In the wild west of fintech, state banking regulators have been called to act as the keepers of the peace and the primary enforcers of the law. That is, until the Office of the Comptroller of Currency (OCC) offered to become the new sheriff in town.
The OCC unveiled its plan in December to offer special purpose national bank charters to fintech companies. The OCC argues its intervention is necessary to promote innovation that would otherwise be stifled by the patchwork quilt of inconsistent state regulations. But to state regulators—them's fightin' words.
The Conference of State Bank Supervisors on Friday announced their continuing opposition to the OCC's proposal, going so far as to challenge the power of the OCC to make such a sweeping proposal without express congressional authority. They went even further, arguing that any special charters issued by the OCC will be "unlawful and invalid." This strongly suggests that some state regulators intend to continue to enforce their state's regulations, even against those fintech companies who obtain a national special purpose charter from the OCC. At least, until the courts tell them otherwise.
The state regulators maintain they're in the best position to protect consumers through the enforcement of anti-predatory lending laws, mortgage restrictions, and state oversight. They basically argue that the OCC cannot be trusted to oversee this developing new industry, given that the OCC "created the legal foundation for the mortgage crisis and prevented states from having the opportunity to respond to lending practices that hurt consumers."
In its separate objection, the New York State Department of Financial Services reiterated many of these same concerns. Their objection put it as bluntly any New Yorker could – "A national fintech charter could allow a well-funded money-losing fintech company, which underprices its services and skirts state consumer regulatory protections, to profit on the backs of smaller established competitors." They further opined that "the states know best" when it comes to the needs of their consumers.
The industry's reaction has been more mixed. The American Bankers Association says it supports the proposal and applauds the OCC's efforts to promote innovation. But it also cautions that fintech companies should be subject to the same robust regulatory supervision as other national banks. The Independent Community Bankers of America were less enthusiastic, expressing "strong concerns" about the proposal and complaining that it presently lacks sufficient detail.
Evident throughout both organizations' comments is the fear that fintech innovators might enjoy an unfair competitive advantage over traditional banks. Yet this competition has the potential to make the industry stronger, by creating more innovative products and services in a market hungry for change. Banks that resist market forces and attempt to preserve the status quo may find themselves left behind whenever the battle is decided about who will oversee fintech regulation and how that oversight will be conducted.
There are a lot of questions that remain unanswered as the OCC works to stake out a position on fintech and as state regulators fight to retain their authority over the burgeoning industry. One thing's for sure: Any fintech companies interested in taking up the OCC on its offer of a national charter should be prepared to bring some heavy artillery to the party. Otherwise, they risk becoming a casualty of the looming showdown between federal and state bank regulators.