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The US Treasury warns that fintechs may take advantage of an exemption applicable to small banks to circumvent the federal interchange fee cap on debit card transactions.
In a report published on Wednesday (November 16), the Treasury found that a provision providing small banks with an exemption from debit card regulations may be used by fintechs to earn greater income and scale faster.
The provision, which is part of the post-financial crisis Durbin Amendment, sets limits on the interchange fees that debit card issuers with total assets of $10bn can charge but leaves smaller banks out of its scope.
The Treasury now says that this regulatory difference has been key to many non-bank fintech firms’ business strategies and may enable them to avoid the federal cap even after they scale up to larger than the $10bn threshold.
For instance, with its 320m cards issued, Marqeta, a fintech that specialises in debit card issuance and processing for other firms, would be a top 25 issuer of debit cards in the US if it was consolidated as a single-issuer, as opposed to a service provider to other companies.
“Ultimately, large new entrant non-bank firms could compete with larger issuers in the market while benefiting from an exemption meant for smaller firms,” the Treasury points out.
It adds that the exemption, even with such use, benefits community banks and other smaller banks, which have a critical role in reaching underserved communities, by helping them remain competitive in a concentrated consumer card market. As such, the exemption is consistent with the broader approach of the law, the report says.
Nonetheless, the Treasury emphasises that the exemption “does cause asymmetry in competition” and such use of the Durbin Amendment exemption “warrants further examination”.
Impact assessment
The remarks were made in the Treasury’s report assessing the impacts of big tech firms and non-bank fintechs on competition. It was prepared in accordance with President Joe Biden’s executive order aimed at promoting competition in the US economy and is the final piece of a series of reports that looked at competition in various aspects of the economy.
The document, which reviewed the role of big techs and non-bank fintechs, including payment firms, buy now, pay later (BNPL) and earned wage access (EWA) products, concludes that these firms make financial markets more competitive, but they also pose risks related to data privacy and regulatory arbitrage.
Payments is one particular area where the Treasury says non-bank fintechs have improved the delivery of financial services by increasing access through more user-friendly and accessible payment tools.
At the same time, it warns that non-bank firms are not subject to comprehensive supervision and regulation, and it may open the door to regulatory arbitrage.
For example, when a bank enters into a relationship with a fintech, the latter may utilise the privileges that the bank has as a result of the comprehensive regulatory framework it falls under, without itself being subject to the same level of supervision.
Likewise, big techs may increase competition for incumbent market players, but the Treasury cautions that they may leverage their data and use network effects, mergers and acquisitions or predatory pricing to gain market power.
In China, two big tech firms, Alipay and Tenpay, account for 94 percent of mobile payments, while in India, three firms, PhonePe, Google and Paytm, control 94 percent of the market for third-party payment applications.
Given the size and potential impact of these firms, such scenarios “warrant consideration” if they choose to offer consumer financial products to the broad public, the Treasury says.
The report concludes with a set of recommendations, including that federal banking regulators should implement a clear and consistently applied supervisory framework for banks’ role in bank-fintech relationships that address competition, consumer protection, and safety and soundness concerns.
The Treasury also recommends that the agencies increase consistency in supervisory practices related to small-dollar lending programs, including BNPL and EWA, and that regulators take steps to help promote a more unified approach to oversight of consumer-authorised data sharing.
