The Trump Effect

Payments providers expect the Trump Administration’s lighter regulatory touch to make it easier to bring new products to market faster and more cost effectively.

For better or worse, President Trump has made good on his campaign pledge to lighten the regulatory load on businesses. In fact, the brisk pace at which the new administration has eased the regulatory environment was a point the president highlighted in his State of the Union address in January.

It’s also borne out by the numbers. A proxy for the level of government regulation is the number of pages published each year in the Federal Register, a daily government newspaper that publishes federal regulations, proposed rules, and notices. That number fell 35% in 2017 from a record high in 2016, the last full year of the Obama Administration.

Count the payments industry among the beneficiaries of the regulatory rollbacks. The most recent regulatory olive branch to be extended to payments providers came in March when the Consumer Financial Protection Bureau issued a request to interested parties for information about its rulemaking processes.

The request was one of a series the Bureau has issued to better define its mission since Mick Mulvaney, director of the Office of Management and Budget, took over last year as acting director (“Has Trump Tamed the CFPB?” March).

The CFPB is an agency that grew out of the sprawling Dodd-Frank Act passed by Congress in 2010 to more tightly regulate financial institutions in the wake of the 2008 financial collapse. Under its first director, Richard Cordray, it was seen by critics as an unyielding crusader that operated without proper oversight.

Now, its requests for clarity of mission are seen as a pivot toward a more pro-business stance. But in the eyes of supporters, this would run counter to the CFPB’s charter to protect consumers’ interests when it comes to financial products and services.

In its statement announcing the request for information, the CPFB said it was seeking input on, among other things, its adopted and inherited rules, as well as its rulemaking process.

The CFPB consolidates a large portion of the federal government’s consumer financial-protection authority under its roof, giving it broad regulatory powers. Since its creation, the CFPB has paved the way for consumers to receive billions of dollars in refunds and debt relief from financial-service providers considered to have taken advantage of their customers.

Also fueling speculation that the CFPB was preparing to adopt a lighter regulatory touch was the appointment of Mulvaney as acting head. Cordray, who was appointed by President Barack Obama, resigned in November. Mulvaney is expected to leave the post later this year after President Trump appoints a new head of the agency to a five-year term.

“Mulvaney’s appointment strikes a new tone at the CFPB,” says Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based consultancy that closely follows regulatory issues in the payments industry.

“I suspect the CFPB will receive constructive suggestions as part of its request for information where it could make supervision less burdensome and more effective,” Grover says. “The Trump Administration understands that heavy regulation suppresses business and its appointees reflect that position. The administration’s focus is on pulling back what it considers regulatory overreach.”

The CFPB isn’t the only federal agency taking a more pro-business stance that could benefit parts of the payments industry, including acquirers.

In 2017, the Department of Justice lifted a huge monkey off the back of payments providers by ending Operation Choke Point, an anti-fraud initiative aimed at entities believed to be at high risk for engaging in fraud or money laundering. Choke Point’s idea was to “choke off” such businesses by bringing civil suits against the companies that processed their payments.

The initiative, launched in 2013 by the Obama Administration, was seen by some payments experts and members of Congress as a misguided operation that hurt lawful business partners and merchants. The Justice Department’s decision to shut it down “takes the foot off the industry’s throat,” says Grover. “Operation Choke Point wasn’t good policy.”

Pendulum Swings

While it is too early to say for certain what the new regulatory climate actually means for the payments industry, the early belief among payments experts is that it will foster more innovation in payment products and services.

“As the regulatory pendulum starts to swing in the other direction, there is the potential for new partnerships between financial-service providers and [financial-technology] companies to bring new and lower-cost products and services to market faster,” says Scott Talbott, senior vice president for government relations at the Washington D.C.-based Electronic Transactions Association. “This kind of environment can make payment products more accessible to more consumers.”

One way fintech companies might benefit from the trend: special-purpose bank charters from the Office of the Comptroller of the Currency. The OCC, which has authority under the National Bank Act and the Home Owners’ Loan Act to grant charters for national banks and federal savings associations, announced the special-purpose charter initiative in 2015 to help fintechs gain regulatory approval for new products.

In December, Comptroller of the Currency Joseph Otting said he plans on moving forward with the effort. He also said he will move on easing compliance and anti-money laundering rules for community banks.

Currently, fintech firms can only receive bank charters at the state level, which leaves them regulated by the individual states granting the license. A fintech company receiving bank charters in all 50 states, for example, would have 50 sets of regulations to follow. Meanwhile, gaining bank charters in 50 states can take a couple of years and cost $1 million or more in licensing and legal fees, says Talbott.

A special-purpose bank charter from the OCC would also streamline the regulations fintech banks would have to comply with. The OCC would be responsible for regulating technological innovations offered by the bank. It would also subject the bank “to the same laws, regulations, examination, reporting requirements, and ongoing supervision as other national banks,” the OCC said in a 2016 paper entitled Exploring Special Purpose National Bank Charters for Fintech Companies.

While special-purpose national bank charters have been around for some time—credit-card-issuing-only banks have such a charter, for example—the OCC further stated in its 2016 position paper that “there is no legal limitation on the type of special purpose for which a national bank charter may be granted, so long as the entity engages in fiduciary activities or in activities that include receiving deposits, paying checks, or lending money.”

Not surprisingly, reaction by some states to the OCC’s proposal has not been positive. New York State’s Superintendent of Financial Services, Maria Vullo, for example, filed a lawsuit challenging the OCC’s regulatory authority to grant bank charters to fintech firms. That suit was dismissed last December by the U.S. District Court for the Southern District of New York, handing the OCC a major victory.

The ETA is a strong supporter of OCC bank charters for fintech companies, arguing that granting such charters will enable fintechs to bring new payment products to market faster and more cost effectively by replacing the maze of state regulations they must navigate with a single set of regulatory rules.

“A fintech bank charter will provide numerous public-policy benefits, including a regular and consistent regulatory framework for chartered fintech companies and increased competition to develop cost-efficient, inclusive products and services,” Talbott says. “The OCC recognizes the value of fintechs and the need for regulations not to stifle their ability to do business nationally.”

The ETA’s legislative agenda also includes support for industrial loan company (ILC) charters. An ILC is a financial institution that lends money and may be owned by non-financial institutions. Last year, payment processor Square Inc. acknowledged it is seeking an ILC charter to expand its small-business lending operation.

‘Through the Battles’

Whether the OCC ends up granting special-purpose bank charters to fintech companies is likely to hinge on whether such charters would generate more innovative payment and financial-services technologies than partnerships between fintechs and financial institutions do already, says Jason Kratovil, vice president for government affairs for payments at the Financial Services Roundtable, a Washington D.C.-based advocacy organization for the financial-services industry.

Indeed, many fintech companies have adapted to the stricter regulatory environment they encountered under the Obama Administration, payments experts say. Some of the payments products to debut and expand during this time included Zelle, the person-to-person payments service from Early Warning Services, a financial-services company owned by Bank of America, BB&T, Capital One, JPMorgan Chase, PNC Bank, U.S. Bank, and Wells Fargo.

Also emerging during the former administration were: Venmo, the PayPal Holdings Inc.-owned mobile-payment service; cryptocurrencies such as Litecoin and Ethereum; and blockchain applications for recording the sale and transfer of any asset, such as insurance policies.

“What we have seen prior to the current regulatory environment was financial-service providers working with their fintech partners to make sure those partners adhere to regulatory compliance,” says Christopher Feeney, president of BITS, the technology-policy division of the Financial Services Roundtable. “Financial-service providers understand that they have a responsibility to make sure partners coming from outside the industry are regulatory-compliant.”

Diligent oversight of fintech partners is not likely to change in the new regulatory environment because financial institutions have come to understand that what has not changed is that the actions of partners reflect directly on them in the eyes of regulators, payments experts say.

“I believe it is important to conduct a due-diligence process to help [decide] whether to work with a fintech company, as they may be subject to additional regulatory examination in comparison to a well-known third-party for various reasons,” says Yvette Hollingsworth Clark, executive vice president and regulatory innovation officer for Wells Fargo’s Innovation Group. “The financial institution must demonstrate knowledge of the solutions as if the institution developed [them] itself.”

Also, don’t expect a repeal of the Durbin Amendment to the Dodd-Frank Act. That amendment requires the Federal Reserve to limit fees charged to retailers for debit card processing. Many politicians view repeal as a political hot potato, payments experts say. A vote would force members of Congress to squarely come out on the side of either merchants or banks, which could hurt them in a re-election bid.

A glimpse of that pressure appeared last May when nervous House Republicans stripped out a repeal provision they had previously approved as part of the Financial Choice Act. There’s little appetite for a repeat performance, observers say.

“Lawmakers have been through the battles over the Durbin Amendment and there does not appear to be any push to revisit the issue,” says Beth Provenzano, vice president, public affairs, for the Minneapolis-based Merchant Advisory Group. “The returns from the law for merchants, which worked hard to pass it and protect it, have been positive.”

‘More Dialog’

If nothing else, the new regulatory climate is creating an opportunity for the payments industry to work with federal agencies to revise regulations to reflect the times in which financial-service providers and fintechs do business.

“Many of the regulations in place today were written in an era that did not envision the kind of technology we have today,” says Heather Hogsett, vice president for technology and risk strategy at BITS.

Updating existing regulations is important, payments experts say, because future administrations are likely to have a different viewpoint than the Trump Administration when it comes to regulatory policies. They say revising regulations in place now, as needed, can help strike a better balance between needed consumer protections and a suffocating regulatory environment for payment providers.

“Fintechs have been able to solve problems financial institutions couldn’t, and regulators are starting to be pushed to figure out how current regulations apply to the new technologies coming to market and how rapidly those technologies are changing the market,” says Hogsett. “The more dialog the industry and regulators have, the more it will move innovation along to the benefit of consumers.”