Weekly Fintech Focus

• The OCC is focusing on fintech-bank partnerships as explained in a speech by Acting Comptroller of the Currency Michael J. Hsu
• Congressmembers seek information related to a firearms BNPL provider

OCC Warns About Fintech-Bank Partnership Risks

On September 7, 2022, speaking before conferencegoers at the TCH + BPI Annual Conference in New York, Acting Comptroller of the Currency Michael J. Hsu explained why he thinks regulators should be paying more attention to fintechs and big tech companies engaged with banks and banking services.

To start, Acting Comptroller Hsu recommends developing a more sophisticated understanding of bank-fintech arrangements, which have proliferated throughout the industry—resulting in financial services being “compartmentalized” and offered by non-bank entities through “increasingly varied and complex set[s] of arrangements.” Hsu believes that the growth of fintech, banking-as-a-service (BaaS), and big tech engagement with payments and lending is affecting the risk profile of financial products and services. As an example, Hsu noted that after reviewing banks regulated by the Office of the Comptroller of the Currency (OCC), his team found at least 10 banks that have BaaS partnerships with nearly 50 fintech companies and, using public data, identified similar arrangements at banks regulated by the Federal Reserve and FDIC. Most of the banks offering BaaS products have assets below $10 billion, and nearly a fifth have assets less than $1 billion.

As the industry has grown and changed, the efforts by banks and tech companies to provide clean customer experiences has, according to the OCC, made it “more difficult for customers, regulators, and the industry to distinguish between where the bank stops and where the tech firm starts.” And these facts together create for Hsu a “nagging familiarity” with the 2008 financial crisis and a concern that a “similar increase in complexity is happening with regards to online and mobile payments, lending, and deposit-taking activities.” So Hsu is concerned that “if left to its own devices,” the “‘de-integration’” of banking services will lead to a “severe problem or even a crisis.”

To address the problem, the OCC is developing a process to “subdivide bank-fintech arrangements into cohorts with similar safety and soundness risk profiles and attributes” to enable the regulator to focus on risk management expectations. This process will answer questions about responsibility for problems with the partnerships, effects on consumer confidence in the event of a disruption, treatment of consumers (including in the context of whether they are considered customers or products), and issues related to resiliency and managing fintech failures.

Congressmembers Seek Information From Firearms BNPL Company

Recently, a group of 18 Democratic congressmembers sent a letter to a buy-now pay-later (BNPL) company that provides financing for online sales of firearms and accessories regarding its business practices and safeguards for consumers. Historically, firearms merchants have had challenges obtaining and maintaining relationships with payment processors and other financial services due to heightened risks associated with sales of firearms, including background checks, licensing, and negative press.

The company receiving the request for information partners with gun merchants and the NRA to promote its services. According to the letter, the BNPL company “aggressively advertise[s]” its BNPL product as a payment option, thereby “increasing the apparent affordability of firearms to consumers.” The congressional inquiry focuses on the company’s customer demographics, underwriting activities, credit reporting activities, and advertising.

A response to the letter is due September 26, and we do not know if a report on the responses will be issued. The focus on this BNPL company appears to be primarily related to the congressmembers’ opposition to BNPL services for firearm purchases in particular. Still, BNPL providers—particularly those that are offering BNPL services to high-risk products—can use this letter as a guidepost to understand what some lawmakers are concerned about in relation to the provision of financing for these types of products.

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