Why are Amazon and PayPal meeting with banking regulators?
WASHINGTON – Tech giants like Google, Amazon, Facebook and Apple are showing growing interest in engaging with federal banking regulators, a move that highlights Silicon Valley’s growing involvement in financial services.
In recent years, these companies have formed a lobby group, Financial Innovation Now, which provides advice on a variety of hot topics. But some companies also meet individually with government agencies.
For example, Amazon lobbyists met with the Office of the Comptroller of the Currency starting in the second quarter of 2016, and again this year to discuss “issues with mobile payments and payment processing, financial innovation and technology, ”according to publicly available information. lobbying disclosures.
PayPal, meanwhile, met with OCC officials in the second, third and fourth quarters of last year to discuss “mobile payment innovation” issues related to underserved customers and remittances. and money transfers, according to his information.
Amazon, PayPal and OCC have all declined to comment on the topic of their meetings.
Although sources have suggested the companies weren’t there to necessarily talk about OCC’s fintech charter, but rather more immediate issues in the world of payments and finance, observers said it didn’t. no doubt that tech companies would eventually move in that direction.
“People are kicking the tires,” said Lawrence Kaplan, bank attorney at Paul Hastings. “People are asking questions: what does this imply? Can you update us if we want to pull the trigger? “
When the OCC first announced its Responsible Innovation Initiative, which resulted in the creation of a nationwide charter specifically designed for FinTech companies, it met with large swathes of the financial sector, including Emerging FinTech companies primarily engaged in the financial space and large tech companies.
The big tech companies are “really interested in the intermediation part, where you have access to all this data,” said Paul Nash, former senior deputy controller and chief of staff to controller Thomas Curry, who began discussing the possibility of ‘an early fintech charter. Last year. “Everyone thinks about it. ”
At the very least, their engagement with regulators shows just how increasingly involved the tech giants are in financial services. Big tech companies are already engaged in payment processing in one way or another. And they have increasingly started offering various forms of lending, including through Apple’s installment loans for iPhone purchases and Amazon’s small business loans, which nearly doubled in volume last year. .
Ultimately, a banking charter could be a timely investment – an investment some may already be valuing, experts said.
“Financial services companies have shown a lot of interest in technology companies and financial technology companies,” said Kevin Petrasic, partner at White & Case. “Some tech companies are now looking in the other direction.”
A banking charter could offer tech companies a long list of advantages over their competitors. On the one hand, it would give them access to the federal payment system, thus reducing their need for banking partnerships, giving them more ownership over their data and minimizing interchange fees.
It would also allow them to directly issue credit cards, prepaid cards and debit cards. And that would give them the ability to expand to various types of loans while operating under a single regulatory regime, avoiding usury rates and state-by-state licensing requirements.
If tech companies go straight into banking, they could capitalize on their direct relationship with millions of customers and huge datasets that could help them create sophisticated financial models.
“It’s safe to say that if you’re dealing with cash right now and have a large captive consumer base, turning into a full-service national bank may be a desirable thing for some,” said Pratin Vallabhaneni. , partner at AKPS.
It’s a strategy already adopted by Square, a payment processor seeking an industrial loan company charter in Utah to expand its small business loans. The company has developed sophisticated origination models based on the accumulated data of more than 2 million small businesses for which it processes payments.
Of course, there are also plenty of reasons that tech companies may want to steer clear of a banking charter. On the one hand, the separation of banking and commerce remains an important legal and philosophical obstacle.
The principle runs deep in banking law, and challenging it would be a difficult undertaking that may require action by Congress.
When asked if a company like Amazon should be allowed a banking charter, the former chairman of Federal Deposit Insurance Corp. William Isaac, who spoke at an online lending conference on the need to welcome new players into the banking system on Monday, hesitated.
“It’s a tough decision we’ll have to make someday,” said Isaac. But this “could have a profound effect on the structure of the financial sector in the United States.”
But the decision could come sooner than expected. Business firms already have access to a number of loopholes to these restrictions, including industrial loan companies, which have been sought after by online lender Social Finance and by Square, as well as credit card banks and the like. specialized charters.
Even the OCC’s fintech charter could be considered one of those exceptions. On Thursday, Acting Currency Comptroller Keith Noreika asserted that chartered companies would not be subject to Federal Reserve oversight under the Bank Holding Company Act and would therefore be able to conduct business. financial and commercial under the same roof.
An institution with a fintech charter “would not be a bank for the purposes of the Bank Holding Company Act,” Noreika said at a fintech conference hosted by the Federal Reserve Bank of Philadelphia, contradicting the position taken by its predecessor Thomas Curry, who led the program. “He would not be subject to these membership restrictions.”
But tech companies know that any open attempt to expand into the financial sector would be highly controversial. When Walmart applied for an industrial banking charter in 2005, a coalition of unions, community banks and progressives joined in the opposition, and the company ultimately pulled out.
And today, as consumers worry more about their privacy rights and the expansion of tech companies into more industries, a transition to banking could be a tough sell.
“There is a growing backlash against the market power of big tech companies,” said Todd Baker, senior researcher at Harvard Kennedy School and CEO of Broadmoor Consulting. “They are very careful about what they are doing so as not to further stir up concerns.”
Yet technology has blurred the line between finance and commerce more than ever –
and Silicon Valley companies would have the resources to make things happen in Washington, if they wanted to.
“Very innovative companies have a natural tendency to try to take the model apart and put it together and see if they can do it better,” Petrasic said. “I don’t think they’re the kind of people to sit back and wait and see what happens. They’re having these conversations now.
Whether or not tech companies end up turning into banks, they will certainly occupy more of the territory of traditional financial institutions.
They are already urging regulators to force banks to open access to their financial data through an application programming interface. This would essentially make the connection to banking transactions instantaneous, allowing technology companies to capture a greater portion of consumer activity.
“If this principle comes into effect, it will be much less necessary for them to have a [bank] charter, ”said Baker,“ because they will be able to be the first supplier to consumers and will essentially force banks to play more of a public service role ”.