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Payments and passports

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The new administrations in the UK and USA are apparently planning to work together to create a new transatlantic America First / Buy British trade alliance. This will, it seems, include financial services. 

A deal to reduce barriers between American and British banks through a new “passporting” system was being considered by Mr Trump’s team

From Donald Trump plans new deal for Britain as Theresa May becomes first foreign leader to meet new president since inauguration

Now what this passporting might mean is anyone’s guess, since this is just a newspaper story based on gossip, but I think it might be a little more complex to arrange than it seems at first because of the nature of banking regulation in the United States. If a British bank were to get a US banking passport this would presumably be equivalent to the implicit granting of a national bank charter and state regulators do not seem enthusiastic about the granting of more national bank charters. We know this, because at the end of 2016 the US Office of the Comptroller of the Currency (OCC) said that it was going provide a new national bank charter for fintech companies.

“The OCC will move forward with chartering financial technology companies that offer bank products and services and meet our high standards and chartering requirements,” said Comptroller of the Currency Thomas Curry

From OCC Grants New Charter to Fintech Firms — with Strings Attached | American Banker

The reason for wanting to do this is obvious: right now, if I want to create a competitor to Venmo or Zelle, I have to either have to be regulated as a payment processor and have regulated banks involved or go and get regulated by 50 different state regulators under 50 different regulatory regimes, most of which remain rooted in a previous, pre-internet age. This seems anachronistic. Surely an American company should be able to a get a licence and get going. Well, the OCC’s proposal is attracting a lot of negative comment.

A turf war is brewing between US state and federal regulators over oversight of the financial technology sector after New York’s top watchdog sent a stinging letter to the Office of the Comptroller of the Currency (OCC), telling it to back off plans for a national bank charter for fintech firms.

From New York regulator blasts OCC over bank charter plan for fintech fi…

Now I saw a few comments about this and other responses from state regulators that cast them in the role of Luddites standing in the way of progress but I have to say I agree with them. I mean, I am not a lawyer or anything, I don’t really understand US banking regulation and I couldn’t make any sensible comments on the proposals myself, but I think that the US regulatory environment is broadly speaking unfit for purpose and might benefit from at least a cursory examination of the direction of regulation in one or two other jurisdictions including Europe, for example and India.

Saycanyousee

The fundamental problem with the OCC proposals to my mind is that they are about a national charter for banking as a whole. They do not distinguish between the payments business and other parts of the banking business. Hence the charter means extending systemically risky credit creation activities in new directions. I don’t see any immediate problem that this solves. And the state regulators may well be right that it potentially makes the problems associated with banking regulation much worse.

Connected to this is the worry that a national charter would encourage large ‘too big to fail’ institutions – a small number of tech-savvy firms that dominate different types of financial services simply because they are able to get a national charter.

From New York regulator blasts OCC over bank charter plan for fintech fi…

Whatever you think about Facebook they are not too big to fail. If Facebook screw up and lose a ton of money and go out of business then that is tough luck on their employees and their shareholders but it’s nobody else’s problem. That’s how capitalism is supposed to work. But if Facebook obtained a national banking charter they would immediately become too big to fail and no matter the greed or incompetence of their management, the government will be on the hook to bail them out just as the Roman senate was forced to bail out the banks there two millennia hence.

Romani

(In case you are curious, in 33BCE the emperor had to create 100 million sesterces of credit (a trifling couple of billion dollars in today’s money) through the banks to save them from collapse. Plus ca change, as they didn’t say in Ancient Rome).

If you look at what is happening in other jurisdictions, what you see is a separation of payments and banking so that the systemically less risky payment activities, which many people see as somewhat less than optimal in the world’s largest economy, can be reinvigorated while the systemically more risky credit business and investment banking business are left alone. In the European Union there is the regulatory category of the payment institution (PI). In Europe, Facebook is therefore a payment institution and not a bank.  They don’t want to lend people money, they want to facilitate buying and selling and for that they need access to core payment systems and that’s all to the well and good. Similarly, in India, the regulator created the new category of payment bank (PB) so that mobile operators and others could start providing electronic payment services to what will soon be the world’s most populous nation.

The reasons for going down this path are entirely logical. If you leave innovation to the banking system then you end up in the situation of India as was or Nigeria as it is. A huge population, phones everywhere, talented and entrepreneurial people, huge and unfulfilled demand and… Nothing happening. I’m sure you’re all utterly bored with me reminding you, but the key innovations in technology in banking do not originate in banks. That’s the nature of the beast. The four digit PIN code was invented by a Scottish engineer. The payment card was invented by New York lawyer. M-PESA was invented by a telco. Bitcoin was invented by… Well, for all I know, it may well have been the head of Citibank or programmer number 2216 in the North Korean army, but you get my point.

This is why I think that the OCC should leave the regulation of credit institutions where it is now and propose instead a new national charter for payment institutions amalgamating the European PI and Electronic Money Institution (ELMI). Allow these American Payment Institutions (let’s shorten this to APIs to avoid confusion) to issue electronic money but not to provide credit, allow membership of payment schemes (e.g., the UK’s Faster Payment Service, Visa and so on), ensure customer balances are held in Tier 1 capital and so on.  This way, Apple and Verizon can apply for a national charter and start providing competitive payment services that will benefit businesses and consumers and the existing banks will just have to suck up the loss of payment revenues for the greater good.

The passporting of such institutions should be much less controversial than the passporting of credit institutions. Surely it will be to everyone’s benefit if the “fintech” passporting agreements give UK and EU payment institutions the right to operate nationally in the United States, in return giving recipients of my proposed American Payment Institution charter the right to operate in the UK and EU? This would allow innovation and competition in the fintech space without creating yet another financial time bomb that bankers will inevitably trigger.

 

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