater market concentration could eventually impose greater costs on consumers.
- Market concentration could create a limited set of financial gatekeepers that could risk the financial exclusion of certain segments of the population.
- BigTech’s involvement in finance could make them a higher risk target for cyberattacks.
- BigTechs have been criticized in the past for their treatment of sensitive customer information.
Coinbase Given Principal Status With Visa
In an announcement on Wednesday, Coinbase shared that it had been approved as a Visa principal member, noting that it would be the first “pure-play crypto company” approved in such capacity. Coinbase launched the “Coinbase Card” with Visa in 2019, allowing holders of the card to spend cryptocurrency in a manner similar to spending money in a bank account.
Visa has three types of membership: principal, associate, and participant members. Per the Federal Financial Institutions Examination Council’s (FFIEC) website, principal status gives a member the power to “solicit cardholders and issue cards, solicit and sign merchants, and sponsor other financial institutions for membership in the company.” These are generally the same responsibilities that an issuing bank would have under the card rules.
Through sponsorship, a principal member can authorize an entity as an associate member. Visa provides its principal members with a Bank Identifying Number (BIN) and an Acquiring Identifier, to use and engage with the service. While a principal member receives both on its own, an associate member does not. An associate member can only access the service by either licensing both a BIN and an Acquiring Identifier with a principal member as a sponsor or using the BIN and Acquiring Identifier of the principal member sponsoring it.
The Visa Core Rules are available here.
The Coinbase announcement is available here.
A Forbes article discussing this development, and its implications, is available here.
FDIC Issues Procedures for Applications for Non-Bank and Non-Traditional Community Banks
The Federal Deposit Insurance Corporation (FDIC) announced it released a Supplement to its Deposit Insurance Application Procedures Manual. The Supplement addresses issues relevant to non-bank and non-traditional community bank applications for deposit insurance. Specifically, the Supplement provides clarity on pre-filing activities, the application process generally, and pre-opening efforts. Additionally, and in response to industry feedback, the FDIC changed its prior approval requirement for changes to business plans to simply requiring prior notice.
Varo Money Receives Approval of its Federal Deposit Insurance Application
Varo Money, a mobile-only banking services company, received approval of its federal deposit insurance application from the FDIC. The FDIC’s approval marks a major step for Varo Money, and fintech companies in general, as Varo Money may become the first pure fintech company to receive a full-service, FDIC-insured national bank charter.
Previously in 2018, the Office of the Comptroller of the Currency (OCC) granted a preliminary conditional approval of its bank charter application. Among other things, the approval was conditioned on Federal Reserve membership and obtaining deposit insurance from the FDIC. The OCC noted that final approval would not be granted until all conditions were met.
This milestone puts Varo Money one step closer toward obtaining a national bank charter, which would allow Varo Money to operate independent from its banking partners when offering online banking services.
LendingClub Buys Radius Bank for $185 million
LendingClub announced its purchase of Radius Bank for $185 million in cash and stock. LendingClub appears to be the first pure fintech company to purchase a bank, and thereby avoided having to apply for a national bank charter.
The deal is expected to reduce LendingClub’s warehouse lines and generate more recurring net interest income. Among other things, LendingClub noted benefits to include its ability to offer a source of low-cost, stable funding that will enhance its resiliency during downturns and increase the trajectory of its earnings.
NYDFS Financial Innovation and Inclusion Symposium on April 2
The New York Department of Financial Services (NYDFS) announced the first symposium on financial innovation and inclusion during New York Fintech Week. The symposium will bring together regulators and stakeholders from both within the United States and internationally to discuss opportunities for innovation and inclusion, while mitigating risk.
The event will be held in Midtown Manhattan on April 2, 2020. See here for details.
Brazilian Central Bank to Launch “Near-Instant” Payment System
The Central Bank of Brazil will launch a “near-instant” payment system in November, referred to as PIX. Financial and payment institutions licensed by the Central Bank will be required to offer the platform to their customers if they maintain over 500,000 active customer accounts. The platform will be available “24/7/365” for immediate funds transfers, and customers may initiate these transfers using a QR code or submitting other identifying information, such as a cell phone number or an email address.
The creation of PIX appears to be, in part, related to the Central Bank’s need to compete with cryptocurrencies, given their increase in popularity. Roberto Campos Neto, the Central Bank’s President, stated that “if we think about what has happened in terms of the creation of bitcoins, cryptocurrencies and other encrypted assets, [creating the payment system] comes from the need to have an instrument with such characteristics.” The press release announcing PIX goes on to state that “[i]n line with the ongoing technological revolution in the banking industry, PIX will encourage digitization of payments and enhance financial inclusion.”
According to the press release announcing the payment system, Brazilian taxpayers will be able to use PIX to pay federal taxes at the November launch, with plans to expand the capabilities of the system in the future so as to enable customers to collect other government payments, such as income tax refunds, social benefits, and grants.
A story by Coindesk discussing the implications of the PIX platform in Brazil is available here.
The press release announcing the platform is available here.