Smbliq A 064 Ilpa Comment Letter To The Federal Reserve On Proposed Account Access Guidelines 2021 07 12
Summary
Comment letter from ILPA to the Federal Reserve on the proposed Account Access Guidelines for Federal Reserve Bank accounts and services. ILPA describes itself as the leading trade organization for online financing and service companies serving small businesses, and states that its members facilitated over 600,000 PPP loans with an average size of approximately $35,000. The letter says the guidelines could be substantially improved and argues that new market entrants with special purpose charters meet the definition of a "depository institution" under Section 19 of the Federal Reserve Act. It also encourages the FRB to extend account access to non-depository state-regulated lenders.
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“Smbliq A 064 Ilpa Comment Letter To The Federal Reserve On Proposed Account Access Guidelines 2021 07 12.”
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4. Provision of an account and services to an institution should not create undue risk to the stability of the
U.S. financial system.
5. Provision of an account and services to an institution should not create undue risk to the overall
economy by facilitating activities such as money laundering, terrorism financing, fraud, cybercrimes, or
other illicit activity.
6. Provision of an account and services to an institution should not adversely affect the Federal Reserve’s
ability to implement monetary policy.
ILPA applauds the FRB for taking the initiative to proactively address concerns around granting access
to accounts and services to novel new market entrants. While we are thankful for the attempt to provide greater
certainty to these novel applicants as they seek to gain access to Federal Reserve Bank accounts and services,
we believe the Account Access Guidelines could be substantially improved in specific ways that further
promote the Board’s policy goals and strengthen the financial ecosystem. Our comments will seek to address the
three specific questions the Board poses in the release:
1. Do the proposed account access guidelines address all the risks that would be relevant to the Federal
Reserve’s policy goals?
2. Does the level of specificity in each principle provide sufficient clarity and transparency about how the
Reserve Banks will evaluate requests?
3. Do the proposed account access guidelines support responsible financial innovation?
About ILPA
ILPA is the leading trade organization for online financing and service companies serving small
businesses. Our member companies 1 share a commitment to the health and success of our nation's small
businesses and dedicate themselves to advancing best practices and standards that promote responsible
innovation and access to capital. Our members have provided over $50 billion to more than 1 million small
businesses in a variety of industries, from restaurants, to construction to hair salons and beyond. Our members
provide financing from $5,000 to $500,000 with an average loan size of between $35,000 and $80,000 primarily
to businesses with fewer than 10 employees. In addition, ILPA members meaningfully participated in the
Paycheck Protection Program (PPP) lending, both directly and through bank partnerships. Our members
facilitated over 600,000 PPP loans with an average size of approximately $35,000 and a median loan size of
approximately $15,000. According to the data submitted by borrowers, ILPA members saved over 2 million
jobs and served small businesses with an average of 5 to 6 employees. Additionally, fintechs were active
members in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF) throughout the
pandemic.
In 2016, ILPA launched an industry-first, voluntary model disclosure tool – the SMART Box® – that
presents small businesses with comprehensive pricing metrics and identifies key financing terms in plain, easy-
to-understand language. In addition to the SMART Box®, each ILPA member adheres to a Code of Ethics that
sets forth the best practices for our members involved in providing, facilitating, and supporting the provision of
capital to small businesses. Those best practices include the following commitments: (1) offers of capital or
financing should be transparent and comprehensive; (2) small business customers should be treated fairly; (3)
capital to small business customers should be offered responsibly; (4) agents and brokers should be encouraged
to adhere strictly to all applicable laws and treat small businesses honestly and fairly; and (5) adoption of this
Code of Ethics throughout company operations.
1
Members of ILPA include A10 Capital, BFS Capital/Nuula, Biz2Credit, BlueVine, Fundbox, Funding Circle, Kabbage/AMEX,
Lendio, Mulligan Funding, OnDeck/Enova, Paynet/Equifax
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As small business lending platforms, ILPA members have a tangible impact on our nation’s businesses
every day. ILPA members believe that in order to grow and invest in their business and employees, small
business owners need access to timely and affordable credit. They need capital to purchase inventory and
equipment, to upgrade or expand their facilities or operations, and to hire new workers. Unfortunately, small
businesses have historically lacked access to capital, a challenge exacerbated by the Great Recession. The cost
and approach of traditional underwriting practices continue to render “Main Street” lending not economically
viable for many banks, resulting in a credit gap for small businesses that risks their success and vitality. ILPA
members leverage innovative technologies, business models, and in some cases, bank partnerships to fill that
gap.
Overview of Response To Account Access Guidelines Proposal
In response to the Board’s third question in the release, ILPA is encouraged by the possibility of non-
depository fintech lenders that are subject to regulation by a state(s) being permitted access to the Fed’s
settlement services. At present, fintech’s have to rely on a bank partnership with a legacy financial institution to
gain access. While that relationship has been beneficial in allowing banks to expand their reach into traditionally
underserved communities, fintechs can achieve far greater scale and provide greater service to millions of
consumers and small businesses if these companies are allowed to access the Fed’s settlement service directly.
ILPA is encouraged that the FRB includes special purpose charters granted through the Office of the
Comptroller of the Currency (OCC) in its Account Access Guidelines. However, ILPA believes the proposal
does not adequately encompass all potential new market entrants that should be eligible for account access and
services. Special purpose charters through the OCC are difficult to qualify for and the Acting Comptroller has
recently issued a pause on applications as the agency undertakes a comprehensive review. The ILPA encourages
the FRB to move forward in the meantime, expanding access to fintechs beyond those that have applied for and
been granted special purpose charters through the OCC. With respect to including a broader set of institutions,
we believe the principles and factors used in the framework to govern access to accounts and services should be
tailored to the specific risk these new market entrants present – risk posed which is oftentimes far less than the
risk of deposit-taking institutions.
Such payment system access is not without precedent since many fintechs participated in the PPPLF
with no emerging systemic threat to the financial system. More specifically, fintech participation in the
payments system would further the Board’s five policy goals as outlined above, increasing stability, consumer
protection and access.
Guidelines Do Not Support Responsible Financial Innovation
A. Guidelines are Contrary to the Promotion of an Inclusive and Innovative Payment System
As previously mentioned the ILPA is encouraged that the Fed is open to supporting responsible
innovation through allowing access to the FRB settlement service. With regard to institutions that have received
a special purpose charter through the OCC, ILPA contends that these institutions meet the criteria for inclusion.
ILPA asserts new market entrants that obtain special purpose charters, whether through the OCC or the various
states, are legally entitled to access to accounts and services as they meet the definition of a “depository
institution” under Section 19 of the Federal Reserve Act which governs eligibility for accounts and services.
Section 19 defines a “depository institution,” in part, as any banking entity that is “eligible to make an
application to become” insured under section 5 of the Federal Deposit Insurance Act.
ILPA, along with the OCC, has long maintained that a “bank” is constituted by any entity substantially
engaged in lending, payments or deposit taking. While a new market entrant with a special purpose charter
might only be engaged in lending, payments, or a combination of the two at present, pursuant to its charter, it is
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eligible to take deposits as a line of business in the future. Thus, it is also “eligible to make an application to
become” insured rendering it qualified for access to accounts and services at a Federal Reserve Bank.
Beyond those institutions that have received a special purpose charter through the OCC, the ILPA
encourages the FRB to broaden the scope of the proposal, to include non-depository state-regulated lenders. As
previously mentioned, such a step would help foster innovation and drive down costs for customers. As noted
by other commenters, the Bank of England recently took a similar action in providing “non-bank payment
service providers” direct access to its wholesale settlement services. This approach is consistent with the idea of
regulating institutions based on the activities said institutions perform, rather than a broad-based one-size-fits-all
approach that only allows legacy institutions into the settlement service network.
The lack of access to Federal Reserve Bank master accounts and services for new market entrants does
create barriers to entry which reduce competition in the financial services arena and inevitably raise the cost of
doing business which is then passed onto the customer. Many new market entrants offering new financial
products and services and traditional banking services to customers partner with existing banks to offer their
services. However, many of these new entrants, if they obtained direct access to master accounts and services at
a Federal Reserve Banks, would not need to partner with a bank in order to conduct their operations, at least as
it relates to the transmission of payments. If new market entrants were able to hold an account at a Federal
Reserve Bank, it would eliminate the need to hold an account with and process payments through a
correspondent bank. The elimination of this banking intermediary would reduce operational costs for new
entrants which could and ultimately would be passed onto their customers. PPP lenders that ultimately accessed
the PPPLF can attest to the costs and friction incurred in securing a correspondent bank to access the Federal
Reserve Bank. In fact, most banks do not even offer the correspondent service as the costs do not justify the
operational burden required to facilitate such intermediary relationships. In addition, access to Federal Reserve
Bank services could also lower costs to the extent pricing of those services is advantageous to the pricing
provided by private banks.
B. Guidelines Fail to Support Financial Innovation by Entrenching Existing Regulatory Structures
In proposing the Account Access Guidelines, ILPA believes the FRB should seek to balance the need
for additional oversight with risk posed by new entrants in the settlement service, no more and no less. Fintechs
are not traditional banks, do not take deposits and do not pose the same risks to the FRB. As currently written,
we believe the principles and factors established entrench the traditional regulatory structure governing access to
Federal Reserve Bank master accounts and services which inordinately centers around the risks posed by and
protects the interests of deposit-taking institutions.
There are numerous factors in the proposal that guard against the increased risks posed by depository
institutions, for instance the capital and liquidity requirements suggested in factors 2(d)(ii), 3(c)(i) and 3(d)(ii).
These factors are appropriate for a deposit-taking financial institution, especially large banks that pose a
systemic risk. Non-depository state regulated fintech lenders, however, tend to be far smaller, do not pose a risk
to the FDIC insurance fund, and pose no systemic risk. The imposition of this factor to new market entrants
who are overwhelmingly non-depository institutions is extraneous and excessive. Such a requirement would
only serve to hamstring new market entrants with additional regulatory burdens that are not necessary to protect
the system all the while reducing their ability to compete with established industry participants by increasing
costs that will need to be passed onto customers.
Finally, while ILPA believes it understands the Board’s rationale for permitting new accounts and
services to new market entrants enhances the efficacy of monetary policy transmission, as factors 6(b) and 6(c)
appear designed to do, we do not believe this is an important consideration or useful policy goal to determine
the merits of permitting access to accounts and services given the limited role fintechs play in credit
intermediation as compared to legacy institutions. Subjecting approval for these entrants to accounts and
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