The only newsletter that scans and analyzes the full breadth of regulatory developments every day. Written and curated by Rob Garver for SourceMedia.

10.4.17 - As threats go, it isn’t the most colorful or the most dramatic, but when a banking lawyer warns commercial companies seeking entry into the financial services world that they are courting “Walmart 2.0,” there’s no mistaking that a line in the sand has been drawn.

The banking industry was unnerved by Comptroller of the Currency Keith Noreika’s suggestion last week that companies like Google, Amazon, and other commercial firms could be eligible for the agency’s so-far-only-notional fintech charter, allowing them to operate as limited financial services companies without the full burden of banking regulations applied to depository institutions.

There is a healthy debate raging over whether the OCC actually has the authority to start granting the new kind of charter, but in general, the banking industry is less interested in legal niceties than it is in protecting itself from what it sees as potentially unfair competition. And it will fight bitterly to prevent that competition from taking root.

That’s what attorney Joseph Lynyak III, a partner at Dorsey, meant when he spoke to American banker’s Lalita Clozel this week about commercial firms gaining fintech charters. “It may be legally permissible, but politically, it raises very serious concerns," he said. "This may become Walmart 2.0."

While Lynyak’s warning might seem to have been directed at Noreika and the OCC, it was surely meant to be heard by any commercial companies who are toying with the idea of entering the financial services world.

If you haven’t spent the past decade or more immersed in the debates over financial regulation, the reference to Walmart may be lost on you. Lynyak was referring to a full-scale mobilization of the banking industry’s lobbying power that was mounted in the years prior to the financial crisis to prevent the retail giant from getting an Industrial Loan Company charter.

Despite protests from Walmart that the entire purpose of its application was to create internal systems that would help it save money on credit card processing, the banking industry fought a pitched battle from 2005, when the company’s intentions became clear, until 2007, when Walmart finally withdrew its application.

Led by community bankers concerned that their firms would be devastated by the retail giant like mom and pop grocery stores unable to compete with the Bentonville, Arkansas company’s prices, the fight raged in Congress and in bank regulatory agencies for two years.

From the outside, it might have looked like a lopsided contest, with the largest commercial firm in the country taking on tiny banks, but the combined weight of the lobbying against Walmart, as well as an aggressive effort to portray the company as a rapacious destroyer of small businesses, eventually took its toll.

In 2007, Walmart withdrew its application, which it announced in an angry press release that said, in part, “Unlike dozens of prior ILC applications, Wal-Mart’s has been surrounded by manufactured controversy since it was submitted nearly two years ago. At no stage did we intend to use the ILC to establish branch banking operations as critics have suggested -- we simply sought to reduce credit and debit card transaction costs.”

Among bankers’ biggest concerns about the fintech charter is that it could allow competitors who don’t have to abide by the full suite of regulatory controls imposed on banks to compete with them in some key areas. Allowing them to do so without incurring all of the additional costs of operating as a bank could allow them to price banks out of the market.

The message the industry is sending to the Amazons and Googles of the world is plain. If regulators are willing to lower the barriers to entry in some areas of the financial services market, established firms are prepared to step in and impose some barriers of their own, in the form of aggressive lobbying campaigns, negative advertising, and long, expensive legal challenges.


Like what you've just read? Get it in your inbox first-thing every morning.

Today’s Key Reads

Tax-crime restitution: Many are called, few pay
Accounting Today - Every year state and federal courts order tax criminals – often preparers – to repay a scam’s gains back to taxation authorities. Relatively few seem to pay. Restitution was ordered in more than 75 percent of tax crimes in recent years, according to the Overview of Federal Criminal Cases for 2015, from the U.S Sentencing Commission. Yet over the last few years, the amount of federal restitution deemed uncollectible has ranged between 81 percent and 92 percent of the total amount outstanding.

FASB proposes targeted fixes to accounting guidance
Accounting Today -- The Financial Accounting Standards Board published a proposed accounting standards update Tuesday to clarify and get rid of some specific inconsistencies in key parts of GAAP. The proposals cover several areas of the FASB Accounting Standards Codification and apply to a variety of organizations, including public companies, private companies and nonprofits.

New CEO, same drubbing for Wells on Capitol Hill
American Banker - One of the most dramatic moments during Tuesday’s congressional hearing on the Wells Fargo scandal came when CEO Tim Sloan was asked why the bank should be allowed to keep its charter. Until recently, that question would have been unfathomable at a Senate Banking Committee hearing. But in response, Sloan did not present a strong case for why Wells should be permitted to continue operating.

Can the OCC really grant fintech charter to a Google?
American Banker - Not so fast. That was the message industry observers were sending to acting Comptroller of the Currency Keith Noreika after he suggested last week that commercial firms, including Google and Amazon, could legally obtain a fintech charter if they applied. They said that if the OCC opened the door to such a move, it would set off a political firestorm.

Innovation vexing for banks and fintechs alike
American Banker - Compliance red tape. Legacy technology. Bureaucratic cultures. The impediments to bank innovation were a recurring theme at the Frontiers in Digital Finance conference at Columbia Business School on Monday. They are valid, and we've written about them many times.

Fed’s Powell says U.S. bank capital is 'about right'
American Banker - Federal Reserve Gov. Jerome Powell said Tuesday that capital levels at U.S. banks are about where they should be but some changes to the capital rules may be in order to make compliance easier. Powell said that the Fed and other U.S. regulators' calibration of risk-based capital standards is roughly appropriate to safeguard against the risks posed by banks’ portfolios.

NCUA's goal: Avoiding future assessments
Credit Union Journal - Oddly enough, the controversial plan to merge the Temporary Corporate Credit Union Stabilization Fund with the share insurance fund was inspired not by a desire to return dollars back to credit unions ahead of schedule but rather as a way to avoid levying new assessments. Indeed, the real goal was to prop up the National Credit Union Share Insurance Fund, according to NCUA Chairman J. Mark McWatters during a special press briefing where he and fellow Board Member Rick Metsger dug into the history and thinking behind the plan that was approved last Thursday.

Private flood insurance bill avoids costs of floodplain management
National Mortgage News - While lawmakers appear eager to help develop private flood insurance as an alternative to the federal program, some are worried that private policies won't help support flood mapping and the enforcement of flood codes. "We are not opposed to private flood insurance," Chad Berginnis, executive director of the Association of State Floodplain Managers, said in an interview. But "private insurers should be paying a fair share of doing the mapping and supporting floodplain management in this country."

Declining capital at Fannie, Freddie 'irresponsible': FHFA's Watt
National Mortgage News - The top regulator for Fannie Mae and Freddie Mac signaled Tuesday that he was not prepared for the government-sponsored enterprises to continue to lose their capital cushion, calling the current situation “irresponsible.”

As ex-Equifax CEO testifies, all credit bureaus are on trial
Payments Source - Richard Smith came to Capitol Hill this week to speak about the massive breach at Equifax, where he was until last week the CEO. But it was clear Tuesday that he will have to defend the entire credit bureau industry, not just his former company. In his first of four hearings this week, Smith took bruising questions and criticism from members of the House Energy and Commerce Committee on security lapses leading up to the hack, the company’s response, suspicion about stock sales by Equifax managers and who may have perpetrated the breach.

Extra Credit

Equifax Breach Caused by Lone Employee’s Error, Former C.E.O. Says
New York Times - In a hearing before a subcommittee of the House Energy and Commerce Committee on Tuesday, former Equifax CEO Richard F. Smith testified that a single employee’s negligence, in failing to patch a known software vulnerability, allowed hackers the access they needed to steal more 145.5 million consumers’ personal data.

End of the Social Security Number? A White House Official Thinks So
Wall Street Journal - The social security number, long the standard identifier for Americans has “outlived its usefulness,” according to a top technology official with the Trump administration. With so much personal data exposed to hackers, the administration is talking about a switch to cryptographically protected identification codes.

Yellen: Why AIG is no longer ‘too big to fail’
Financial Times - Federal Reserve Chair Janet Yellen on Tuesday discussed her pivotal vote as a member of the Financial Stability Oversight Council to remove the “systemically important financial institution” designation from insurer AIG. Once a prime example of the excessive risk that led to the financial crisis, she said AIG the now much smaller company would not have the same effect. In the event of a problem with the company, she said, the market “should be able to handle the potential fire sales.”

After Hack, SEC Defends Plan to Amass Traders’ Sensitive Data
Bloomberg - Just weeks after revealing a major data breach in the system public companies use to make required filings, the Securities and Exchange Commission is pressing lawmakers to allow it to amass reams of sensitive data, some of it personal, on brokerage accounts and traders.

Rob Garver

Rob Garver has been covering the intersection of public policy and the private sector for more than 20 years.