The Future of Payments

93 BANKING PERSPECTIVES QUARTER 4 2018 Rather than creating yet another U.S. financial regulatory system, it seems more logical to examine the obstacles preventing the firm from actually becoming a bank . Expanding opportunities for banking charters and licenses need not mean lowering standards. Rather, it involves reexamining certain regulations and licensing policies that pose particular obstacles to payment firms’ banking applications. The reexamination would weigh the original justifications for such regulations and policies, as applied in the context of non-bank payment firms, against the potential benefits of expanding direct access to the payment system in a safe and sound manner. Such assessments can draw on policy discussions already underway in the U.S. bank regulatory community and the experiences of other jurisdictions with more flexible licensing environments. One potential area for reexamination is the scope of acceptable business models for de novo banks. A more nuanced approach to narrow business models – particularly payment-focused ones – could permit non- bank payment firms to charter U.S. banks comparable to the payment-focused banks some already operate in other jurisdictions. In addition, limited-purpose bank charters, such as the FinTech charter announced by the Office of the Comptroller of the Currency, could function as a U.S. version of the e-money/payment service provider licenses available in Europe – effectively, a money transmitter subject to federal prudential supervision and federal banking rules. Policymakers could also consider reviving certain types of uninsured depository charter types that, while technically available, have fallen into disuse. Uninsured state member banks, uninsured deposit-taking national banks, and foreign-owned Edge Act corporations are all eligible for master accounts, have federal prudential supervisors, and are subject to federal prudential bank regulations under existing law. Uninsured charters are not suitable for every non-bank business model, but they may be a good fit for some. Finally, even though it would require a change in regulation, it may also be worth reexamining the application of the “bank chain requirement” of the QFBO test to non-U.S. payment firms that own banks outside the U.S. In a surprising number of cases, this relatively unknown requirement turns out to be the decisive and insurmountable obstacle preventing non-bank payment firms from operating under U.S. banking licenses. It is worth asking whether the policy objectives behind the test are well served by excluding firms engaged predominantly in payments activities based on the legal entity structure through which they conduct those activities. The most effective policy response to non-banks seeking direct access to the payment system may therefore be expanding opportunities for suitable firms to obtain the banking charters or licenses that confer eligibility. This option would ensure these firms are subject to the same supervisory and regulatory standards as incumbent participants, without the wasteful duplication and competitive inequity inherent in creating a parallel regime. At the same time, non- bank firms that do not want to (or simply cannot) become banks could continue to operate pursuant to their existing regulatory regimes and to rely on indirect access to payment systems through banking relationships – including, potentially, relationships with new payment-focused banks. n ENDNOTES 1 H.R.4986 - Depository Institutions Deregulation and Monetary Control Act of 1980. https://www.congress.gov/bill/96th- congress/house-bill/4986 2 “A Blueprint for a New RTGS Service for the United Kingdom.” https://www.bankofengland.co.uk/-/media/boe/files/payments/a- blueprint-for-a-new-rtgs-service-for-the-uk.pdf?la=en&hash=56424 C6BC6D9E056F05476A96B482D4779377E45 3 “First Non-Bank Payment Service Provider (PSP) Directly Accesses UK Payment System.” https://www.bankofengland.co.uk/news/2018/ april/non-bank-psp-access-to-the-payments-system-announcement 4 “Federal Reserve Policy on Payment System Risk.” https://www. federalreserve.gov/paymentsystems/files/psr_policy.pdf