At the end of July, the U.S. Office of the Comptroller of the Currency (OCC) began accepting special-purpose charter applications from fintech firms. Fintechs – which include online lenders, cryptocurrency exchanges, and payment companies — that opt for the charter would be regulated on a national level, like banks.
Today, in addition to overseeing 79 percent of the nation’s banks, state regulators are the primary regulatory authority of the tens of thousands of nonbank entities that range from mortgage companies to fintech firms. Put another way, fintechs that want to operate across the nation need to go through the licensing process 50 times
The response to the OCC’s announcement has been mixed. Organizations such as the Chamber of Digital Commerce, Center for Financial Services Innovation, and the Milken Institute all support some form of national licensing. Other groups, like the Conference of State Bank Supervisors (CSBS) and the New York State Department of Financial Services, are not only against the fintech charter idea; they think it could be unlawful.
Then there are the fintechs themselves. Through mid-September, none have applied because, according to a Sept. 12 article in the Wall Street Journal, of uncertainty about what activities the OCC will allow, what regulatory requirements it will carry, and whether it will hold up in court.
The Benefits of Fintech Charters
Comptroller of the Currency Joseph Otting claims that issuing fintech charters makes the federal banking system stronger by promoting economic growth, innovation, and competition. He sees it as a way to provide consumers with more choices, promote financial inclusion, and create a more level playing field in the world of financial services.
Even those in favor of fintech charters do agree that there should be some limitations. There have been suggestions to limit fintechs to performing the check payment function, thus avoiding the risks associated with deposit-taking and lending, although removing these functions could take a big chunk out of the fintech market. The U.S. Treasury Department, which has publicly endorsed a national fintech charter, even adds the caveat that these special-purpose banks should not be permitted to accept FDIC-insured deposits.
What Could Go Wrong?
Voices in favor of the charters meet an opposition of similar size. In fact, both the Conference for State Bank Supervisors (CSBS) and the New York State Department of Financial Services brought lawsuits against the OCC last year claiming that the OCC had exceeded its authority. In fact, both suits were thrown out since the OCC had not yet made the decision on whether to grant a charter, but they could now get a new day in court.
New York state’s top banking regulator, Maria Vullo, sued the federal government on Sept. 14 to void its decision to award these charters. Vullo, who oversees more than 2,200 banks, financial-services companies, and insurers with about $7 trillion in assets, told the New York Times that “financial centers like New York, which have developed comprehensive and well-functioning regulatory bodies, should not needlessly bear the harmful brunt of an over-reaching federal agency.”
The CSBS sees fintech charters as the federal government picking winners and losers in the marketplace as well as exposing taxpayers to new risks. The organization points to the early 2000s when states became aware of predatory mortgage lending and enacted laws to protect consumers only to see the OCC act to preempt those laws. The CSBS agrees that the process of applying for state licenses needs to be streamlined but believes the role of the states as local regulators should be preserved.
Consumer groups are concerned that fintechs would not be held to the same equal-lending requirements as banks. The OCC addressed this concern by requiring fintechs to make a commitment to financial inclusion. State regulators still feel that their proximity to consumers and communities makes them uniquely situated to see and act on consumer financial protection issues.
What Do Fintechs Think?
The lack of applications may tell you all you need to know. The head of regulatory affairs for LendingClub, an online marketplace lender that has been cited as a candidate, told the WSJ that “the OCC’s new charter is a huge step for regulatory modernization but marketplace lenders with long track records and robust risk management processes will likely consider all their options.”
Like other large fintechs, LendingClub already operates without a federal license, instead partnering with a bank that enables it to benefit from the partner’s federal pre-emption over state laws and licensing requirements. Other fintechs say such partnerships enable them to gain from the reach, stability, and regulatory know-how of banks, while the banks benefit from the technical insights and customer-experience focus.
Fintechs are concerned that the new charter would thwart innovation to develop new ways to provide products to borrowers and possible restrictions not yet written should they apply for the charter. They question whether there is even a need for the OCC’s fintech charter, given questions about potential strict capital and liquidity requirements that govern funding of their operations; the detailed long-term business plans they’d have to submit; and the increased vetting of investors and partners.
In addition, there’s the question of the time, effort, and money fintechs may need to put into applying for a charter when then they are trying to attract customers and achieve scale and profitability, says Todd Baker, a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University in an Oct. 1 article in the American Banker.
On the other hand, replacing state licenses with a national charter could be attractive if it comes with access to the Fed’s nationwide payments system and deposit insurance through the FDIC – both of which are still being debated – not to mention eliminating the need to manage 50 different state-licensing authorities.
What Do You Think?
Please join the conversation. Will fintechs decide it’s worth the effort to obtain federal pre-emption through a national charter? Will states develop revised fintech-specific requirements to encourage local oversight? Will we see an increase in big bank-fintech partnerships? And perhaps most important, would federal pre-emption for fintechs undermine financial market competition, innovation, and consumer protections?
Kelly Dickerson is Head of Product Strategy for Katabat.