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Trying to reconcile compliance of a fintech challenger bank with the current regulatory environment is a bit like my breakfast encounter the first time I came up to meet my new team in New York City.
Some background on me - I have lived most of my life in the Dallas-Fort Worth area of Texas. I stayed in a hotel the night before and when I went down to breakfast, I noticed a huge bowl of guacamole, a common sight in my region. My first thought was “That’s a strange breakfast choice but I guess they like it here.” I instinctively look around for the chips and salsa (the appropriate accoutrements of guacamole) but don’t see any. Perplexed, I got some food, sat down, and stared at the bowl waiting for someone to bring back the chip bowl. The whole time I’m eating, I’m waiting and wondering what the problem is with the chip situation. I finish my meal and left to go back to my room, still puzzled. Getting on the elevator, I happen to glance over at a person holding their breakfast plate and that’s when I figure it out. They had put the “guacamole” on their toast – it was avocado spread. No chips required.
Just like me staring at the bowl, regulatory bodies are staring at fintech - something is instinctively familiar about it but doesn’t quite fit expectations.
The rules haven’t kept pace with the times and haven’t adapted to the new technology in several cases. A money transmission license in Wisconsin is called a “seller of checks”, which is wholly inaccurate for an MSB whose purpose is to move money electronically. Crypto (or virtual) currency compliance is more challenging because state regulatory agencies have less familiarity and varying opinions on how to regulate it. Wyoming has exempted virtual currencies from their money transmitter regulations, states like New York and Washington have defined licensing requirements, and others have created obstacles to make their reluctance known (you know who you are).
Challenger banks offer new and more efficient ways of doing what has been the traditional banks roles and can be financial champions to some. These app driven entities can help, according to the World Bank, the 1.7 billion people globally are un- or under banked with 1.14 billion of those having access to smartphones. General purpose reloadable (GPR) prepaid card use, which is a tool used by several fintech companies, is projected to reach $3.1 trillion by 2022.
Federal rules have their own set of challenges too and regulators also must be educated on how these new entities aren’t the same as traditional banks. The Consumer Financial Protection Bureau (CFPB) issued the Prepaid Debit Card Rule, effective on April 1, 2019. The rule comes with contractions. The rule says the fees must be disclosed in a specific chart format and “The consumer must be required to view the web page containing the electronic pre-acquisition disclosures before choosing to accept” In the comments on the rule, the CFPB also states that “Electronic disclosures must be provided in a manner which is reasonably expected to be accessible, accessible via Web browsers or mobile applications” Do I have to make a customer look at the fee chart or can I provide a link? When is a customer “acquired” on an app?
What should we do now? We educate them. We educate consumers. We keep having conversations with rule makers and regulators about the importance of these new technologies, how financial access is a human right, and why the US should update the laws.
And let’s keep our fingers crossed that they figure out sooner rather than later that the green stuff in the bowl is avocado spread for toast and not guacamole.