Fintech, Customer Experience Key Concerns for Fed Advisory Council

Members of the Federal Reserve’s Community Depository Institutions Advisory Council — which includes several American Bankers Association member bank CEOs — raised concerns over the uncertain regulatory environment for innovation and bank-fintech partnerships and over growing regulations that directly harm the customer experience, according to minutes of the CDIAC’s last meeting released by the Fed.

The council said that “regulatory uncertainty is a major challenge for banks seeking to adopt innovations or pursue fintech partnerships,” adding that “the risk aversion among regulatory agencies can be reflected in costly requirements that outweigh the advantages of innovation.” Council members called on the banking agencies to work together to keep innovation from happening outside of insured depository institutions and to promote a level supervisory playing field for banks and nonbanks.

While regulatory burdens have continued to increase, the CDIAC told the Fed governors that newer regulations are now significantly affecting the customer experience — in particular the TILA-RESPA integrated disclosures and customer due diligence rules, which “have meant a sharp deterioration in the customers’ experience,” they said. “If the ultimate result drives these customers to alternatives, such as marketplace lenders and shadow banks that have become easier to deal with, not only will the institutions lose business, but the Federal Reserve System will also suffer in its ability to influence monetary and economic conditions.”

After the election, there are now eight states where recreational marijuana use is permitted by state law and 28 states where medicinal use is permitted. The expansion of marijuana use poses challenges for banks in these states, which are subject to federal laws prohibiting marijuana use. “When it comes to banking services for emerging marijuana businesses, frankly, community institutions are at a loss,” the CDIAC members said.

They asked banking regulators for more and clearer guidance that would touch on — among others — whether banks that serve pot businesses will lose access to their Fed accounts, what kinds of onboarding and ongoing monitoring is necessary for marijuana-related customers and what responsibilities banks have related to tax collections and payments.