On December 2, 2016, Comptroller of the Currency Thomas Curry announced in a speech that the Office of the Comptroller of the Currency (OCC) will "move forward with chartering financial technology ['fintech'] companies that offer bank products and services and meet ... high standards and chartering requirements." On the same day, the OCC released a white paper that examines issues related to such a charter and solicits comments from the public. This Insight examines special purpose charters for fintech companies, their possible benefits, and the concerns they create.
Financial technology is allowing traditional financial services and products to be delivered in arguably innovative ways. Many industry observers believe these technologies may improve the efficiency of the financial system and increase inclusion among groups previously underserved by the financial industry. One development that has attracted attention is that technology-focused companies with relatively little experience in finance are now engaging in financial activities typically associated with banks, such as making loans and facilitating payments.
The emergence of these companies—which are like banks in some ways but not in others—raises questions regarding the appropriate way to regulate them and whether their risks can be properly managed without stifling beneficial innovation. Much is unsettled about the extent to which a particular fintech company, such as a marketplace lender, digital currency, or online bill payment company, fits into existing regulatory categories. In general, absent a federal charter, a fintech company is likely to have to comply with various state laws and regulations in each state in which it does business. Some observers argue that the fragmented state-by-state system is overly burdensome and potentially stifles beneficial innovation.
The OCC proposes that in certain cases innovation could be encouraged, risks contained, and regulatory ambiguity resolved if fintech companies could obtain a special purpose national bank charter.
The OCC has the authority to charter national banks, including special purpose banks that, as described by the OCC's Licensing Manual, "may offer only a small number of products, target a limited customer base, incorporate nontraditional elements, or have narrowly targeted business plans." Special purpose charters are not new; they have been granted to credit card banks and trust banks for some time. Comptroller Curry's speech indicated that special purpose national bank charters also will be available to "fintech firms that conduct at least one of three core banking activities—receiving deposits, paying checks, or lending money."
According to the OCC's white paper, if a fintech company chooses to apply for and is granted a special purpose national bank charter, the company would be "subject to the same laws, regulations, examinations, and reporting requirements, and ongoing supervision as other national banks," including but not limited to lending limits, anti-money laundering laws, and consumer protection laws with respect to any activity being conducted. It also would include federal laws, regulations, and judicial precedents governing the preemption of and applicability of state laws to national banks. Thus, a fintech company that acquires this charter would generally be choosing to subject itself to certain federal regulation and oversight in exchange for availing itself of certain federal preemptions of state regulations and other benefits that accrue with a federal banking charter. Importantly, these preemptions may allow the company to forego state licensing and to make loans that exceed state interest rate limits.
The OCC is making the option to apply for a charter available to fintech companies, not requiring them to obtain a charter to operate. Companies will continue to be able to operate as a nonbank subject to state-by-state laws and regulations.
The OCC argues that giving fintech companies the option to enter the national bank vetting process and subjecting them to clear standards improves the ability of regulators to understand and monitor risks and consumer protection issues posed by these companies.
Fintech proponents have argued that state-by-state regulation is a burdensome, inefficient way to regulate certain fintech companies, and having the option to obtain a national charter could alleviate the problem for certain companies. A prominent financial technology industry group was encouraged by Comptroller Curry's announcement.
Banks believe the regulation they face is more burdensome than that faced by nonbanks and that this gives nonbanks an unfair advantage over banks. A national charter that treats fintech companies as banks could address this concern, at least as it relates to companies that are granted a charter. One bank industry group welcomed the OCC announcement as a possible way to ensure fintech companies are held to the same standards as banks. However, some banks are still concerned about competition from nonbanks, as many will potentially continue to operate without a federal charter. A statement issued by a group representing small banks was pessimistic, expressing concern that banks will continue to be at a regulatory disadvantage relative to fintech companies.
Some observers—including consumer advocacy groups and state regulators—have concerns. One is that consumer protections will be weakened if fintech companies are granted banking charters. These observers argue that state interest rate limits and small business lending regulations are important safeguards that could be preempted for lenders with a federal charter. They are also opposed to reducing states' ability to examine and investigate fintech companies. In addition, state regulators argue that national chartering and preemption of state laws are powers that the federal government has and should use sparingly and that the extension of these powers to fintech companies is an unwise overreach.
With OCC moving in the direction of opening up the national bank charter to fintech companies and the fintech industry's seeming receptivity to the prospect, the OCC likely will have the opportunity to approve applications from some fintech companies relatively soon. However, the positive and negative effects of national bank charters for fintech companies are not likely to be evident for some time.