On Wednesday, Comptroller Curry took up the shadow-bank cudgel, addressing the question I raised at his conference in late March: What are regulators doing to address the flight of traditional financial services from banks to the “shadows” now that new rules cost so much and apply largely just to banks? It’s great that the question is on his radar; now, what’s the answer?

For Mr. Curry, part of it is a call to action by state regulators. Many non-bank providers of traditional financial services are covered by state licenses. Mr. Curry cited mortgage brokers and, in some cases, servicers as state-governed “shadows” he would like to see dealt with more assertively. He also, rightly I think, said that significant market realignment to non-banks could lead to systemic risk.

However, just scratching the surface of shadow consumer finance by referencing mortgage firms is not, in my view, going to the heart of the matter. As I laid out in a recent paper for the Federal Reserve Bank of Chicago, many other activities once seen as core to financial intermediation are leaving for lush plains where the state regulation Mr. Curry calls upon is weak or non-existent.

Take, for example, PayPal – a behemoth in the payment space and, now, heading full-bore into small-business lending. How is it regulated? Not as an insured depository. But, in 2002 when deregulation was de rigueur, the FDIC said that PayPal customers got pass-through deposit insurance – a privilege once accorded only to other insured depositories. PayPal’s customers thus get a handy safe haven without the company going to all the trouble of those pesky capital, liquidity, resolution, governance, activity, and so many other annoying rules.

To be sure, PayPal has decided voluntarily to comply with the Electronic Funds Transfer Act, but voluntary compliance means questionable enforcement. It’s also regulated as a “money transmitter” in many states, but no prudential rules apply with this charter, with state rules here largely designed to prevent firms from stealing money they’re supposed to send to a customer’s momma back home.

Is PayPal a problem? Maybe. Will lots more non-banks like it handling funds prove problematic? For sure, especially since most customers expect funds they give to a company to be protected without regard to whether the company’s a bank. Look, for example, at the bail-out Bitcoin investors demanded when they lost money in the digital currency earlier this year as a clear precursor to heartfelt cries from ordinary customers using conventional services they think are “banking.”

One important reason rules are tougher for banks is that banks enjoy privileges – deposit insurance, for example – non-banks can’t get. But, if they get its functional equivalent from a federal agency and offer a service then indistinguishable from banking, only lawyers will know the difference. Market power flows to the company offering the best product at the best price. Thus it long has been. But, if the price is better than a bank’s because the rules are easier, market asymmetries result from arbitrage, not competitive acumen.

That’s the challenge I see in retail consumer finance. Innovation outside banks often too timid quickly to offer new services is more than fine. Except, though, it isn’t fine when bankers head into the competitive race with one leg tied to a potato sack. Back in the day, bankers had a fair chance to earn reasonable rates of return because their core financial-intermediation business was largely a monopoly franchise acquired at the cost of unique regulatory responsibilities. Now, those products come with a hefty price tag not shared by others offering like-kind services, mooting the value of the monopoly franchise.

If only bankers and their shareholders suffered as the market evolved, so be it. But, Mr. Curry is right – the rest of us could soon feel the systemic pain.