Chartering the Fintech Future by reflecting on banking history

Prof Charles Calomiris in this Cato paper traces future of fintech banks by looking at banking history:

I have shown that the chartering of fintech shadow banks as national banks is a desirable development. In the near term, this will occur in the form of unbundled, novel providers of payments or lending services. Some of their business models entail borrowing deposits, but some do not. All of them are banks. They and their consumers stand to benefit greatly from coming out of the shadows and becoming chartered banks. For many shadow banks, the advantages of greater geographic reach and enhanced market credibility from OCC examination will outweigh the new costs of regulations they will bear. That is especially so if they are able to avoid unnecessary regulatory burdens on their organizations.

I emphasize that I am not arguing in favor of requiring fintech banks to obtain national charters. This would impose new regulatory burdens on banks, some of which would be less able to meet customer needs as a consequence. I also emphasize that the externality argument often used to justify forcing traditional intermediaries that issue deposits to be chartered does not apply to unbundled nondepository fintechs. Traditional banks that use deposits to fund loans can magnify recessions as the result of the combination of deposit taking and lending. Losses on loans create credit crunches when banks facing loan losses cut lending to maintain a low risk of default on deposits, and such banks can face a risk of runs if they are unable to keep deposit risk low (Calomiris and Wilson 2004). Unbundled banking does not create these sorts of externalities, and therefore, there are no obvious arguments for forcing fintech shadow banks to obtain charters unless doing so creates value for their enterprises.

The point of chartering fintech banks should be to allow them to reap the net gains of a charter, if those gains are positive for them. This approach ensures chartering only occurs when the charter creates value. Furthermore, by permitting, but not requiring, fintech banks to obtain charters, society reaps a further benefit: technology serves as a check on excessive regulation. If chartering authorities know that excessive regulatory burdens will discourage fintech banks from coming out of the shadows, then regulators will be more mindful of the costs of regulation.29

Consumers stand to gain dramatically from allowing fintechs to obtain national bank charters. Chartered fintechs, in many cases, could offer lower costs, better service, and greater access to financial services, especially for the unbanked and underbanked. Consumers will also gain from improved supervision of these banks, which will help to ensure that their customers are treated fairly and that the banks are run on a safe and sound basis. For all these reasons, the OCC is welcoming novel fintech banks to apply for national bank charters.

Superb read..

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