Deep Dive Episode 37 – Fintech Licensing and the OCC Charter

Regulatory Transparency Project Teleforum

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Innovations in financial technology have enabled financial services to be provided in new ways and by new competitors, but under old rules. One area of tension is the role of federalism in a world where, thanks to the internet, firms can provide services nationwide at their inception. The balance of authority between the states, who traditionally had primary authority over non-bank lenders and money transmitters and the federal government has been called into question, with some advocating for greater federalization in the interest of efficiency and equity, and others resisting citing concerns about state sovereignty and consumer protection. Federal regulators have also taken note, with the Treasury calling for reforms to streamline fintech regulation and OCC announcing it would offer some non-depository fintech firms the opportunity to get a federal bank charter, which led the states to sue. Come hear a discussion on the state of fintech and federalism and the proper path for the future.


  • Brian Knight, Director of Innovation and Governance and Senior Research Fellow, Mercatus Center, George Mason University
  • Margaret Liu, Senior Vice President and Deputy General Counsel, Conference of State Bank Supervisors

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Event Transcript

[Music and Narration]


Operator:  This is Free Lunch, the podcast of The Federalist Society's Regulatory Transparency Project. All expressions of opinion on this podcast are those of the speakers.


Devon Westhill:  Good afternoon and welcome to The Federalist Society Free Lunch Podcast for the Regulatory Transparency Project. As I always suggest, if you're interested in where government regulation might be improved, go ahead and visit the RTP website at,, and subscribe to our bi-weekly newsletter. You might also consider following the RTP on Facebook, Twitter, and LinkedIn. My name is Devon Westhill. I’m the Director of the RTP and the host of the Free Lunch Podcast.


In this episode, we discuss innovations and financial technology, commonly referred to as Fintech and the regulatory challenges that this technology faces. One critical area of tension that we will explore today is the uncertainty surrounding who has the authority to regulate Fintech companies. This is both a vertical and horizontal federalism issue which is exacerbated by the speed at which, thanks to the internet, firms can provide services nationwide at their inception.


Today we'll hear from two experts about these thorny issues and the recent developments at the Office of the Comptroller of the Currency, among other entities. Our speakers today are Brian Knight and Margaret Liu.


Brian is the Director of Innovation and Governance, and a Senior Research Fellow at the Mercatus Center at George Mason University. Brian's research focuses on numerous aspects of financial regulation, including the creation of pro-innovation regulatory environments, the role of federalism in Fintech regulation, the use of digital assets for financial transactions, the role of regulation for credit markets and consumer protection, and the provision of capital to businesses.


Prior to joining Mercatus, Brian worked for the Milken Institute, where he headed up the Fintech and Capital Access programs. He has experience working as a broker-dealer with a focus on the emerging online private-placement market and was the co-founder of CrowdCheck, a company providing due-diligence and disclosure services to companies and intermediaries engaged in online private offerings.


Brian earned his law degree from Virginia and his bachelor’s from William and Mary.


Margaret Liu is Senior Vice President and Deputy General Counsel at the Conference of State Bank Supervisors (CSBS). Margaret serves as a part of the CSBS legal and policy team, providing legal support for CSBS and its affiliate organizations as well as overseeing CSBS efforts representing the policy perspectives of state banking commissioners before Congress.  She also serves as the lead CSBS staff member on Fintech issues. 


Margaret has worked as a consultant on financial services policy issues and in a variety of roles at Fannie Mae, including as Vice President of Single Family Mortgage Business, as Vice President for Industry Relations, and as Vice President for Policy Communications.


Margaret earned her undergraduate degree at Harvard and her law degree at Chicago.


In just a minute, I'm going to turn the floor over to Brian. Before I do, I will remind everyone that The Federalist Society takes no position on particular legal or public policy initiatives, and therefore, all expressions of opinion on Free Lunch Podcast are those of our featured speakers. Also as usual, our speakers have agreed to take questions after their remarks, so please be prepared with any questions that you might have prior to the start of the question-and-answer period. Brian and Margaret, thank you so much for joining us today as our Free Lunch Podcast guests. Brian, the floor is yours.


Brian Knight:  Thanks, Devon. Pardon me, everyone. I am down with the plague, so hopefully I can make it through this, but if not, know that I died doing what I loved—talking about Fintech. So I thought it would be useful to open up the floor to Margaret to give us some opening remarks about CSBS and sort of what they do and why they have a unique perspective on this issue. So Margaret, take it away.


Margaret Liu:  Thanks, Brian. And Devon, thanks to you and The Federalist Society and the Regulatory Transparency Project for hosting this discussion. It's timely, and we really appreciate the opportunity.


For those who aren't familiar with CSBS, we are a Washington-based organization. We've been around since 1902. And we represent the state banking and financial regulators in all 50 states and territories of the United States. Our members, the state banking commissioner and state financial regulators are not generally based here in Washington. They're all over the country, you know, pretty far outside the Beltway. And one of the key things about state regulators and the members that we represent is that they regulate a bank and non-bank ecosystem. And here's what it looks like. I'm going to throw some numbers out there because I think it's always good to kind of level set and paint a picture with data.


So state regulators, the state banking supervisors, they charter and supervise over 78 percent of this nation's banks. That's a little over 4,300 of the 5,000 -- 4,080 or so banks in this country. That's about 4,200 banks under 10 billion in assets. Between 10 billion and 50 billion there are 58 state-chartered banks. And finally, there's 17 state-chartered banks over 50 billion. So that's what the banking side of the regulatory portfolio looks like.


In the non-bank space, state regulators license and examine over 22,000 individual companies. And these cover a range of business models and activities. It includes non-bank mortgage lenders, payments companies such as money transmitters, as well as other non-bank consumer finance lenders. And across all of those different business models, I mentioned you have any number of small and large companies that self-describe as Fintech. And really it ranges in sizes too to companies operating on a huge, nationwide scale to very local companies.


And for this non-bank world that I'm talking about, state regulators are the primary regulator of these companies. And I think particularly for this audience and given that this is a discussion sponsored by The Federalist Society, it's a good opportunity for us to step back and ask how and why the states are the primary regulator in this non-bank space. Non-bank, non-depository, that's the shorthand term I'm going to use. And it goes back to the fact that our government is a balance of enumerated and unremunerated powers. The federal government operates based on enumerated powers and the state governments and state operate and function under the unremunerated powers, as far as the 10th Amendment goes. And so filling in and playing a role where the federal government does not have a clearly delineated and articulated role.


In terms of what CSBS is doing in the Fintech space, and we'll talk more about this later, but as an organization, we're supporting a variety of state efforts—individual and collective—to create a streamlined state system of licensing and supervision. So thanks for listening to kind of the overview, and I'm looking forward to getting into a more detailed discussion with Brian and with everyone who's dialed in.


Brian Knight:  Thanks, Margaret. I'll also take an opportunity to level set a little bit because as Devon alluded to, Fintech is a very broad term, and there are a lot of different policy issues that Fintech touches on. And if you want, probably the both most accurate and least useful definition of Fintech that I've heard or come up with is it's the application of technology to financial services. And so by that definition coin—you know, minted currency—is Fintech, the printing press is Fintech, the ATM is Fintech, double-entry bookkeeping is Fintech. But that's not what we're talking about here. And I think to add some specificity to this where I believe our conversation is going to focus, though it may move somewhat beyond this depending on how it goes, is around the provision of certain financial services, specifically lending and money transmission, that banks provide and are considered sort of core banking functions, but also have a long tradition of non-banks providing these functions. And the banks and the non-banks have operated in overlapping but not necessarily identical regulatory environments.


And with regard to Fintech, what we've seen recently is a significant intrusion into these spaces of relatively new, technology-heavy firms that did not come out of traditional finance, did not start off as a brick and mortar and grow organically and then over time . . . But thanks to technology, are able to service the entire country at the very beginning of their life but for the regulation. It's the regulation that limits their ability to cross state lines. It's the regulation that forces them to potentially change the products they offer on a state by state basis. It's not that there is some sort of geographic, or physical, or business limitation that prevents them from serving people the same way a brick-and-mortar facility would be limited by the fact that people are only willing to travel so far.


So with that sort of laid out, I think it's worth thinking about. What is really different, and what isn't different about this Fintech stuff, relative to other evolutions in the financial services market over the course of this country's history because depending on who you listen to, you will hear people say that -- or act as if this is somehow -- that we've just invented lending. And that doesn't seem true. On the other hand, I do think that there is something here or else so many people ranging from customers to businessmen and women to VC funding to regulators wouldn't be reacting to it. So, Margaret, to give the floor to you, what do you think is and is not different about this?


Margaret Liu:  Well, so Brian, I think that in level setting and scoping out what we're talking about today, I think you really put your finger on it, which is I think it's the pace of innovation and the pace of the deployment of that innovation. And the challenge that comes from that is that that pace is colliding with the highly regulated nature of financial services. And from our standpoint, financial services is highly regulated for a lot of really important reasons. But generally with technology, consumer expectations have evolved and changed drastically over the past few decades so that the expectations also are based on that pace of change. And financial services, again, because of the nature of the regulation, creates this tension.


The other thing, too, that we should think about in terms of the what's going on here, at the same time we have -- you used the word intrusion and certainly, you've got this huge disruptive—and I don’t say that positively or negatively—this huge disruption in financial services that is happening at the same time that we continue to have a lot of consolidation in banking that has kind of accelerated, that continues. And that, I think, also is a key piece of the background, whether that's different or not. And related to that consolidation in banking I think is the -- let's think about some of the drivers of that I think the Fintech companies are starting to understand is it takes effort to be a financial services company, and regulation has perhaps contributed to that consolidation. I think there' a lot of factors. And so what you're seeing is innovation colliding with that, and they're both trying to figure their way.


Brian Knight:  Yeah, I think that's right. I think we should also always be wondering, and not that you're not, but we should always be asking whether or not the regulatory burden makes sense. All too often we -- I feel like people take the regulation as a given or say, "Well, financial firms are highly regulated. And implicit is that is not just they're highly regulated, but they are regulated in certain specific ways. And that's descriptively true, but that doesn't necessarily mean that it should be that way. And one thing that I think the financial technology moment that we're having is prompting, and I think it's beneficial, is a rethinking on the part of everyone, not just about -- not just the statement that, okay, financial firms are regulated, but how should they be regulated? Why should they be regulated? And do different means for providing the same end merit different regulation.


So to take lending as an example, banks lend, and a big, but not the only source of funds that they draw on to lend are deposits. And these deposits are frequently demand deposits that the depositor has the right to reclaim at any moment. They're frequently -- they're not always federally insured. And so that creates a little liquidity mismatch issue, and it creates an issue where there is a government interest in -- and the government serves as the insurer. And so there is an interest in the firm not going insolvent. In addition to the potential systemic affects that insolvencies may have.


Compare that to your sort of prototypical Fintech firm that uses investment risk capital to fund their loans. So you don’t have, generally, a liquidity mismatch-type issue because the money tends to be locked up for a while, and it's risk capital that's not insured and that the investor understands is being put up to risk. So in that case, I think it's worth asking just -- or I think that poses as an example of us being willing to say, okay, financial services are regulated, but do we need to regulate -- do they need to all be regulated the same? And is the technology allowing for different methods that may actually lower or at least change the risks that are generated by financial services?


Margaret Liu:  So let's kind of pull apart some of the things that you said there because you said a lot of really important points. In terms of regulation, I think that from the state perspective, and when you look in the non-bank space, you have regulation that is activities based. And let's go back to the point that was is and isn't different here because that effects, of course, the type of regulation that you should have. And what's not different is you said is that we're still talking about some of the same core activities that have been around for a while: lending, moving money, and holding money. The delivery might be different, and certainly in the lending space, you have different decisioning tools, inputs, and processes. But state regulation is based on those activities and based in large part on how the consumer/borrower/customer experiences those activities with regard to money, frankly.


And you make a great point in terms of the fact that banks are different because you have the demand deposits and you very importantly have the role of deposit insurance. And a lot of the regulation that surrounds the fact of that very special connection to the federal government that the deposit insurance creates.


And when you talk about non-bank financial services that are regulated at the state level, you do have different regimes, whether -- the way that lending, non-bank lending, is regulated is different than the way that money transmission is regulated at the state level because it recognizes that those are different activities and the companies that are set up to do those, the risks are different. And so the ways that those risks are mitigated are different too.


Brian Knight:  Yeah. So I mean, I think that highlights an interesting question about where is the current regime working well versus where is the technology or the change of business practice enabled by the technology really running up against regulation in a way that's harmful to consumers because outdated or unnecessary regulation is interfering with the ability of consumers to access top services. Or regulation is unduly privileging one competitor over another. So I'm on the record as saying this, and this is controversial, and this is where Margaret and I are going to get into a little bit, but one area that I would point to as very clearly nonsensical is the idea that banks are allowed to lend nationwide on the basis of the law of their home state with regard to interest. That's the amount that they can charge, or the usury limit. That's the famous part of it.


But there's other stuff too. Like definitional issues of what counts as interest versus penalty versus whatever; when does a loan become a personal loan, even if it's nominally a small business loan; the definitional issues of lending, which non-banks are bound to do on a state -- they're bound by the borrower's home state law. Whereas banks, including the state-chartered banks, under federal law get to use their home state law, which gives them the ability to offer a consistent product nationwide, etc. And that strikes me as an area where maybe it made sense, or at least it wasn't that big a deal, when your non-bank lenders tended to be storefront, local, their clientele was local. But if you're a non-bank lender but you can provide credit nationwide on day one, it is not obvious to me at all why they should be having to go state, by state, by state. Whereas a bank offering the exact same product gets to go nationwide on the basis of their home state. And that strikes me as an area where law is standing -- traditional law is standing in the way of positive innovation and is privileging banks over non-banks.


Now having thrown the grenade, Margaret, I'll let you decide.


Margaret Liu:  [Laughter] Well, yeah, I think that, Brian, what you've pointed out is really the big policy question here. It's kind of like the meta-question behind a lot of these policy discussions around Fintech. And, frankly, that underlies the states' challenge -- the OCC's proposed Fintech Charter. And the point there is that Congress has made that decision. I think that you make a lot of really valid points about the balance in the marketplace and who should follow what set of rules. And I think that that's something that is -- I don't have a real, clear answer to that other than the fact that it's complicated enough that in our system, Congress should be the one discussing this, and evaluating it, and really looking at and being the venue for this policy discussion, which I know means that this is something that's not going to happen quickly one way or the other.


But laws and regulations are never going to change at the pace of innovation. And I think that we should think about whether that's a good or a bad thing. What we saw—and I'm certainly no expert in this space—but in terms of the development of the internet, you had kind of a conscious decision to sit back and watch and not to too quickly regulate. And I think that there needs to be some of that in the Fintech space, too.


Brian Knight:  So if I could push back just a little bit on the internet one. I think there's a big difference in that the internet was born into something of a regulatory green space because the best most consistent analog for the internet is speech. And there's a constitutional presumption against regulation. And the Communications Decency Act of 1996, if I remember it called correctly, included some fairly broad protections for platforms in order to shield them from, perhaps, onerous regulation. Whereas financial services is and always has been and probably always will be sort of highly regulated at the beginning. So I think one difference and one things where maybe the internet -- we can't rely on the internet as the example is that a financial product is born regulated. And then the question is, "Is it put in the right cage? Or is the cage too big, too small, or the wrong shape?"


But I also wanted to pick up on something that you mentioned. And, callers, we promised each other that we were not going to get into the nitty-gritty of the CSBS, OCC lawsuit, but it's all up on PACER, and it's riveting reading. So I recommend it to you all. But I think that there's -- I'll just touch on it a little bit, that there is this sort of -- there are basically two debates going on here, which is, "What should the regulation be?" and then, "Who should be the one doing it?" And the OCC has taken the position—and I'm not taking a position one way or the other as to whether or not they're correct—that Congress has already given us authority. They give us the authority to charter national banks. Our position is if you do one of three core banking services—lending, deposits, or money transmission—you can be a national bank. So this is not us going beyond our remit from Congress or moving in the absence of congressional authorization. Congress has authorized us to do this, and banking evolves, and this is just the next step.


And the CSBS and the New York Department of Financial Services have taken the position that—and correct me if I'm misstating anything, Margaret. I don’t intend to—that, no, the authority of the OCC is limited. And part of that is that when a bank, absence an explicit carve out, has to take deposits. That's kind of the sine qua non of banking. And so the OCC is trying to bring firms under the umbrella of banking that Congress has kept out of the umbrella of banking. And so that's a separate debate of about how wide banking is and what the authority of the OCC has, separate and apart from whether or not the regulations that, if the OCC were to win out, the regulation that the firm would be under as a national bank, are or are not appropriate for that type of firm.


Margaret Liu:  So, Brian, you've described it so well that you must have been working with our communications people ahead of time. Yeah, you summarized well the core of our objection to the Fintech Charter, which is that the OCC is using its -- it's seeking to use its own authority to basically grant itself more authority. And to really distort what it means to be a bank.


But I also don’t want to get away from your point about where does current regulation work well because it all does connect back to that. And, look, frankly, we recognize that there's a reason -- there're many reasons, but there is one reason why some companies are drawn to the concept and the idea of a national charter to do business. And because we recognize that there are frictions and pain points with regard to the state-to-state licensing system. Of course, regulation exists for a reason. Financial regulation exists for a reason. It's about accountability. It's about consumer protection, protecting markets and making sure that they're -- that the playing field and the competitive dynamic within a state is robust. But like I said, we recognize that there are lots of opportunities to make that process more efficient. And if the states are really focused on that, both individually and collectively -- and the goal is to do that in a way that meets the industry's interest in [inaudible 27.17] and greater efficiency without undermining some of the core reasons why regulators exist in terms of fostering a safe and sound marketplace that serves consumers and customers well.


Brian Knight:  Now, CSBS has taken on and is spearheading some regulatory reform efforts. And I'm just curious, from the regulator perspective, and I think you alluded to some of this earlier, but the OCC is moving, the states are moving. Now some of that may be a competitive dynamic between the two because, of course -- and I don’t want to make too much of this, but there is another factor here, which is that regulator, the OCC, and many of the state regulators are funded on the basis of chartering or licensing fees and other things like that. So there's also something of a market-share driver here. But besides that, what else do you think is motivating regulators to take notice and say, "Okay, well, now is the time for reform?


Margaret Liu:  You know, I think that the discourse in the public policy space and in the Fintech space has kind of -- first of all, I think it has, over the past decade or so, kind of coalesced, and the concerns and the challenges that industry has articulated have come together in a way. And, frankly, we're all human beings, and you have to sort of say things and experience a few things a few times to own them. And I think that the states have seen both the opportunity, and recognized that there are challenges that state regulation poses and that there are ways that are within regulators' control to begin to address some of those challenges. And I do think—and I appreciate, Brian, that you made the point—that I think to look at this as kind of turf and regulatory competition kind of misses the point.


And, similarly, for those who might say that, "Well, the OCC Fintech Charter is just a way to replicate in the non-bank space the dual banking system that you have in the banking space," also kind of misses the point because this is about -- from our standpoint, it's about local accountability and the ability and responsibility of state governments and state officials to promote those economies and to protect their citizens.


Brian Knight:  So, yeah, you said something that I kind of want to pick on because it strikes me as a little bit interesting is sort of the promoting of the economy. Is some of this what amounts to industrial policy? Like a desire to be able to have governments cultivate a certain economic environment?


Margaret Liu:  Well, certainly, I would say that the OCC's approach is industrial policy in terms of picking winners and losers through a charter. For those who are not the financial services geeks that Brian and I are, maybe I'll take a second and talk about what a license is versus a charter. And, Brian, feel free to chime in.


So a bank charter, or a charter to do business, is a judgment on that business model and that business plan. And it's a statement that, "We think this business will succeed." You know, when you look at state licensing requirements in any of these non-bank areas, what you're talking about is a set of objective standards, kind of the minimum requirements that a state legislature or state regulators have decided are necessary for responsibly doing business. And so that's kind of a basic difference between licensing and chartering that I think is important to think about.


And then when you think about a license, there's also -- and I might be taking us a little bit far field, too. A license doesn't presume long-term success. It says that you've got what we think you need to do this business. You might succeed, you might fail, and either way is okay.


Brian Knight:  So just to pick up on one thing there, I think we should -- or at least I would push back a little bit on this sort of "picking winners and losers" thing, just in the sense that any regulatory system is going to pick a winner and a loser, right? I would argue that the current system, in many important ways, advantages banks—state or federal—over non-banks. And so that system is picking winners and losers. If the OCC were to be able to move forward on its Fintech Charter, there would be winners and losers.


Now, whether or not that mix of winners and losers is more just or more efficient, or whatever the motivating principle is, is subject to -- that's something that we can debate on. But I just want to point out that I don’t think the current system is devoid of picking winners and losers. But -- and here's where I think Margaret and I can come together a little bit on. I will agree with you that if the OCC is successful in their ability to issue the Charter, that will in a very real way highlight and create a further asymmetry in the dual-banking system because -- and Margaret, you're the one who pointed this out to me, so I'm eternally grateful. If you look at the law that grants state banks the ability to lend on the basis of their home state interest rate, or interest law and all that, it's keyed to being an FDIC insured depository. And so in a world where the OCC is allowed to have these non-depository, lending, and money transmitting banks, the states could not, under current law, at least as I understand it, just easily replicate that and say, "Well, fine. We're going to issue our own non-depository charters," because the state banks don’t get the same power unless they're depositories.


Margaret Liu:  I believe—and since you've given me credit, I'll take credit for that—that's correct. But I guess I'd like to go back and kind of challenge your premise that -- and I think they're probably a lot of banks, particularly smaller banks, who do not feel like they are necessarily the winners in the current financial services marketplace, and that they're necessarily advantaged. And if anything, if you look at the industry advocacy related to the OCC Fintech Charter, one of the points that the industry makes is that everyone should be regulated like a bank. And I think because banks don’t necessarily feel like they are the advantaged players right now because of the nature of banking regulation.


Brian Knight:  Sure, --




Margaret Liu:  There's a tradeoff -- oh, sorry. Go ahead.


Brian Knight:  I was going to say, but that goes to what sort of risks are being generated. If you're a federally insured depository, you are generating risks that a non-federally insured depository, or non-depository I should say, does not. It's not that the risks are entirely different, right? You know, things like consumer fair lending, nondiscrimination. If you're in the business of making loans, the consumer protection issues that go along with making loans, apply depository/non-depository, bank/non-bank. But if one party is, "Hey, I have the federal deposit insurance and the other party doesn’t," the party receiving the federal deposit insurance probably shouldn't complain about the regulation related to that insurance function because the other party isn't getting the advantage.


Margaret Liu:  Yeah, that's true. And you've made two really interesting and critical points here. With regard to deposit insurance, one of our big concerns with the Fintech Charter is that it is creating a connection to the taxpayer and to the federal government. It might not be an explicit connection in terms of the letter of the FDI Act or the letter of federal law. But I think that it's hard to get away from the fact that this kind of imprimatur of the federal government that if the OCC does charter someone under this authority—that is it grants Uncle Sam's blessing to that company in a way that creates a connection, implicit or explicit, that you can't get around. And I think that's a real risk, and I don't want to sound like a broken record, but I think that's a risk that Congress needs to be discussing, not one agency headed by one individual, frankly.


And consumer protection, I think as you mentioned, kind of different sets of rules. There's clarity, mostly, in the banking space in terms of the state federal balance there. Going back to Dodd-Frank, there was a readjusting of that balance because of some of the things that led to the financial crisis. And consumer protection is a really big reason why we've got a lot of concerns about a Fintech charter that would explicitly and effectively preempt a lot of state consumer protection law for a business model that is not the type of business model that Congress envisioned should benefit from preemption.


Brian Knight:  Yeah, though, then the question becomes, well, it's a different business model, but is it different in a material way? If the concern is lending or money transmission—the idea that people will put money in one end and it will never come out the other—then are the business models materially different in a way where the law wouldn't necessarily cover it? Because if the OCC is correct in its authority, if it grants a charter, that institution is now a national bank and is subject to all the laws and all the legal balance that goes into being a national bank vis-à-vis the states, vis-à-vis whatever. And so I think that this could be another whole teleforum, but we could sort of tease that -- that's a question that needs to be teased apart.


Now, your point that it should be Congress that's doing the teasing is, I think, a valid one. Not that I necessarily agree, but it's certainly a good point. And like I said, this is sort of the dual debate that's going on is in a perfect world, what should the laws for these institutions look like? And then who should be the one making that call? And is the law as it currently stands in a place where the OCC does have the authority to drop these institutions into an existing framework? Or do we need to create a new framework? And if we need to create a new framework, Congress is the entity authorized to do that.


Margaret Liu:  So big questions and I think when you think about the proposed Fintech Charter and, for example, on money transmitter -- in the state regimes, you have permissible investment requirements and net worth and bonding, all of which are designed to protect the customer while that money is being moved or held. And it's a question that I don't think that certainly the OCC hasn't publicly answered. There's not a lot of transparency around what they would do with the chartered Fintech in this realm. How do you modify a bank capital regime to fit the business model of a large money transmitter? I don't know, and I don't know if you can apply traditional leverage to an entity that's moving hundreds of billions of dollars in a year, just as one example.


Go ahead.


Brian Knight:  No, go ahead.


Margaret Liu:  You know, the other thing to think about in this space, too, I've talked about local accountability and consumer protection. And what you're talking about in the Fintech space right now are a real variety of business models that are working -- yes, are able to leverage technology and would like to be national in scale on day one. That's a bit of an oversimplification. But I always come back to the point of, yes, but these customers live somewhere, right? And they need to have some means of redress that is not clear at a federal level, can be handled -- this is a little anecdote, but when state regulators deal with complaints, they deal with these like case work. Whereas you have federal agencies that function as traffic cops when they take complaints: Customer (A) complains about Company (B), Regulator (C) says, "Hey, Company (B), here's the complaint. Please deal with it." When a state regulator gets a complaint, they work with the consumer, or the customer, and with the institution in a very hands-on way. And that's really important in terms of local accountability and in terms of confidence in institutions.0


Brian Knight:  So as I understand it at least, banks, including national banks, are not entirely immune to state consumer protection law. And certainly unfair and deceptive trade practices, discrimination, etc. apply to national and state banks at the state level. I can see the other dynamic is the comparison to banks where if -- I acknowledge it's a balancing act as a series of law and political compromises. But if any complaint that could be raised about a Fintech bank, or non-bank lender, whatever, depending on who you talk to could, in theory, be raised about a bank. This dynamic, this overarching federal authority, or in the case of a state-chartered bank, this sort of federal enablement of certain things exists now. And so it's not clear to me, at least, why if it works in one context, it doesn't work in another. And maybe the answer is, well, it doesn't actually work in any of these contexts and we need to roll it all back. I know there are people who advocate that. I don't think that would be a good idea. I think it would be incredibly destructive to the economy and kind of nonsensical.


And to just to back to the very beginning here, yes, the federal government is a government of enumerated powers. One of those enumerated powers is interstate commerce. And these types of activities look a lot more like interstate commerce than certainly the current definition of interstate commerce is much broader than this. This seems like much more core interstate commerce. So if Congress wants to intervene, or as the OCC would argue, they already have, and this is just an application of that intervention, it doesn't strike me as a particularly problematic issue.


Margaret Liu:  Problematic from what standpoint? And I think that that's really Congress' decision. We are not, and I'm certainly not saying that there is no place for federal regulation in what the states do now because we already have kind of an integrated and networked regulatory system. And so I'm not saying that there should be no role for the federal government in what the states do now.


Brian Knight:  So this has been a great conversation, but we want to leave a little time for Q&A. So let me skip ahead a little bit and talk about where do you think the states should be going from here? What should be state reform agenda, to the extent it is a reform agenda and it doesn't have to be, where do you think the state should be going? And where do you think the federal government should be going on this topic?


Margaret Liu:  So the states -- and I appreciate the opportunity to talk about some of this. I mentioned the fact that there is an awareness among the states. And CSBS has certainly fostered a dialog among the states about what can be improved. And we spent a lot of time talking about our challenge to the Fintech Charter. That's really one relatively small piece of a much broader Fintech agenda for the states, and most of it is proactive. And it's about improving multistate coordination and collaboration.


The states and we have heard from non-bank companies that are regulated on a multistate basis about some of the challenges that go with not just the licensing but the ongoing supervision and examine process. And the states are really focused on being more seamless. I think that—and we are hoping, expecting that we're going to see some concrete outcomes this year in terms of increased coordination and collaboration.


The other thing that the states are doing is that they're thinking creatively on their own. CSBS might be their membership organization, but there's a lot that goes on at the states in the Fintech space outside of what is kind of "officially" the CSBS umbrella. In fact, The Banker just had a piece maybe yesterday or today about an initiative that Washington state has driven around bringing more seamlessness to the licensing process. And this is about regulators working more closely with each other and relying on each other's work. That, I think, is a key piece too are around the collaboration and information sharing. That's something that all regulators do. And by the way, it's not just a state-to-state thing. For decades, there's been a lot of state-federal collaboration, and I think in the current environment, actually, over the past decade, we've seen that become even more integrated and more networked.


The other thing, too, that I would -- that in terms of where the states are going and what the states are focused on is our own Regtech. Every regulatory agency, and the states are definitely included in that, is improving and trying to leverage its own technologies that it uses to improve its processes. And I think later on this year you'll see the states rolling out some new supervisory technology platforms that, again, are going to make the exam process much more tech reliant and efficient.


Brian Knight:  If you were advising the President, or whoever the embodiment of the federal government you chose to pick, what would you recommend they do with regard to financial technology regulation in the future?


Margaret Liu:  So in terms of at the federal level, and you've heard this come out of Treasury, a big focus on -- and I'm sounding like a broken record on a few things, but coordination and information sharing. From some of the Treasury reports that I really focused on, you saw that as a reoccurring theme in terms of regulators collaborating and not functioning in silos and breaking those silos down, and not relying on formalistic barriers to avoid coordination. And I guess, Brian, I'd like to -- given where you sit in this space, what do you think the states should be focused on, and where should they be going?


Brian Knight:  Well, thank you for asking. I appreciate it. As someone who likes the outcome of -- or who thinks that the OCC Fintech Charter is aimed at addressing some very real, meaningful problems that should be addressed, even if I'm not taking a position on its advisability or legality, I think that one thing the states should do -- you know, all credit and praise for the coordination efforts, I'm somewhat more pessimistic as to how successful or long-term durable they will be given experience in other areas, like the U.C.C. or something like that. I think there are just going to be political pressures over time that, even if you get some good harmonization, it will drift apart over time.


But one thing that I think that the states should really be thinking hard about is -- and working hard with Congress or whoever on is getting -- I mentioned earlier that the OCC Charter, if its legally successful, would represent a significant asymmetry in the dual-banking system because of the non-depository. Because of the powers that come with being a depository at state level were not necessary at the federal level. And I think that that's an area that should be addressed and should be considered, like allow a state-licensed or state-chartered, and there are subtle but important differences there that we could talk about another time, entities to be able to compete nationwide, so that the national charter is not the only or best option, and it doesn't confer a significant regulatory advantage. In my view, as a general rule is that regulation should not be the thing that gives you the market advantage. Regulation is there; to the extent regulation is justified, it's justified to protect something that's worth protecting be it the consumers, be it the system, be it whatever.


And so getting a regulatory -- being in one regulatory category shouldn't be the thing that lets you win. And so enabling the states to compete on a level playing field, which in my opinion would probably require federal harmonization akin to what we saw with state banks and interest, is something that I think would be really worthwhile. And then the states and the OCC could continue competing. You'd have if not a dual-banking system because some of these institutions may not have to be banks, at least a dual-banking services system that could continue to develop and would hopefully allow for innovation and competition to the benefit of consumers.


Margaret Liu:  I think you make some great points there. We want to make sure we leave time for questions, but I'll just kind of react briefly to a few things that you said there. I think that one of the takeaways from -- one thing I'm taking away from what you just said is that there's all this talk about innovation in the non-bank space. And, of course, that's the topic that we're talking about here. But I think it's important that innovation be thought about comprehensively throughout the ecosystem we're talking about and ensuring that banks generally have the same opportunities or have similar corollary opportunities to leverage technology. And innovation is really important again kind of in the vein of not picking winners and losers.


The other thing I think your reference to the U.C.C. reminded me that from our standpoint, harmonization, greater efficiency does not require a change in law. In fact, there is a lot that the states are focused on that does not require a change in state law or in federal law. And I think state regulators are feeling empowered and encouraged to seek those opportunities within the appropriate scope of their own existing authority to drive towards some greater consistency, while not diluting regulatory protections.


But I think it's a really good question that states are asking themselves when you look at certain, maybe long-term standing requirements, does this make sense? Should there be more flexibility to accommodate new business models? Can this requirement, like a brick-and-mortar requirement in certain licensing regimes -- is this necessary? I think states and state legislatures are asking those questions.


Brian Knight:  Well, as you said we want to leave some time for Q&A, so why don't we get to it. Devon, are there any questions?


Devon Westhill:  Well, what a great conversation. I know we've got a hard stop, so we got very little time here for questions. So if anyone on the call has questions, make sure you buzz in quickly here. In a moment, everyone's going to hear a prompt indicating that the floor mode's been turned on. After that, if you have a question, hit star and then pound on your telephone keypad. I'm opening the floor now.


Okay, the floor mode is on. When we get to your request, you'll hear a prompt. What I'd like for you to do thereafter is to state your name and affiliation and then you can ask your question. We'll answer the questions in the order in which they are received. Again, to ask a question, what you need to do is hit star and then pound on your telephone keypad soon because we do have a hard stop in about five minutes.


Not seeing any questions right away, I think Brian and Margaret, the two of you could go on for another six or seven hours at the very least until Brian, of course, passes out from his plague. But let me toss is back, perhaps to Brian and allow you to offer a few more insights.


Brian Knight:  Yeah, well, so I guess I was going to ask Margaret and then time just got away from us as if often does. How optimistic are you on these reform efforts? What do you think the reasonable chance is of some sort of benefit coming out of the state or federal environment are?


Margaret Liu: Well, speaking for the states I'm very optimistic, and I'm really confident that there is a will continue to be a commitment by the states and a recognition of the opportunities to kind of do what we do but to do it better and to think creatively about new ways to achieve regulatory objectives and goals. And I think that -- we have this thing called Vision 2020, which is how we describe a lot of our Fintech initiatives. But 2020 is not the end, and I think that what you'll see is that a lot of what is going on this year will shape what the states do well past the year 2020, which, even though we're only at the beginning of 2019, will be upon us before we know it.


Brian, I guess one thing, and probably because we don't have anyone from any of the federal agencies on here, where do you see th0e federal regulatory fabric and infrastructure going when it comes to Fintech? We've got different agencies that have their own offices of innovation. You have some interesting work and efforts between the SEC and the CFTC in terms of scope of authority there. And I'll kind of throw that out probably because I'm not a securities expert, but I'd be interested in your perspective in that space.


Brian Knight:  Well, I'm not a securities expert either. So I guess it's the blind leading the blind here. I think at the agency level you are seeing agencies getting serious about reevaluating how they can act in a way that benefits innovation and competition, with the recognition that innovation and competition is consumer protective in that it gives consumers more and better choices, and allows them to have options, and to walk away from bad options. And so I think you're seeing some recognition of that, and that's actually completely consistent with their regulatory agenda. We'll see how long, and how durable, and how much power these groups actually have or if it's just something where it's like more window dressing. We'll have to see.


I think that the SEC and the CFTC are doing some interesting stuff together around digital assets. And in part, I think out of a legitimate desire to not be caught behind the power curve and not to unduly impede beneficial regulation and things that make it easier to access capital, access good investment, and have orderly markets, while also being on top of the issues so that if and when there are issues, and problems, and fraud, and whatnot, they are not having to figure out what's going on for the first time. You don't want to be reading the plane's manual when you're having to make your landing. You want to know what you're doing by the time you have to actually do it.


So I think there's some efforts there. I also think that there is more of an appreciation of benefit cost analysis of regulation. And that not only applies when you're actually writing a regulation but it also can apply to the broader thought of, "Hey, what does this regulation cost society, and is there a way we can obtain the same benefits with lower costs?" And so my hope is that this is not a blip. My hope is that this represents a durable change in regulator mentality that will persist beyond this administration and become sort of a more consistent thing.


Devon Westhill:  Brian and Margaret, since we have one question here pending, I'm going to go ahead and go to that question and try to get this in before our hard stop here.


Margaret Liu:  Sure thing.


Devon Westhill:  Okay, great. Caller, when we get to you, please state your name and affiliation and then ask your question.


Tony Cotto:  Hey, guys. This is Tony Cotto with the Kentucky Public Protection Cabinet. Real quick, I just wanted to get your thoughts on the fact that delivery devices make such a difference now. When you talk about those regulations and bringing in the regulators for the communication devices and the lines where things go well beyond financial regulation, any thoughts or conversations happening in that space?


Devon Westhill:  Thanks, Tony.


Brian Knight:  So --


Margaret Liu:  Thanks, Tony. Go ahead, Brian.


Brian Knight:  No, no. You go ahead.


Margaret Liu:  So far, I think that those two have basically been able to kind of operate in separate lanes, and operate kind of effectively there. And I'm not a technologist, so we have already exceeded my knowledge in terms of the technology of the devices. But I think what kind of unifies and is kind of the overarching concern there is cybersecurity. You know, talk about something that is the topic for another -- any multiplicity of podcasts. That's where some of this is going to converge. And when you look at data related to cybersecurity, the generally applicable data protection standards, for example.


Devon Westhill:  Brian, any thoughts there?


Brian Knight:  Yeah, well, I would first plead complete ignorance of the SEC side of the house. But just to add to Margaret, the other area where it might end up being relevant the interplay between technology and the financial side is market penetration, and the fact that with the greater penetration of smart devices to broader and broader segments of society, that means that products may be available to new groups who otherwise might have been more limited or bound by their, say, geography or their limited movement area, or something like that. And so it'll be interesting to see what, if any, that implications that has for regulation.


Margaret Liu:  Yeah, that's a great point, Brian, in terms of -- and this gets back to kind of the speed of proliferation and deployment of new financial services. Are the consumers who are on the receiving end, are they appropriately and kind of adequately informed about the transactions they're undertaking, about the services that they are seeking to avail themselves, are aware of the benefits and the risks because technology can offer a lot of consumer benefit but we can't forget that there's bad actors in every space. And just because it's tech doesn't mean it's better for consumers.


Devon Westhill:  Margaret and Brian, thank you so much for you thoughts. I want to get just, maybe, 30 seconds on any final thoughts that you have. But before we get there, and as you're thinking about those, I want to just let everyone on the call know that later this month, we'll be releasing on our website,, a short mini-documentary on Operation Choke Point. Of course, that initiative of the Justice Department and other financial regulators to investigate fraud in the banking industry, which has proponents and opponents. And it features our distinguished Brian Knight in the film. So please, if you haven't already, subscribe to our bi-weekly newsletter so you'll know when that's coming out, or follow us on one of our social media platforms. Again, that's Operation Choke Point mini-documentary coming out later this month, featuring Brian Knight among others.


Okay, 30 seconds, Margaret, Brian, I'm not sure who wants to go first. Do you have any closing thoughts for our guests?


Margaret Liu:  So I'll start. This is a big and complicated space. I think it's really important that organizations like The Federalist Society and this particular project are engaging because one of the main things we have learned from this effort is kind of the constant feedback loop with as broad of range of stakeholders as possible is really important for regulators.


Brian Knight:  Yeah, and I would just say I agree. It's a large, complex issue, and it's actually multiple issues, as I think we touched on here. So to the extent that people can think through, with as much precision as possible, and really kind of figure out what exactly they are fighting over and fight over that rather than just sort of abstracting up to a bigger concept of innovation: good/bad; or are states good/bad; or federal good/bad? I think that'd be really helpful to the discourse because I think that there are some areas -- there are some positive innovations and positive reforms that can occur that should be broadly popular if we can just kind of get the questions right.


Devon Westhill:  Brian, Margaret, thanks so much for participating today. Everyone on the call, if you missed anything or you want to review something that's been said on today' teleforum, we'll have the podcast up live tomorrow at and on our social media pages, so that you can re-review or to share with your colleagues.


But on behalf of The Federalist Society's Regulatory Transparency Project, I want to thank everyone for joining us today, and until we meet again, so long.


Operator:  On behalf of The Federalist Society's Regulatory Transparency Project, thanks for tuning into Free Lunch. As always, you can subscribe on iTunes and Google Play to get new episodes of Free Lunch when they're published. Also, visit our website at That's There, we regularly upload content in addition to our podcasts, such as short videos and papers. And you can join the discussion by sharing your story of how regulation has personally affected you. Until next time, remember there's no such thing as a free lunch.


This has been a FedSoc Audio Production.