In the Shadow of Banking: Oversight of Fintechs and Their Service Companies

In the United States, the regulatory authority of government agencies over financial institutions’ third-party service providers varies depending on the type of financial institution. The Federal Depository Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) may extend their authority over service providers to their supervised institutions. Meanwhile, the National Credit Union Administration (NCUA) lacks this authority for credit unions. The federal and state agencies that oversee Money Service Businesses (MSBs) also lack this authority. The regulatory authority over MSBs service providers is particularly interesting because of the rise of virtual currency businesses providing an alternative payment rail outside of traditional institutions, allowing small fintech startups to enter into the payment space. This chapter examines federal and state authority over third-party service providers and justifications thereof. It goes on to examine some of the more unique aspects of fintech entrants to the payment space and how their service providers should be treated along with other MSBs. Ultimately, this chapter recommends that private contract law between MSBs and their service providers be used to mitigate the risks in their relationship. Limited resources and duplicative regulatory costs between federal and state agencies as well as the relatively small size of the industry makes it inefficient to directly supervise third-party service providers. However, this chapter does not reject the possibility of future extensions of government authority as the industry and its potential impact over the financial system grows.