How would regulators react to Amazon-JPM checking partnership?

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The negotiations between Amazon and big banks like JPMorgan Chase and Capital One to offer a checking-account-like product pose significant questions for regulators about the e-commerce giant pushing further into the banking space.

Amazon is hardly new to the financial world. It already offers a payments system through third-party websites, called Amazon Pay, and it has a cobranded credit card with JPMorgan. Additionally, a partnership like the one it is reportedly contemplating is not a novel approach.

But the potential scale of Amazon and JPMorgan joining forces would embed Amazon deeper into the banking system and raises questions in terms of how Amazon will be overseen by federal financial regulators.

Following is a rundown of early questions, the answers to which are likely to depend on how the partnership is structured, if it happens at all.

Who owns the customer?

The biggest difference in determining how an Amazon partnership is regulated will depend on whether the company or the bank owns the customer data and therefore, the customer. That has an impact on which regulations apply.

If the bank “owns the customer,” then “the rules governing banks protect the consumer,” said Karen Shaw Petrou, managing partner of Washington-based financial services consultant, Federal Financial Analytics. “If the bank doesn’t own the customer, then the rules — not just the consumer protection rules but the safety and soundness rules — are both different.”

Very few details have been released about the negotiations, which were first reported by The Wall Street Journal, but many observers said if Amazon owns the consumer data, it would give the tech giant far greater access into consumer financial behaviors, beyond their shopping behaviors. Banks have greater access into the debts and assets of a consumer, for example.

Amazon “knows what sweaters I like and what I feed my dog but they don’t know how rich or how poor I am,” Petrou said. “They don’t know what I own and with that data [from Chase], matching it with publicly available data, they would be far more powerful than they already are.”

What is Amazon’s role in the accounts?

Amazon’s role in whether it will simply market the accounts to its consumers or have a greater hand in their features and structure also makes a difference in how the partnership is regulated.

If JPMorgan is “contracting with Amazon to do the marketing and customer intake, in that case, Amazon is subject to the regulation for those activities,” similar to other bank partnerships, said Brian Knight, director of the program on financial regulation and a senior research fellow at the Mercatus Center at George Mason University.

“But it is possible they come out with something really unique that puts a lot of responsibility on Amazon, which could make the regulators concerned.”

Who, if anyone, would regulate Amazon?

Another tricky question is which agency would regulate the partnership depending on how it is structured. For example, if Amazon were to act as a vendor to the bank, the e-commerce company would fall under a wide range of bank regulations involving partnerships and data security. However, if JPMorgan were to be a vendor to Amazon, those regulators would have limited influence over the deal.

“This is not a merger or acquisition. The regulators can’t stop the partnership,” Petrou said. But “they can make a transaction very uncomfortable.”

If JPMorgan becomes a partner to Amazon, the banking regulators will have less oversight of the partnership and Amazon. However, the Consumer Financial Protection Bureau would still be able to regulate Amazon as it relates to financial transactions and protecting consumers.

It’s also likely that the deposits will be held with JPMorgan (or whichever bank it partners with) so that they are ensured by the Federal Deposit Insurance Corp. All of the prudential bank regulators oversee JPMorgan and will likely take an interest, but which one can take the lead — or how many can get involved — remains to be seen, pending the partnership structure.

It could raise some issues with supervisory, industry representatives said.

“Where’s the nexus for deposit insurance and how far do we spread the FDIC safety net?” asked Cam Fine, president and CEO of the Independent Community Bankers of America. “If I were the FDIC, I’d be very concerned about how this would all work.”

“If Amazon got in trouble, what happens to the deposits? I think this poses yet another challenge to the insured depository system.”

Are there other potential regulatory risks?

Amazon is not attempting to become a bank itself, as some critics feared, and media reports indicate it would not be involved in the lending decisions at JPMorgan.

“That could undercut any potential fear from critics about commerce mixing with banking,” Knight said.

But there is the potential concern of what would happen to JPMorgan, from a safety and soundness perspective, if Amazon brought in a ton of customers and something went awry or Amazon pulled out of the deal. Observers said it is too early to predict such potential risks.

“Without knowing more details of the deal, it’s very hard to speculate,” Knight said. “But absent some unique characteristics ... it doesn’t seem like this, from a regulatory perspective, is a unique threat.”

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