Could regulation changes make retailers the next big threat to banks?

Suggested changes in regulations could open up large retailers to become the next serious competitors in the US financial services market.

Over the last few years, a range of new competitors have emerged looking to take on legacy financial institutions by offering more agile, innovative banking solutions to consumers.

Initially, a wave of fintech startups were viewed as posing the main threat, but more recently, it has been suggested that it is the bigger tech players – the likes of Google, Facebook and Apple – that may pose the biggest challenge. One key factor in these organizations’ favor is the fact they have been able to collect such large amounts of data on potential customers, which is an invaluable resource in today’s age of hyer-personalized content.

These companies are not the only businesses that possess significant personal details on their customers. Another area is large retailers, with the likes of Walmart and Amazon able to gain deep insights into their users through factors such as purchase history and loyalty programs.

However, these firms have long been barred from offering full financial services in the US due to regulations mandating the separation of commerce and banking. But now one key regulator in the US has suggesting this could change.

Calling for a rethink

In a recent speech delivered at The Clearing House’s annual conference in New York, Acting Comptroller of the Currency Keith Noreika questioned whether this continued separation – which has been enforced since the very earliest days of the banking industry – is still in the best interests of the economy.

One of the reasons for this separation has been a desire to ensure that customer deposits are kept safe from use in high-risk non-banking practices. This is a concern that has been exacerbated following the 2008 financial crisis, which led to the Dodd-Frank rules that aim to strengthen the separation between deposit-taking and other activities.

However, Mr Noreika noted that the events of 2008 actually did not show there was anything inherently safer about separation banking from other activities, as some of the biggest issues came from companies that were not regulated as banks.

Instead, he suggested that opening up the sector to more players could actually help smaller community banks by allowing them to compete on more equal terms with larger ‘megabanks’.

Could changes shake up the industry?

At the moment, thoughts of any changes to these regulations are still hypothetical. But the fact such significant overhauls are being considered highlights how quickly the banking industry is evolving and the increasing pressure legacy institutions are facing from non-traditional financial providers.

Many potential competitors to the big banks have already taken small steps into the sector in areas where they are not restricted by current regulations, such as payments and lending, which suggests there is a clear appetite among large retailers to have a greater presence in financial services.

Mr Noreika’s remarks seem to give support to the idea of allowing greater competition in the banking sector. Therefore, the growing presence of retailers in financial services will be something the banking sector may have to prepare for in the coming years – but one that could also offer new opportunities.

“In smaller communities, fewer restrictions against mixing banking and commerce could allow for greater use of local capital, and support growth and business activity locally,” he stated. “It could help smaller community banks grow and take advantage of benefits previously only available to grandfathered companies and banks that are big and sophisticated enough to convince the Federal Reserve to grant them an exception.”

Written by Jack Dougal

Jack Dougal

Jack Dougal is's resident news reporter. He writes regular blogs covering the latest stories and key developments in the global financial services industry.

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