February 15, 2018

House Financial Services Financial Institutions and Consumer Credit Subcommittee “Examining De-Risking and its Effect on On Access to Financial Services”

Key Topics & Takeaways

De-Risking: The hearing focused on De-Risking, and Operation Choke Point was a frequent topic of discussion throughout. Witnesses discussed the impact that de-risking can have on various businesses and regions, including international charities, independent ATM operators, and non-bank financial services providers. There was substantial discussion in particular about the impact of de-risking on independent ATMs, and the follow-on impact of independent ATM account closures on the people who rely on those machines (especially people who live in rural and underbanked areas.)
Visibility: The argument was also advanced, by both witnesses and Representatives, that de-risking impedes anti-money laundering efforts by reducing the visibility of regulators and law enforcement into the financial activities of criminals. By excluding whole categories of customers, banks can push these customers – including criminals – to unregulated, informal financial networks. Oxman argued that it would be better to keep customers in the system where they can be easily monitored.

Witnesses

Bryan Schneider, Secretary, Illinois Department of Financial & Professional Regulation, on behalf of the Conference of State Bank Supervisors
Tim Baxter, President, SwypCo ATM Solutions, on behalf of the National ATM Council
Jason D. Oxman, Chief Executive Officer, The Electronic Transactions Association
Manuel Orozco, Director, Migration, Remittances and Development, Inter-American Dialogue

Opening Statements

Subcommittee Chairman Blaine Luetkemeyer (R-Mo.)

In his opening statement, Luetkemeyer discussed Operation Choke Point. He noted that de-risking has spread throughout the country and that this trend is likely the result of increased exam pressure and compliance costs. He said that by removing risk from the payments system, banks are in turn pushing an entire industry into the shadows. He notes that HR 2706 would help curb de-risking by requiring a formal process for terminating accounts, which, in turn, would create more transparency.

Subcommittee Ranking Member David Scott (D-Ga.)

In his opening statement, Scott said that over-regulating is hurting the people that these regulations are designed to protect. Following that train of thought he described how unbanked and underbanked people may only have a pawn broker, for example, as a financial lifeline, and that the over-regulation is causing banks to close those pawn broker accounts, in turn hurting the American people in underbanked areas.

Witness Opening Statements

Mr. Bryan A. Schneider, Secretary, Illinois Department of Financial & Professional Regulation, on behalf of the Conference of State Bank Supervisors (CSBS)

In his testimony, Schneider said that state regulators, which charter and supervise 78% of the nation’s banks, are locally focused and locally accountable. In addition, he notes that state regulators are also the primary regulators for money service businesses (MSBs), who are on pace to handle over $1 billion this year. He said that as a regulator, he does not expect banks to reject total groups of legitimate businesses, but that he has still noticed de-risking occurring in Illinois as well as across the nation. He describes how, as a product of de-risking, MSBs are relying on cash instead of putting the money in a bank because their accounts have been closed. Schneider said that virtually all states have rigorous licensing processes for these types of businesses negatively affected by de-risking and that both enforcement actions and licensing information on this subject matter is available on the CSBS website for the public to see. He also notes that CSBS is building a new tech platform to transform state examinations, as well as how last week, several states announced a streamlined multi-state licensing process for MSBs, which would in turn standard e-licensing practices for fintech payments.

Mr. Tim Baxter, President, SwypCo ATM Solutions, on behalf of the National ATM Council

In his testimony, Baxter noted that approximately 60% of the ATMs in the United States are independently owned, and that Operation Choke Point is growing threat to America’s independent industry. Hundreds of small businesses have been told by their banks that their accounts have been closed since Choke Point’s announcement until 2016, and that in 2017, the industry saw more account closures than ever before. Baxter discussed how no independent ATM provider can remain in business without a bank account, and that a sponsoring bank is essential. Baxter further noted that many of these independent ATMs are in rural and low-income areas, which are underbanked in general.

Mr. Jason D. Oxman, Chief Executive Officer, The Electronic Transactions Association (ETA)

In his testimony, Oxman said it is an exciting time for the payment industry, with innovations such as chip cards and contactless cards demonstrating the progress in technology which has occurred. He stated that he supports H.R. 2706, and stressed that a collaborative approach between the government and the private sector is the best way to handle de-risking. Oxman also said that ETA members have implemented effective due diligence programs that have helped to keep the rate of fraud to a minimum. These include the ETA’s Payment Facilitator Guidelines, first published in 2016, as well as the 2018 updated version of these ETA guidelines, published today (2/15/18). Oxman noted that while Operation Choke Point has been ended, there is nothing stopping the DOJ or AG from bringing a case today that looks like Operation Choke Point.

Mr. Manuel Orozco, Director, Migration, Remittances and Development, InterAmerican Dialogue

In his testimony, Orozco discussed that today’s world is made up of a complex web of interrelationships, enabling the offering of a more robust system of financial services to people. He noted several major patterns he has observed in the financial services industry, including between account opening and account termination. Orozco then laid out potential factors and solutions which could help address problems created by de-risking, the first of which was to increase accountability among banking and financial institutions. Second, that it is important to carefully consider any industry, trade, and country risk assessment. Third, that there is an importance of data sharing through risk-based clearing houses to pinpoint where perceived threats are located as well as how to stop them. Fourth, that it may be helpful to include bank MSB services in the review of the Community Reinvestment Act. Finally, requiring banks to provide documentation on as to the reason for account closures can improve MSB support, and endorsed a procedural right of rebuttal for the MSB.

Question and Answer

De-Risking

The hearing focused on De-Risking, and Operation Choke Point was a frequent topic of discussion throughout. Rep. Keith Rothfus (R-Pa.) stated that during the Obama Administration the Federal Deposit Insurance Corporation (FDIC) released a list of high-risk institutions that should be considered for de-risking, and asked Oxman if he knew how this list was developed. Oxman responded that he believed the previous administration was politically motivated to target these merchant categories, noting that he did not believe the list was not based on a substantive determination of high risk. Rothfus then followed up by asking what a “high risk” merchant would mean in the industry. Oxman responded that a high-risk merchant would include an analysis of charge backs. If charge backs reach a certain level, it is usually an indication that something is going on and that the merchant should be examined more closely. Oxman stressed that this has nothing to do with the category of merchant or the type of products a merchant sells.

Scott asked all witnesses why banks are closing bank accounts of businesses that have been loyal customers, as well as what must be done to stop this. Schneider responded that state regulators are trying to give banks better tools to understand, process, and mitigate risk, leading to banks being able to make better and more informed decisions. Oxman endorsed H.R. 2706 as a means to stop this. Orozco responded that he believes there is an issue between banks and regulators as to how to tackle risk, each party blaming the other. Baxter responded that he believes there are overzealous regulators and that there is a misconception as to what businesses need to be targeted.

Rep. David Kustoff (R-Tenn.) and many other Republican Representatives asked the panel if they would describe asked if they would describe Operation Choke Point as overreach by federal regulators. Oxman responded that yes, this was overreach, citing how the CFPB in the prior administration was sanctioned due to its overreach against one of his member companies. Schneider also agreed that this was an overreach.

Kustoff asked Schneider what happens when customers no longer have access to financial products and institutions due to de-risking. Schneider responded that he does not want people to have to resort to this, since he aims to bring a variety of choices of financial institutions to all people, but when individuals do not have options they unavoidably do resort to unfavorable measures such as loan sharks.

Rep. Barry Loudermilk (R-Ga.) asked witnesses about the impact of de-risking on fraud monitoring. Several other Representatives asked similar questions. Oxman argued that de-risking actually hurts anti-money laundering efforts because by excluding whole categories of customers, banks push these customers to unregulated and difficult to observe, informal financial networks. Oxman argued that it would be better to keep customers in the system where they can be easily observed.

De-Risking and the ATM Industry

Luetkmeyer said that the ATM industry was not on the initial FDIC list of “high risk” businesses but that it has since been added. He asked Baxter why he believes this has happened as well as the response he is getting from those in his industry. Baxter said that with the inception of Operation Choke Point, he believed regulators were going into banks and asking if those banks had ATM accounts, noting that this is specifically targeting his industry. He said that he, and many of his colleagues, received letters from a bank that an account has been closed, and that these letters have zero explanation as to the reason for closure.

Clay stated that some industry actors have stated that the types of extreme fluctuations and cash turnovers that are a normal part of the ATM business are actually triggering regulatory action that results in banks closing accounts for ATM owners. He asked Baker to discuss what is pushing financial institutions to de-risk in these situations despite knowing the needs of this kind of small business. Baxter answered by addressing the fluctuation of cash in the ATM industry. For example, the first of the month is the heaviest usage, so one would see a heavier influx of cash out as well as cash back in during this time. Clay also asked Baxter why there more independent ATMs located in areas of higher concentrations of underbanked and unbanked citizens, and in turn, why big banks have proportionally less ATMs in these areas. Baxter responded that small institutions are “hungry” and willing to service those communities, whereas the big banks are not. He said that there is also a potential risk of an ATM being broken into in a lower income area which may deter big banks from setting up shop there. Baxter also discussed the importance of ATMs to rural communities.

Maloney stated that when a bank is terminating an account of an independent ATM operator, there are sometimes allegations that the bank is doing so for competitive reasons when they say they are doing so for compliance reasons. She asked Baxter how we can ensure banks are not doing so for competitive reasons under the guise of compliance. Baxter responded that while he agrees that competition can lead to the closing of independent ATMs, he can’t answer as to why banks have taken this position. said that he wants to know what happened overnight where independent ATMs suddenly became “high risk” when they weren’t in the 14 years prior.

Regulation and Enforcement

Luetkmeyer stated that he views Schneider’s job as financial regulator as that of a watchdog, as opposed to a micromanager. Schneider agreed, saying that as a regulator his job is not to run banks, but to make sure that the banks are running in a “safe and sound” manner. He noted that if a bank makes a business decision that certain types of businesses are not consistent with its mission, that is fine, but that a bank shouldn’t feel undue regulatory pressure to disqualify certain categories of legitimate businesses from its portfolio.

Clay asked Schneider what actions his department has taken to assess the impact de-risking may be having on access to financial services for vulnerable populations. Schneider responded that this a concern that all citizens have access to a wide variety of financial institutions. He said that his department talks to its banks to that they can understand risks and make informed decisions, so as to not accidentally disqualify individuals based on misinformation.

Rothfus asked Schneider if he believes that state regulators are doing enough to counter abuse in the financial system by illicit actors. Schneider responded that he does believe state regulators are doing enough, stating that his department conducts hundreds of exams each year. Rothfus followed up by asking if federal regulators are consulted by state regulators on issues, and Schneider responded that they do. Rep. Andy Barr (R-Ky.) also asked Schneider about federal-state regulatory coordination, and Schneider said that state bank supervisors work closely with each other and with federal regulators.

Rep. Robert Pittenger (R-N.C.) asked the panel about specific actions Congress could take to combat the trend in de-risking. Schneider responded that collaboration among regulators could help ensure that the same message is relayed as opposed to mixed messages.

Reps. Keith Ellison (D-Minn.) and Al Green (D-Texas) discussed the problems that sudden account closures can cause for international charities. Oxman responded by saying that HR 2706 is needed to prevent this, and that this is an example of overzealous regulators limiting access to the financial sector..Ellison asked if there is a greater need for coordination between agencies to address the issue. Schneider responding by noting that regulators are happy to meet with their federal counterparts at any time to discuss the issue and help them focus their exams.

Financial Technology and De-Risking

Pittinger then asked Oxman what incentives the financial technology industry has to prevent fraud. Oxman responded that the payment industry’s major incentive is that when there is fraud, the industry has to pay. He describes this in practice through use of an example of credit card fraud. In credit card fraud the card holder doesn’t have to pay for the fraudulent transaction, but those in the industry are on the line to absorb that cost instead.

For more information on this hearing, please click here.