Last week, the Office of the Comptroller of the Currency (OCC) officially opened its doors to financial technology companies and encouraged them to apply to become "special purpose" national banks. The premise is simple—become a national bank, abide by the OCC's rules and regulations, and so-called "fintech" companies can avoid much of the thicket of uncoordinated state-by-state regulations that have stymied some industry innovators. This presents potentially huge opportunities for the more than 4,000 fintech companies representing more than $24 billion worldwide. It also poses a potentially disruptive risk to existing banks with full-service charters, who are daily struggling to maintain their competitive advantage in a dynamic industry.
The OCC's invitation to fintech was published (fittingly) online in a whitepaper entitled, "Exploring Special Purpose National Bank Charters for Fintech Companies" acknowledged the rapidly changing needs of consumers and businesses and explained that "chartering companies that are finding new and better ways of satisfying those needs is another step toward supporting responsible innovation that is good for consumers, good for the federal banking system, and good for the country."
In making this groundbreaking offer to fintech, the OCC relies on its authority under the National Bank Act and Home Owners' Loan Act to create special purpose national banks that conduct at least one of the following core banking functions: receiving deposits, paying checks, or lending money. The OCC cites several examples of existing special purpose national banks, such as trust banks, credit card banks, and bankers' banks, to showcase the breadth of the OCC's power to issue charters. And the OCC explains that it will consider on a case-by-case basis whether a new activity is deserving of a special purpose charter – leaving unclear for the moment how many fintech companies will actually be welcomed into the family of national banks when all is said and done.
The path to national bankhood may not relieve fintech of the compliance burdens that have challenged the entire banking industry. The OCC explained fintech companies will be held "to the same rigorous standards of safety and soundness, fair access, and fair treatment of customers that apply to all national banks and federal savings associations." The OCC also reminded fintech companies that they will be subject to the same laws, regulations, examination, reporting, and supervision of other national banks. This includes BSA, AML, and OFAC compliance. Fintech companies will similarly be subject to UDAAP oversight and scrutiny.
The OCC's emphasis on consistent compliance and oversight over fintech seemed to be welcome news, at least for some in the banking industry. American Bankers Association President and CEO Rob Nichols reacted positively to the news of the OCC's special purpose charter proposal:
We are strongly encouraged by the OCC's comments on a potential special purpose charter for fintech companies. This is a bank charter for fintech companies that will hold them to the same standards of safety, access and fair treatment.
The rules of engagement for fintech companies seeking a special purpose charter are still being written. By its very title, the OCC's recent whitepaper acknowledges that the regulators are still "exploring" how to regulate fintech. The OCC has requested comments on its whitepaper by January 15, 2017, and has offered a variety of unanswered questions that suggest the OCC is still just beginning to work through the challenges of regulating in a world of rapidly changing technology.
But it is clear that nontraditional financial services companies are continuing to turn the heat up on the banking industry. And banking regulators, who must also adapt or perish, are warming up to the change.