Big Tech in financial services has become an increasingly important focus for regulators as technology companies expand into payments, lending, and other banking-related activities. While many of these firms partner with established financial institutions rather than operating as banks themselves, their scale, customer reach, and data capabilities have the potential to reshape the competitive landscape. Amazon’s continued expansion into financial services highlights the growing regulatory attention surrounding the role of non-bank technology companies in the financial ecosystem.
In this referenced posting from Bloomberg, the authors review the apparent news that the Fed’s vice chair for regulation (a post created through Dodd-Frank) is keeping a watchful eye on tech giants like Amazon as they explore further ambitions into the financial services space.
Fed Vice Chairman Randal Quarles, the U.S.’s most influential banking watchdog, is monitoring the potential for disruption to the industry and has expressed concern about how tech companies could provide financial services outside of regulators’ oversight, according to people who’ve spoken with him privately. Quarles hasn’t yet made any moves to intervene and the Fed’s influence would be limited.
We don’t know if the ‘most influential’ superlative is accurate for the position since it’s a bit subjective, but the Fed’s direct bank regulatory spectrum is around financial holding companies (e.g.; annual CCAR reports) and an FI’s ability to expand (e.g.; CRA score reviews). However, oversight and concern about tech giants forays into financial services such as lending should certainly be expected. Direct provision of financial services by non-bank entities is of course nothing new (think PayPal in payments and SoFi in lending) so the concern is really around tech giant scale and the role of regulators for non-banks.
To be clear, the distinction between what is a bank and what isn’t is relatively simple; taking deposits. So the Lending Clubs of the world can finance loans through secondary financial markets and the PayPals can use bank partners to facilitate ‘accounts’. However, once a business entity decides to take personal or business deposits in order to fund assets, they must file for a bank charter, thus becoming directly beholden to the U.S. assortment of regulatory agencies. Amazon has been exploring ‘checking accounts’ and so forth, but through bank partnerships. The question becomes whether or not the tech giants (or non-giants) want to set up a real banking entity. As we pointed out in our research titled Fintechs Can Apply for National Bank Charters: Update-Has the Train Stalled?, the OCC at one point was open to this (and seems like still is) but state banking regulators have a lawsuit in place to challenge the OCC’s authority to do so. Nonetheless, there are avenues open to fintechs should they decide to have a bank, but the spectre of regulators is a daunting reminder of the price to pay.
Banks are of course concerned about the ability of non-banks to avoid direct regulation and would prefer a level playing field, although that also increases direct competition. But the overriding sense that banks have is that you should ‘feel my pain’ if you want to do what I do.
As Amazon plows into one industry after another, traditional banks have feared they may be affected. Amazon, Google and Facebook Inc. are already encroaching on turf long dominated by lenders, including payments and making loans to small businesses.
As Big Tech in financial services continues to evolve, regulators will likely seek to balance innovation with consumer protection and financial stability. Whether through partnerships with banks or new fintech initiatives, companies like Amazon will remain under close scrutiny as policymakers determine how existing regulatory frameworks should adapt to a rapidly changing financial services market.
Overview by Steve Murphy, Director, Commerical and Enterprise Advisory Service at Mercator Advisory Group
