Blurring the lines

Banks will compete in the marketplace as they always have, but there must be a level playing field.

It is hard to be online or watch television today without encountering ads for a technology app that purports to meet all of a customer’s “banking” needs. They claim to be able to perform better than a traditional bank, but many are not banks, and consumers may pay a heavy price if federal regulators allow trends to continue.

The FDIC recently solicited comment for a notice of proposed rulemaking and a request for information on false advertising, misrepresentation of insured status and misuse of the FDIC’s name or logo. The FDIC’s request is indicative of a growing list of concerns with non-banks, some fintechs as well as tech investors hoping to take advantage of the hipness of “neo-banks.”

Let’s be clear. This is not about technology. The Texas banking industry continues to innovate and advance its digital presence. Banks of all sizes often partner with responsible fintechs and other providers, responding to the increasing needs of their customers for tech-enabled solutions. Banks will compete in the marketplace as they always have, but there must be a level playing field. New actors cannot be given a pass because their platform is “cutting edge,” their marketing is “cool,” or they don’t appear to fit in traditional regulatory paradigms.

There is a very real difference between fintechs that partner with banks to more effectively deliver customer services and those fintechs that wish to displace banks. They market “banking” services, but their advertising may not conspicuously describe FDIC coverage and there may be no mention of their primary regulator. If not abated, consumers will not know that a shadow banking system has emerged until it is too late.

Greater transparency is needed, and a clear distinction must be drawn between entities supporting and providing back-office functions to banks and those entities in the marketplace implying they are banks. Those in the latter group should be required to clearly disclose in all marketing: “(Entity) IS NOT A BANK. Banking services provided by (insert FDIC insured institution name.)” Customers should be notified when the entity with whom they are conducting financial transactions is or is not an FDIC-insured institution.

In addition to the referral of possible violations to primary bank regulators, the FDIC should consider referrals to the CFPB, SEC and FTC. Many of these abuses are not only violations of the Federal Deposit Insurance Act, but they could also constitute deceptive practices under other federal laws. Further, banks should have the authority to submit complaints of possible violations. Banks are often in the best position to witness these violations through their relationships with their customers.

Across the financial services sector, recent troubles with platforms such as Robinhood and Chime offer cautionary tales that illustrate the dangers of a tech free-for-all. In banking, federal regulators must ensure that advertising executives and tech investors are not allowed to blur the lines on services or mislead the public if we are to preserve a reliable and trusted banking system for the future.