The Future of Payments

89 BANKING PERSPECTIVES QUARTER 4 2018 Non-bank firms have taken on an important and highly visible role in providing payment-related services as the volume of electronic and online transactions has increased. of electronic payments, the demands of mobile technology and e-commerce, the venture-driven FinTech phenomenon, and the advent of cryptocurrencies. Nonetheless, among some non-bank payment firms, appetite for direct access has grown markedly in recent years. This increasing interest in direct access arises from the combination of the market developments described above with two key phenomena: bank de- risking and the difficulty of getting U.S. banking charters and licenses. BANK DE-RISKING In the last decade, the U.S. banking industry has undergone several rounds of de-risking, in which depository institutions terminate or restrict banking relationships with certain types of non-bank payment firms. De-risking results from a combination of actual regulatory pressure on certain relationships and bank concerns about possible future regulatory action. It poses a particular threat to non-bank firms’ clearing relationships with banks because, from the banks’ perspective, the relatively low profit margins from such relationships often cannot justify the elevated risks and risk management expenses that attend regulatory scrutiny. The impact of de-risking falls particularly on money transmitters, specialty third-party payment processors, and non-U.S. banks without a U.S. branch (deemed “non-banks” for our purposes). As a result of de-risking, many such firms have found the effort to obtain and maintain banking relationships increasingly expensive and challenging. Meanwhile, non-bank firms with established banking relationships have come to see their dependence on unaffiliated depository institutions as increasingly risky, leading some to seek risk mitigation through direct access. DIFFICULTY OBTAINING BANK CHARTERS OR LICENSES An obvious means of gaining direct access is to obtain one of the banking charters or licenses that confer eligibility for a master account. But gaining regulatory approval for such charters or licenses has been difficult during the past decade, particularly for non-bank financial institutions. The availability of U.S. bank charters and licenses has significantly constricted in the decade following the 2008 financial crisis. Obtaining approval for new FDIC-insured banks has been especially challenging because regulators have exercised caution in approving applications. While receptivity to new bank applications has increased over the past two years, it has not yet translated into fully successful applications by payment firms. Non-bank payment firms face particular obstacles due to the typical business models of their proposed banks. Bank applications involving nontraditional or narrow business plans – common attributes of proposals by non-bank payment firms – have faced especially tough scrutiny in the past decade. The U.S. banks that have been approved during this period have typically followed traditional business models, even as non-U.S. jurisdictions have been approving payment-focused banks, “challenger” banks, and other narrow or nontraditional institutions. Though there are signs some U.S. regulators have become more open to nontraditional business models, it is too early to say how far down this road they will be willing to go. Non-bank payment firms seeking a bank charter or branch license must also confront another distinctive feature of the U.S. regulatory system: the Bank Holding Company Act’s restrictions on non-banking activity. Many non-bank firms are unable to comply with these restrictions, or to qualify for the full scope of exemptions afforded to certain qualified foreign banking organizations (QFBOs). NO INHERENT BARRIER Given the right legal and policy changes, there is no inherent barrier to granting non-bank payment firms