Tag Archive for: regulation

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Auriemma Analysis: Insight Into the OCC’s Proposed Fintech Charter

(New York, NY):  Last month, the Office of the Comptroller of the Currency published its proposal to debut a national bank charter specifically for fintech companies and invited public comment on potential implications of the measure.  Auriemma responded to the OCC’s request with a comment letter assessing the proposal’s possible effects on non-bank lenders, payment companies as well as traditional banks.

The core of the OCC proposal is offering a national banking charter to a segment of fintech companies, such as payments technology and marketplace lenders, that provides recipients with the ability to forgo deposits (and skip the FDIC insurance process), while still having the advantages of a national bank charter. For fintech companies with consumer lending businesses, this is especially useful in simplifying pricing, as a national bank charter would allow such companies to select one domicile for determination of rates and regulations and to “export” them to consumers in other geographical areas.

Currently, non-bank lenders are often in contractual relationships with “originating” banks as a way to indirectly achieve national bank advantages, such as avoiding the “state-by-state” regulatory compliance model historically used by non-bank finance companies. The new charter would eliminate the need for an originating bank and allow the OCC to more directly regulate these activities.

Fintech firms would be primarily regulated by the OCC, but this proposal makes clear that all other relevant regulators would still be involved (e.g., a public company would still be regulated by the SEC also).  If a fintech bank elected to be an FDIC depository, for example, the FDIC would also be a key regulator. (Among the most unique features of the charter is that the FDIC insurance is not a requirement, but rather an election.)

Should the proposal move forward, it could also signal a flow of new equity capital moving into the banking sector. (Many institutional equity investors had been sidelined by the current interplay of the Bank Holding Company Act and the FDIC insurance requirement.) This would mark a return of the same investors who flocked to the non-bank fintech companies to participate in consumer credit without these regulatory impediments.

Still up in the air: the appropriate level of regulatory capital that would be needed by a fintech bank. While a non-FDIC insured institution presents no risk to the FDIC guaranty fund, it may still present systemic/contagion risks. Similarly, a non-FDIC insured institution would not fall under the Community Reinvestment Act, but the OCC will still expect fintech companies to address financial “inclusion.” It remains to be seen how this could be addressed outside of the CRA framework.

Since the OCC published its proposal, political opposition has emerged.  Some state Attorneys General and Senators Sherrod Brown (D-Ohio) and Jeff Merkley (D-Ore) are questioning the new charter, saying it is a way to avoid state usury and compliance laws.  Although the OCC did not expect this to become a partisan issue, it now appears likely to become one.

Ultimately, we view this proposal as the OCC offering fintech companies national bank preemption in exchange for direct supervision.  While fintech companies have always had the option of becoming a bank, the new charter makes this more acceptable to institutional equity investors while simultaneously safeguarding the insured deposit base.  Clearly, the OCC is open to revisiting some traditional bank regulatory matters from a new vantage point.

 About Auriemma Group

Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. For more information, contact John Costa at (212) 323-7000.

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FCA to Focus on Repayment Behaviour, Persistent Debt in Follow Up to Credit Card Market Study

(London): The FCA is conducting research on consumer repayment behaviour to alleviate persistent debt in anticipation of a new package of remedies. The additional research follows the Credit Card Market Study Final Findings released in July.

Everything from behavioural cues to statement presentation could potentially influence payment behaviour, an FCA representative said during a Q&A session at Auriemma’s Card Finance Roundtable in October. While at the meeting of card issuers, the regulator detailed some of the hypotheses it is testing, including how different consumer segments react to behavioural nudges around suggested repayment amounts, the impact of minimum payment “anchoring,” and how the presentation of amortisation can stimulate repayment habits.

Six months of data will be used in the analysis to assess the study’s impact on consumer behaviour and monitor for unintended consequences.

The FCA also detailed an additional study in collaboration with The UK Cards Association, focussed on further conceptualising early intervention and establishing a set of escalation tools firms will follow to encourage consumers out of persistent debt.

“The FCA has acknowledged that behavioural nudges may not work for all customers, as some may be in financial difficulty,” said Matt Bethell, Senior Associate of Auriemma’s UK Industry Roundtables. “The output of these additional studies will be remedies that incentivise firms to escalate intervention around persistent debt, without damaging customer service.”

The follow-up studies directly respond to some of the FCA’s more significant conclusions from the July study, including the identification of two consumer groups requiring attention:  those carrying debt for longer than three years (most likely due to habitual minimum payments) and those moving rapidly from acquisition to problem debt within one year. To identify these groups, the FCA requested significant data sets from issuers and ran analysis across the product lifecycle. The FCA compared the returns of credit card products for both low- and high-risk consumer segments and found that, between 2010 and 2014, returns were typically six percentage points greater on high-risk segment products. One quarter of accounts taken out in 2013 by consumers within the high-risk segment were in severe or serious arrears by 2014.

“While the FCA concluded that the market is working well for the majority of consumers, and that product cross-subsidisation was not materially impacting competition, it also believes firms have fewer incentives to address consumers with persistent levels of debt and should be intervening earlier,” Bethell said.

While the full implications of the results of these studies are not yet known, issuers are anticipating changes to their portfolio economics and, potentially, value propositions. These developments will be key agenda items at the Card Finance Roundtable in the year ahead.

About Auriemma Group

Auriemma is a boutique management consulting firm with specialised focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. For more information, please contact Matt Bethell at +44 (0) 207 629 0075.

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Clearer Issuer Communications Help Consumer Satisfaction With Credit Cards Reach 4-Year High

(London): Consumer satisfaction with credit cards has seen a steady increase since 2012, suggesting that the investments issuers have made in communicating the value and benefits of credit cards are paying off, according to Auriemma Group’s UK Cardbeat.® This syndicated online research publication was conducted in February 2015 among 442 UK cardholders. While the industry scored better for each of the factors measured, the improved satisfaction is mostly attributed to higher levels of trust in protecting information, and clarity surrounding credit card terms, signifying that recent efforts by banks have not gone unnoticed.

The Auriemma Industry Satisfaction Index (ISI) is a trended measurement of consumer satisfaction with credit cards, and has seen a stable rise over the past 4 years (69.6 in 2015 vs. 61.6 in 2012). While the industry posted an increase in each of the factors measured, the largest gains were among “I trust credit card companies to protect my personal information” (averaging 6.8 vs. 5.9 in 2012) and “Rules, terms and conditions are easy to understand” (5.6 vs. 4.4 in 2012). While this higher rating demonstrates progress, there is still substantial room for further improvement in transparency by banks, which the Financial Conduct Authority (FCA) has prioritised since early 2014.[1] The organisation identified areas they believe are not working in the best interest of some consumers, and hope to build a detailed picture of the credit card market to identify which actions should be taken.

“Improving consumer education through easily-understood marketing has been a priority in the industry for quite some time, and it’s encouraging to see consumers are recognising the efforts that have been made,” say Marianne Berry, Managing Director of the Payment Insights practice at Auriemma. “Even before the FCA’s most recent push, banks were already headed in the right direction.”

The research shows additional signs of improved consumer knowledge, specifically regarding APRs. In 2012, less than one-quarter (22%) were able to indicate the interest rate on the outstanding balances on their most frequently used credit card. Over the past four years awareness has steadily risen, and the proportion has doubled to nearly half (45%). Among revolvers, the group most impacted by APRs, awareness is even higher, with 6 in 10 able to specify their interest rate.

Following a similar line of inquiry to the work the FCA is doing, Auriemma’s upcoming issue of UK Cardbeat® will focus on opportunities for consumer education and improvement. “Providing notification is no longer enough; we need to ask cardholders what aspects of financial education they want more of. Efforts tend to be unsuccessful without a thorough understanding of what the consumer hopes to learn, and by what means we can successfully deliver this information. Our forthcoming research aims to unveil just that” says Berry.

Survey Methodology

The study was conducted online within the United Kingdom by an independent field service provider on behalf of Auriemma Consulting Group in February 2015 among 442 credit card users (“cardholders”). The number of interviews completed on a monthly basis is sufficient to allow for statistical significance testing between sub-groups at the 95% confidence level ± 5%, unless otherwise noted.

 About Auriemma Group

Auriemma is a boutique management consulting firm with specialised focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines.

[1] http://www.fca.org.uk/news/credit-card-market-study

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