A Look at the Legal Implications of Next-Generation Banking
By most accounts, PayPal can’t be considered a “real” bank. The numbers, however, suggest that PayPal Holdings Inc. holds more customer money than all but the largest twenty U.S. banks. According to the Wall Street Journal, PayPal customers held more than $13 billion in their accounts at the end of March.

Currently, the U.S. legal system does not view PayPal as a bank, as customer’s funds aren’t considered deposits. Instead, these funds are simply allotments of cash that sit, without earning interest, waiting for consumers to spend whenever they like. Unlike most banks, PayPal also doesn’t offer customers deposit insurance and doesn’t enjoy the powers, or suffer the regulatory costs, of being a “real” bank.

PayPal also earns the majority of its revenue when money is moved, rather than when it is held. When it comes to services, however, PayPal offers what many consider to be the essential services provided by most banks, and their success may soon cause many longstanding financial institutions to reexamine the method with which they manage their standing customer relationships.

What Does It Mean To Be a Bank?

Although it may not be viewed as such under current U.S. law, PayPal offers much of what any traditional bank prides itself on. They allow customers to use money in their accounts to purchase items online or transfer money to other accounts or users. Customers can link accounts to credit or debit cards and PayPal currently partners with 66,000 affiliate stores when customers can add money to their accounts.

In addition, PayPal offers loans and credit cards through partner banks and is exploring effective tools to help consumers manage investments and prioritize personal budgets. According to Frank Rohde, chief executive of Nomis Solutions, “I don’t see any philosophical reason PayPal isn’t a bank. They can offer an account, a payment app, and a loan.”

PayPal Chief Executive Dan Schulman, however, says that his company’s purpose is not to supplant traditional banks. “What we mean to do is to extend traditional consumer financial services,” says Schulman. He goes on to add that PayPal’s target market consists of more than two billion people who are outside the traditional banking system.

Looking Ahead

In 2015, global banks earned an average of 46% of their profits from individuals and small businesses. But with the push to deliver more and more banking services via online or mobile apps, analysts say that more than “17% of the $1.2 trillion in U.S. and European revenue generated from those sources may be vulnerable to financial technology, or “fintech” firms by 2023.”

This means that many traditional banks will have to think outside-the-box if they wish to remain solvent. One potential solution is for established banks to serve as regulated money vaults that connect with a variety of “fintech” firms. But traditional banks have historically been skeptical of partnering with financial tech upstarts, and additional regulations that could be levied in the future aren’t doing anything to alleviate their long-held skepticism. The Fed, Treasury Department, and a number of additional regulatory agencies have already begun exploring various frameworks for regulating fintech firms.

However, because companies like PayPal are built upon growing large numbers of users with smaller individual balances, as opposed to the traditional approach of maintaining fewer, but larger, accounts, there is a real chance for these fintech startups to alter the landscape of the financial sector.

According to John Kunze, PayPal’s vice president for Xoom, “Instead of asking, ‘Do we end up becoming a bank,’ we ask, ‘Do we end up becoming the epicenter of financial life?’” That, of course, remains to be seen.

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Posted by: DSR
Friday, July 1, 2016
Tag: Legal
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