Traditional banks and lenders may soon see some increased competition from actors in the financial technology industry. As we previously discussed, the Office of the Comptroller of the Currency (OCC) has led the regulatory charge by inviting so-called "fintech" companies to apply for special purpose national bank charters. Soon after this invitation was extended in 2016, the Conference of State Bank Supervisors (consisting of state banking regulators) filed a lawsuit in 2017 hoping to block the OCC's fintech charter, but the lawsuit was dismissed in 2018. With that lawsuit behind it, the OCC recently announced that it will begin accepting applications for special purpose charters from non-depository fintech companies, such as online lenders and payments companies.
The OCC's announcement will likely stir up some strong feelings among those in the traditional banking and lending industries hoping to preserve the status quo. Here are a few things we can expect from the announcement:
- A Rigorous Application Process: The application process will be no "walk in the park." According to the OCC, each application will be reviewed based on its unique facts and circumstances. Under the OCC's Licensing Manual Supplement, the application process involves four distinct phases: (1) the "pre-filing phase," during which the applicant engages in formal and informal meetings with the OCC; (2) the "filing phase," during which the applicant submits its complete application; (3) the "review phase," during which the OCC carefully analyzes the application; and (4) the "decision phase," during which the OCC decides whether to approve or deny the application. Put frankly, the application is not easy and many startup fintech companies will balk at the cost, people, experience, and resources needed to gain OCC approval. For instance, the OCC will require strict capital and liquidity requirements based on the risk and complexity of the applicant's proposed business model, and the OCC will likely want to see an all-star cast of executives and directors with significant banking experience. You can bet your bottom dollar that the application and vetting process will be extremely thorough before the OCC gives its stamp of approval for any fintech charters.
- Heightened Scrutiny: Many in the traditional banking industry strongly oppose the new fintech charter, and some fear that fintech banks will have an unfair advantage by enjoying less regulation. For example, the CEO of the Conference of State Bank Supervisors called the charter "a regulatory train wreck in the making." However, the OCC made clear that fintech banks will be "supervised like similarly situated national banks," which will require comprehensive capital and liquidity requirements, financial inclusion commitments, safety and soundness and fairness examinations, a consumer compliance program, and a program designed to comply with the requirements of the federal bank secrecy act and anti-money laundering rules. If approved, a new fintech bank can definitely expect heightened supervision initially, similar to other de novo. One thing is certain: the OCC will have high expectations and closely monitor its fintech banks.
- Less State-by-State Compliance: Currently, a major hurdle for online lenders and other fintech companies is the thicket of state laws that apply to their financial services. In many situations, a fintech company is forced to comply with each state's laws in which it interacts with customers, which can potentially require a separate license in each state in which it operates. The OCC's special purpose charter gives these fintech companies the opportunity to operate on a national scale, thus potentially eliminating the expensive state-by-state approvals they currently need to offer financial services in those states. As you can suspect, many interested parties oppose the fintech charter, arguing it would allow fintech companies to evade state interest rate caps and other state-specific consumer protections. For example, the Superintendent of the New York Department of Financial Services stated: "[A] national fintech charter will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape." According to the OCC, however, a special purpose charter is only one of the many options for fintech companies engaged in the business of banking, and the charter will simply provide greater choice, promote financial inclusion, and create competition for financial services.
- No Deposits, Yet: The OCC's special purpose charter will be limited to fintech companies that would engage in one or more of the core banking activities of paying checks or lending money, but would not take deposits and would not be insured by the FDIC. In other words, if a fintech company has plans to take insured deposits, it will still need to obtain FDIC insurance and apply for a full-service charter. For now, traditional banks and credit unions can rest easy knowing their deposit bases should remain unaffected by the OCC's fintech charter announcement.
- Partnership Opportunities with Fintech: Today, many fintech companies ultimately decide that they do not want to become banks, but they want to instead provide services directly to financial institutions. For instance, a fintech company may ultimately decide that the OCC's fintech charter application imposes unreasonable and unrealistic capital and liquidity requirements making it near-impossible to turn a profit. In that case, the fintech company may seek a partnership with a chartered bank or credit union. Of course, if your financial institution is approached by a fintech company hoping to establish a partnership to offer its financial services to customers, your institution should go through its normal vendor management program to assess the risk associated with that fintech company and any laws specifically applicable to its activities.
At this point, the OCC's fintech charter announcement has not yet caused the sky to fall. The fear that hordes of borrowers will flock to the internet to obtain substantial loans and financial services from non-bank fintech companies seems unjustified (for now), and many startup fintech companies that explore a fintech charter application may quickly realize the vast experience, resources, and capital requirements needed to obtain a fintech charter from the OCC. In fact, this new fintech charter application might actually create more partnership opportunities for financial institutions. The OCC's fintech charter is likely a step in the right direction by eliminating the spider-web of state-by-state regulation faced by many fintech companies and promoting innovation and competition in the financial services industry. Although many oppose the mere notion of a fintech bank, only time will tell what effect, if any, it will have on the traditional lending and financial services industries.