The distinction between banks and non-bank financial institutions has become increasingly distorted. Non-bank Fintechs act like banks and banks attempt to appear like innovative Fintechs (often dropping the word “bank” from their name). This blurring has sparked a crucial debate around the terminology used by non-banks, with their business names and for products and services traditionally offered by banks, such as earning interest on deposits. The heart of this discussion isn’t just semantics — it’s about consumer protection and the regulatory frameworks designed to safeguard it.
The Risks Behind the Terms
The term “bank” is a regulated term reserved to be used only by financial institutions holding bank licenses. This is imposed by banking regulator and even enforced by domain registrars and the trademark registrar. Non-banks are unable to have the word ‘bank’ in their name and are limited to using terms like ‘banking’. When consumers hear about earning “interest” on their “deposits,” they bring a set of expectations molded by their lifetime experience, even if indirect, of banking regulation. These terms imply a level of security and protection, underpinned by numerous rules and regulations aimed at minimizing risk. However, non-bank entities, by their very nature, operate outside these banking regulations. Their use of banking terminology, therefore, can mislead consumers about the nature of the product being offered and the protections — or lack thereof — that accompany it. And, that is why it is unlawful for non-bank to use regulated bank terminology.
The Case of Celsius and Rewards
Celsius Network, a company that pioneered the use of the term “rewards” in lieu of interest, serves as a cautionary tale. By sidestepping traditional banking terminology Celsius positioned itself as able to offer banking services without being an actual (licensed, regulated bank). This strategy came at a high cost: a staggering fine of $4.6 billion for multiple regulatory violations, imposed after the company filed for bankruptcy when it failed to be able to provide clients their deposits and collateral (as both had been rehypothecated by Celsius into investments with longer duration lockups). This example underscores the potential dangers hidden behind the rebranding of traditional banking functions with softer, less regulated terms. And, Celsius is just one example; others such as BlockFi, Gemini, Coinbase, Genesis and others offered interest-rate based “rewards” without regulatory licenses to do so and they each and all (among others) were either fined or had to terminate or revise their reward programs.
International Implications
The repercussions of using banking terms extend beyond US based companies. Non-US entities, such as Nexo, have also faced fines and regulatory actions for similar missteps, eventually leading them to exit markets with stringent consumer protection laws, like the US. This pattern raises a red flag for consumers and regulators alike. If a non-bank is willing to flout laws designed to protect consumers in one area, what other corners might they be cutting? And more importantly, how safe are consumers’ funds when entrusted to such institutions?
A Call for Clarity and Caution
The allure of innovative financial products should not blind consumers to the risks these products may carry, especially when offered by entities that intentionally skirt the regulatory framework established to protect the public. This situation calls for a dual response: increased regulatory scrutiny of non-banks using misleading terminology and greater consumer awareness of the protections they forfeit when engaging with these entities. If a product feels like a traditional bank product but uses a term that banks don’t use, be careful. For example, when you deposit funds, but the companies say you are lending money, that is a red flag.
The Bottom Line
As the financial landscape continues to evolve, the importance of clear, honest communication and stringent regulatory compliance has never been greater. Consumers deserve to know exactly what they’re signing up for, including the risks involved. Likewise, non-bank financial institutions must be held accountable for the terms they use and the implications those terms have. Only through transparency, rational regulation, and consumer education can the balance between innovation and consumer protection be maintained.
In navigating this complex terrain, consumers, regulators, and financial entities alike must remain vigilant. The future of finance depends not only on innovation but on the trust and safety of those it serves.
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