Unmasking the Hidden Dangers of Imitation Banks

New Roosevelt Institute brief takes a deep dive into the economic threat posed by dangerously unregulated imitation banks

December 6, 2023
Anthony Thomas
(202) 412-4270

New York, NY — Over the last several years, predatory financial technology firms have made headlines—and lots of money—by marketing themselves as foolproof wealth-building opportunities. But while many of these “fintechs” market themselves as equally safe and sound as traditional banks, many aren’t safe—or even regulated—at all. By avoiding regulation, these so-called “imitation banks” can pose huge threats to their individual consumers’ livelihoods and the macroeconomy.

“Imitation Banks: Abusing the Public’s Faith in Banks,” a new Roosevelt Institute brief, takes a critical look at imitation banks and their exploitative and deceptive practices that risk harming millions of low-income and/or Black and brown Americans who have been historically locked out of safer wealth-building opportunities. Authored by Todd Phillips, assistant professor at the Georgia State University J. Mack Robinson College of Business, the brief argues that imitation banks intentionally leverage the public’s high opinion of traditional banks in order to lure in customers. In doing so, they pose great risk to their customers while successfully evading regulatory oversight.

“Like crypto issuers in years past, imitation banks make specious promises of high returns to gain ground with consumers who may have been historically locked out of more traditional wealth-building opportunities,” said Phillips. “And they’re doing so without the necessary government oversight and accountability mechanisms to ever make them safe for consumers or the US financial system as a whole. Regulators and Congress must act to address these harms.”

Phillips calls for a broad and coordinated government approach to reining in imitation banks in order to protect US customers and the macroeconomy—from leveraging existing authorities granted to the Securities and Exchange Commission (SEC), prudential regulators, and the Consumer Financial Protection Bureau (CFPB) to calling for new legislation specifically aimed at imitation banks.

“While there are a few regulatory regimes that could be applied to imitation banks, the variety of business models they exhibit necessitates a broad and coordinated approach to regulating them in all their forms,” said Phillips.