WASHINGTON — Technology giants like Google, Amazon, Facebook and Apple are showing an increasing interest in engaging with federal banking regulators, a move that underscores Silicon Valley’s growing involvement in the financial services arena.
In recent years, such firms have formed a lobbying group, Financial Innovation Now, that is staking out their view on various hot-button topics. But some firms are also meeting individually with government agencies.
For example, Amazon lobbyists met with the Office of the Comptroller of the Currency starting in the second quarter of 2016, and again this year to discuss “issues related to mobile payments and payment processing, financial innovation, and technology," according to publicly available lobbying disclosures.
PayPal, meanwhile, met with OCC officials in the second, third and fourth quarters of last year to discuss “mobile payment innovation” issues related to underserved customers and remittances and money transfers, according to its disclosures.
Amazon, PayPal and the OCC all declined to comment on the subject of their meetings.
Though sources suggested that the companies were not there to necessarily talk about the OCC’s fintech charter, but rather more immediate issues in the payment and financial world, observers said there is little doubt that technology firms will eventually move in that direction.
“People are kicking the tires,” said Lawrence Kaplan, a bank lawyer of counsel at Paul Hastings. “People are asking questions: What does this entail? Can you get us up to speed if we want to pull the trigger?”
When the OCC first announced its so-called responsible innovation initiative, which culminated in the creation of a special-purpose national charter designed for fintech firms, it met with large swaths of the financial industry — including up-and-coming fintech companies primarily engaged in the financial space, and large technology companies.
Large technology firms are “really interested in the intermediation piece, where you have access to all that data,” said Paul Nash, the former senior deputy comptroller and chief of staff under Comptroller Thomas Curry, who began discussing the possibility of a fintech charter early last year. “All of them are thinking about it.”
At the very least, their engagement with regulators shows how much more involved the tech giants are becoming in financial services. The major technology firms are already engaged in processing payments in one way or another. And they have increasingly begun offering various forms of lending, including through Apple’s installment loans for iPhone purchases and Amazon’s small-business lending, which nearly doubled in volume last year.
Ultimately, a bank charter could be a timely investment — one that some may already be evaluating, experts said.
“There's been lots of interest by financial services firms in technology companies and fintech companies,” said Kevin Petrasic, a partner at White & Case. “Some tech firms are now looking in the other direction.”
A bank charter could offer technology companies a long list of advantages over their competitors. For one, it would give them access to the federal payments system, reducing their need for bank partnerships, giving them more ownership over their data and minimizing interchange fees.
It would also allow them to directly issue credit cards, prepaid and debit cards. And it would give them the option of expanding into various types of lending while operating under a single regulatory regime, avoiding state-by-state usury rates and licensing requirements.
If tech firms do move directly into banking, they could capitalize on their direct relationship with millions of customers, and immense data sets that could help them build sophisticated financial models.
“It's safe to say that if you're processing money right now and you have a big, captive consumer base, transforming into a full-service national bank may be a desirable thing for some,” said Pratin Vallabhaneni, an associate at AKPS.
That is a strategy already adopted by Square, a payments processor that is seeking an industrial loan company charter in Utah to expand its small-business lending. The company has developed sophisticated origination models based on accumulated data from more than 2 million small businesses for which it processes payments.
Of course, there are also many reasons technology firms may want to stay away from a banking charter. For one, separation of banking and commerce remains a significant legal and philosophical obstacle.
The principle is deeply ensconced in banking law, and challenging it would be a difficult endeavor that could require congressional action.
Asked if a company like Amazon should be allowed to get a bank charter, former Federal Deposit Insurance Corp. Chairman William Isaac, who spoke Monday at an online lending conference about the need to welcome new players into the banking system, hesitated.
“It's a tough decision that we are going to have to make one of these days,” Isaac said. But it “could have a profound effect on the structure of the financial industry in the United States.”
But the decision could come earlier than expected. Commercial companies already have access to a number of loopholes to these restrictions, including industrial loan companies, which have been sought out by the online lender Social Finance and by Square, as well as credit card banks and other types of specialized charters.
Even the OCC’s fintech charter could qualify as one of those exceptions. On Thursday, acting Comptroller of the Currency Keith Noreika asserted that companies that obtained the charter would not be subject to Federal Reserve oversight under the Bank Holding Company Act, and would therefore be able to engage in both financial and commercial activities under the same roof.
An institution with a fintech charter “wouldn’t be a bank for purposes of the Bank Holding Company Act,” Noreika said at a fintech conference organized by the Federal Reserve Bank of Philadelphia, contradicting the position taken by his predecessor Thomas Curry, who spearheaded the program. “It wouldn’t be subject to those affiliation restrictions.”
But technology companies know that any open attempt to expand into the financial industry would be highly controversial. When Walmart applied for an industrial bank charter in 2005, a coalition of labor unions, community banks and progressives joined in opposition, and the company ultimately pulled out.
And today, as consumers grow increasingly concerned about their privacy rights and technology firms’ expansion into more industries, an out-and-out move into banking could be a tough sell.
“There's a growing backlash against the market power of the large technology companies,” said Todd Baker, a senior fellow at the Harvard Kennedy School and managing principal at Broadmoor Consulting. “They are being very careful about what they do so they don't inflame concerns further.”
Still, technology has made the line between finance and commerce blurrier than ever —
and Silicon Valley firms would have the resources to shake things up in Washington, if they wanted to.
“Very innovative companies have a natural inclination to try to pull the model apart and pull it back together and see if they can do it better,” Petrasic said. “I don’t think those are the types of folks to sit around and wait to see what happens. They're having these conversations now.”
Whether or not technology companies do end up transforming into a bank, they will certainly occupy more of traditional financial institutions’ territory.
They are already urging regulators to create a requirement for banks to open up access to their financial data through an Application Programming Interface. This would essentially make the connection to bank transactions instantaneous, allowing technology companies to capture more of the consumer-facing business.
“If that principle goes into effect, it will be much less necessary for them to have a [bank] charter,” said Baker, “because they will be able to be the front end for consumers, and essentially force the banks into more of a public utility role.”