In its whitepaper, Exploring Special Purpose National Bank Charters for Fintech Companies issued in December 2016, the Treasury’s Office of the Comptroller of the Currency (OCC) made its case for giving financial technology (also known as “fintech”) companies the opportunity to apply for a special purpose national bank charter.
The Preface by the Comptroller of the Currency offers an excellent perspective on where the OCC started and where it’s going:
“When President Abraham Lincoln signed the law creating the national banking system and the Office of the Comptroller of the Currency (OCC), the very notion of establishing a national bank charter was itself innovative. Our country’s leaders provided the Comptroller with the authority to grant a national charter because they recognized the public value of a robust, unified, and nationwide system of banks.
The national banking system became a source of strength for the nation and our economy. National banks and, later, federal savings associations became anchors of their communities and the predominant providers of financial services for consumers and businesses. The system flourished because it enabled and encouraged national banks and federal savings associations to adapt to the changing needs of their customers and the market [emphasis mine].
More than 150 years later, we have a diversified and evolving financial services industry. New technology makes financial products and services more accessible, easier to use, and much more tailored to individual consumer needs. At the same time, consumer preferences and demands are evolving, driven by important demographic changes: for example, the entry of 85 million millennials into the financial marketplace in the United States.”
Ah yes, the millennials. Millennials are projected to spend more than $200 billion this year, mostly using their phones and the internet. They are driving innovation in financial services to meet their needs – primarily they want everything fast, convenient and catered directly to them. Banks can’t move fast enough to keep up. Technologically driven solutions – fintechs – are meeting the need.
Although the OCC’s objectives in granting limited-purpose bank charters to fintech companies are regulatory in nature, the move could be a huge game changer for companies seeking to innovate within the financial services industry. Here’s why. Currently, fintech companies must obtain licenses in every state where they have customers. Imagine how this process bogs down innovation and execution, not to mention the cost, with every state having their own requirements, taxing regimes, bonds, audits and reviews. The Chamber of Digital Commerce estimates that state-level regulatory and compliance costs could amount to $2 to $5 million per year per company.
Speaking at the Georgetown University Law Center, Comptroller of the Currency Thomas Curry announced that fintech firms will be granted the same preemption over state laws that national banks possess. In response to criticism by state regulators and some within the banking community, Curry maintained that requiring adherence to a standard set of regulations to manage risk will be safer for the system and consumers.
"But the reality today is that the 4,000 fintech companies out there are already competing with national and state banks, without regard to any of the national bank responsibilities and under a patchwork of supervision," Curry said. "In some ways, [creating a charter] levels the playing field because statutes that by their terms apply to national banks would apply to all special purpose national banks, even uninsured ones."
The OCC isn’t the only regulatory body to consider oversight roles for fintech companies. In its October 2016 Project Catalyst report, the Consumer Financial Protection Bureau (CFPB) encouraged the development of innovative consumer financial products that meet regulatory requirements. The CFPB is also writing rules affecting small-dollar loans that would affect online lending firms. The Federal Deposit Insurance Corporation (FDIC) has established a steering committee to consider fintech. The Securities and Exchange Commission (SEC) hosted a fintech conference in November 2016, which informed the SEC’s fintech working group. And the Federal Reserve released a whitepaper in December 2016, signaling its plans to monitor financial innovations (such as blockchain). In fact, Fed Chair Janet Yellen, speaking at the Annual International Conference on Policy Challenges for the Financial Sector, encouraged bankers to learn about the technology, including blockchain digital technology.
By enabling a national charter the OCC is attempting to strike a balance between regulatory clarity and consumer protections. Whereas many fintech companies have partnered with banks as key vendors in the past to offer critical financial services, they will soon have the option to be recognized as a distinct type of special purpose bank. The larger digital lenders to consumers and businesses such as On Deck Capital are considered particularly likely to apply for a charter in order to streamline their compliance process and reduce costs to be compliant with laws and regulations.
Not everyone is excited about the new opportunity for fintech companies. Both banks and consumer groups have expressed their concerns about new fintech companies operating outside of federal supervision. Financial institutions fear that the charter will allow fintech firms to have the advantages of a bank without banks’ regulatory obligations, while consumer groups worry about fintech companies growing too quickly without proper consumer protection measures.
Eligibility for the new fintech charter will be limited to firms that have a fiduciary responsibility or perform an essential banking activity — namely, taking deposits, paying checks or lending money. There are only certain fintechs that meet those banking activity criteria and therefore are eligible to pursue a charter. Other fintechs will not be able to obtain a charter because they do not perform the specific banking activities and therefore should not be regulated by the national banking regulators. Many of these “other” fintechs are focused on payments or other bank processes and have their own industry standards and are reviewed by the regulators as key vendors for the banks. The OCC has previously applied the “special purpose” designation to trust and credit card banks, among other types of entities.
Special purpose financial institutions have to meet certain rules and standards related to:
- Business plan
- Governance structure
- Compliance risk management
- Recovery and exit strategies
Fintech groups that would apply for the new charter would have to ensure their processes meet these special purpose requirements. It is also currently voluntary for a fintech to opt into obtaining a special purpose designation from the OCC, as opposed to being a mandatory requirement.
The larger fintech companies have a national presence and relationships with millions of clients. Having a special purpose national charter for certain fintechs allows the OCC to take the lead role in monitoring these companies that have a growing influence and market share. Having a national regulatory agency such as the OCC provide a charter helps to ensure these banking fintechs are being reviewed by qualified examiners with expertise in finance, banking, risk, operations and technology. The fintech industry becomes more complicated and complex every day and making sure that it is not only being watched but also regulated appropriately is critical to avoiding any systemic problems or issues that could potentially affect the U.S. and global financial networks.
The OCC sought public comment through January 15, 2017 on the specific criteria and process under which it will consider fintech charter applications. It will review the comments and is expected to begin accepting charter applications sometime in 2017.
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