Fintech Regulation

Competing interests weigh in on the OCC’s proposed charter for financial technology companies

When the Office of the Comptroller of the Currency announced its intentions last year to develop a limited purpose national banking charter directed at the burgeoning industry of financial technology, more than a few eyebrows were raised.

The OCC has since collected comments, released a draft of the charter, collected further comments and has otherwise continued to seek support for the effort. In March, Thomas J. Curry, Comptroller of the Currency, told a gathering of fintech company executives in New York City the intention of the charter is to reduce risk for online lenders or any other tech company offering a service that would traditionally be part of a bank’s suite. Curry argued that at the core of any business looking to grow is a culture fixated on risk management. A special charter, he said, would act as a guidepost for a company vying to be disruptive without making a move that leads it to fail or harm its consumers.

“The OCC already supervises banks and service providers, who like you, push the limits of technology to serve customers better,” Curry said. “We have experienced examiners who specialize in banking technology, have expert knowledge of payment systems, credit and consumer protection, and know where companies can face pitfalls. This is an expertise that we nurture through training and recruiting talented people with specialized skills and backgrounds. Complementing our examiners are lawyers, policy experts, IT specialists and economists. So whether it’s an issue of law, appropriate governance, or a complex question of modeling risks, the OCC has the resources to meet the challenge. The resources supporting the supervision and function of the federal banking system are unmatched.”

Reactions to the OCC’s effort have been mixed, to say the least. Christopher Cole, senior regulatory counsel, Independent Community Bankers of America, said his group has “pushed back pretty hard” on the fintech charter idea. The ICBA objected to the process by which the OCC was unveiling its intentions and has questioned whether the Comptroller has a legal authority to issue the charter under the National Banking Act of 1863. The ICBA has urged the OCC to obtain congressional authorization before it attempts to issue a fintech charter.

At issue is the OCC’s authority over “the business of banking” and the very meaning of the word bank. Is a software company selling a clever money transfer smartphone app a bank?

“We said that is a very liberal interpretation of the business of banking, particularly when other statutes like the Bank Holding Company Act and the federal bankruptcy laws all define banking as an institution that both lends and takes deposits,” Cole said.

Cole said the fintech charter might shape up to be too light on regulation while being too heavy in the direction of allowing non-banks to compete with fully regulated banks on an uneven playing field.

“We’re fine with banks partnering with fintech companies, and a lot of our guys do that,” Cole said. “But our concern is that if you issue a fintech charter that institution is not going to be regulated like a depository bank. You could have a charter that allows a company to operate on a national basis, pre-empt state laws, pre-empt usury laws and they would have all the benefits of a national bank charter but they would not be examined and supervised like community banks.”

Cole said his preference would be for the fintech industry to grow alongside the traditional bank industry as partners, and if they want to compete with banks they can get lending licenses state by state, which some larger online lenders, for instance, already do.

“What we don’t want is for them to get a bank charter unless they are examined and regulated like an insured depository institution is regulated,” Cole said.

In a January letter to the OCC, the American Bankers Association offered both encouragement and a cautionary warning. “ABA supports the OCC’s intent to consider special purpose charter applications from fintech companies as long as existing rules and oversight are applied consistent with those for any national bank,” wrote Robert Morgan, ABA’s vice president of emerging technologies. “Any such charter option must be implemented thoughtfully to ensure that the policy determinations underlying our bank regulatory framework are maintained, including the separation of banking and commerce. This means applicable rules are applied evenly and fairly across all national bank charters, and the OCC performs effective oversight to assure safe and sound operation and consumer protection.”

The political reception to the OCC’s proposed charter also has been tepid, if not negative. Earlier this year members of the U.S. Senate Committee on Banking, Housing and Urban Affairs sent the Comptroller a letter acknowledging the new regulatory challenges posed by fintechs but asked why a company looking to engage in banking services shouldn’t have to abide by existing regulatory rules. The letter also raised concerns about the potential of fintechs co-mingling banking and commerce.

“We believe that the OCC’s plan to offer alternative charters to nonbank and fintech firms as explained could upset the current financial regulatory structure. We would urge the OCC to refrain from offering any alternative or special purpose charters. It is up to Congress to take action on these important matters, and while it does we would encourage the OCC to devote its resources to collaborating with other federal and state regulators to aid innovative financial services providers in navigating the current landscape of laws,” the letter concluded.

Randy Benjenk, an associate at the New York law firm Covington & Burling with expertise in financial law, said the new charter could face a much harder road in the near future.

“The initiative began as a non-partisan issue, but it is turning more partisan as more details are put on the table, with different groups seeking to influence what the charter and its regulatory regime will look like,” Benjenk said.

Republicans on the House Financial Services Committee sent a letter to Comptroller Curry in March saying Congress would consider overturning the fintech charter policy if it is finalized before the next comptroller is confirmed.  Curry’s term expired in early April.

“That isn’t because those Republicans disagree with the policy of issuing a fintech charter – they don’t – but they want a comptroller appointed by President Trump to be able to shape the direction of the policy,” Benjenk said. “The charter is becoming the focus of a lurking state-federal turf battle. State banking regulators would lose influence and jurisdiction if fintech companies flocked to a federal charter, and they have been extremely critical of the OCC’s initiative.”

The Conference of State Bank Supervisors, for instance, sent a letter to the Comptroller earlier this year criticizing the charter along mostly the same lines Cole said the ICBA objects.

“The OCC’s unauthorized expansion of power should not be allowed to move forward because it exceeds its legal authority and makes an end run around Congress,” John Ryan, CSBS president and CEO, said in the letter. “A federal charter would stifle innovation, not foster it, and advantage large, established institutions at the expense of new and small ones. No one should have a monopoly on innovation.”

No one can predict how the journey of the fintech charter will play out, but Cole said the burgeoning mish-mash of financial technology products,  that appeal in particular to a younger demographic, pose a potentially massive threat to community banks if the end result is a direct competitor with decreased regulation. He said community bankers should make determining how the fintech industry evolves a high priority.

“We’re on the verge of an historic time,” Cole said. “If the OCC goes forward with a fintech charter I think it will transform the industry.”