Banking Power: States work to maintain authority over new financial players.

• Author: York, Tres
• Position: FINANCIAL SERVICES AND COMMERCE

The dual banking system--federal and state--has been one of the cornerstones of the American financial landscape since the nation's founding.

And it works.

"The dual banking system has been an extraordinary success in the United States, providing the country a strong and resilient banking system," says Kentucky Rep. Adam Koenig (R), who serves on the House Banking and Insurance Committee. "States have worked hard to design regulatory systems that encourage innovation, while still protecting citizens. Especially in the rapidly expanding world of financial technology, state oversight is critical."

And there's plenty of it. Nearly 80% of all U.S. banks are regulated by state banking supervisors, who also serve as the primary regulators of nonbank financial institutions, including financial technology companies. States require a thorough charter process for banks and nonbank companies and enforce different types of consumer protections, including preventing housing discrimination and privacy violations, and imposing interest rate caps, among others. States regulators also have made enormous strides in creating a more uniform chartering process across state lines.

Over the last few years, however, state banking authority has faced a variety of challenges. In 2020, for example, the Office of the Comptroller of the Currency decided to accept applications from payments companies to obtain national bank charters. That would preempt state regulatory authority and bring the companies out from under state regulations and consumer protections, including interest rate caps and state usury laws. A similar OCC proposal in 2016 to accept national bank charter applications from fintech companies was stalled in the courts. As a result, the OCC narrowed its proposal to "payments companies" that help facilitate the transfer of payments between people or other entities.

While the issue is still being litigated, states believe that because money transmitters, mortgage lenders, loan providers and other fintech companies do not accept deposits like traditional banks, the companies do not meet the threshold of operating in the "business of banking," as defined in the National Bank Act. Moreover, states believe any preemption of their banking authority should come from Congress, not federal regulatory agencies.

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