lawmakers and regulators scrutinize nascent ‘neobank’ industry | Man’s pepper with trout
The proliferation of “neobanks” has recently attracted the attention of lawmakers and regulators. “Neobanks” are financial technology companies that offer banking-like services through a digital interface. These businesses often market themselves as serving low- and moderate-income people who are underserved by traditional banks. Neobanks offer a variety of services, such as deposit accounts and payday advance programs. While these services are similar to those offered by traditional banks and payday lenders, neobanks are not subject to the same regulatory frameworks that govern more traditional entities. As a result, neobanks occupy a regulatory gray area that regulators and lawmakers are currently working to define.
How neobanks work
In practice, neobanks offer many of the same services as traditional banks, but they differentiate themselves by advertising to a wider customer base. Companies like Chime and Dave welcome customers with less than perfect credit histories because these companies do not require a customer credit check. Although clients can open accounts with neobanks, neobanks outsource actual banking operations to other institutions. For example, Chime customers interact with the Chime digital interface, but two regional FDIC-insured institutions actually hold the customers’ money.
This model leaves the neobanks in a regulatory no man’s land. According to Alex Horowitz, senior researcher for the Pew Charitable Trusts’ consumer finance project: “When you have a fintech that is the interface with the consumer, they don’t have a primary regulator,” he said. he declares. “They are primarily regulated as a supplier to the existing bank, as the banks are required to manage their suppliers and they are responsible for relationships with third parties. But this is still a deleted step.
Neobanks also offer payday advance services like those provided by payday lenders, but they offer these services in a way that occupies a regulatory gray area. Unlike non-digital payday lenders, neobanks have no recourse against users. And unlike non-digital payday lenders, neobanks don’t charge customers a fee before granting them a loan; instead, neobanks seek optional “advice”. This model does not fit perfectly into the current laws that deal with payday loans.
Increased surveillance of neobanks
Despite the unstable regulatory landscape – or perhaps because of it – lawmakers and regulators are looking at neobanks with closer scrutiny. In July, Sherrod Brown (D-OH), chair of the Senate Committee on Banking, Housing and Urban Affairs, sent a letter to the Consumer Financial Protection Bureau (CFPB), asking it to assess the risks associated with applications that offer banking services. In the letter, Senator Brown highlighted the potential risks posed by non-banks offering financial products and services. These risks include the potential for apps to shut down, leaving consumers “unable to pay their bills, [become] subject to late fees, become past due on bills and risk losing their home to eviction or foreclosure. In addition, Senator Brown called on the CFPB to “offer advice on gaps in the regulatory framework that may require action by Congress.”
The CFPB has already opened its own investigations into neobanks. Last summer, the CFPB opened an investigation into Dave to examine the company’s cash payday advance business. In particular, the CFPB was interested in Dave’s compliance with consumer protection laws regarding unfair or deceptive practices, the Electronic Funds Transfer Act, and the Truth in Lending Act. The CFPB ultimately decided not to prosecute Dave.
Neobanks have also caught the attention of state regulators. In 2019, the California Department of Financial Protection and Innovation opened an investigation into Chime after receiving complaints about a failure in Chime’s system that prevented consumers from accessing their accounts. Upon investigation, the agency concluded that Chime had violated state law by describing itself as a bank, which the agency said “was likely to confuse consumers” because “Chime itself is not licensed or insured as a bank “.
Likewise, the New York Department of Financial Services and officials from 10 other states, as well as Puerto Rico, are investigating the neobank industry. Their investigation focuses on whether neobanks violate consumer protection and payday loan laws – in particular, these regulators assess whether the “tips” or monthly membership fees collected by neobanks are usurious. or illegal.
Take away food
The nascent neobank industry offers insight into the challenges that arise when traditional industries move online. It will be interesting to see if regulators continue to investigate neobanks on a piecemeal or company-by-company basis, or if lawmakers act to fill gaps in the regulatory framework.
 See https://www.propublica.org/article/chime.
 See https://www.law360.com/articles/1428712/banking-app-says-it-cleared-cfpb-s-paycheck-advance-probe.
 See https://www.propublica.org/article/chime.
 See https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1908061.