US Non-Banks Face New Scrutiny From Federal Agency

The tide is turning for fintechs in the US. Regulators are moving to impose bank-like rules on financial companies that engage in bank-like activities, starting with payments. On November 7, the Consumer Financial Protection Bureau (CFPB) proposed supervising larger non-banks that offer services like payments and digital wallets.

“Driven largely by Big Tech and other large technology firms, digital payment apps and wallets continue to grow in popularity, but many of the companies are not subject to CFPB supervisory examinations,” the agency commented in a statement.

Big Tech often refers to Google parent Alphabet, Amazon, Apple, Meta and Microsoft. The CFPB says the share of e-commerce payments via digital applications is similar to or greater in volume than standard payment methods, such as credit and debit cards. However, complaints about these newer services—and the companies behind them—have risen in recent years.

CFPB director Rohit Chopra said on November 7, “Today’s rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other non-bank payments companies are subjected to appropriate oversight.”

If the proposal passes into law, non-banks executing more than five million transactions per year will be subject to the same consumer-protection rules as banks.

Affected fintechs should start preparing for supervisory examinations using simulations, advises law firm Greenberg Traurig in an alert: “This enhanced supervision would entail elevated compliance responsibilities, including potentially increased staffing, comprehensive employee training, and possibly overhauling operational processes to meet new regulatory requirements.”

Last year, the CFPB launched the Office of Competition and Innovation to “ensure nascent firms can compete with Big Tech companies within consumer finance.” The office’s supervision technology program focuses on the risks from consumer financial products offered by Big Tech, which do not provide regular banking safeguards, like deposit insurance. The CFPB’s move came ahead of a mid-November vote by the Financial Stability Oversight Council, an influential US standard-setter, to make it easier to classify non-bank financial companies as “systemically important financial institutions,” thus subjecting them to bank-like regulations. This post-financial crisis measure will primarily target asset managers, insurers and private equity firms.