By Bill Camarda
In the U.S., financial institutions can legally provide banking services in several ways. They can apply for a state banking charter or other business license, or partner with financial institutions that already have a charter. Alternatively, they can earn a federal charter through the OCC, thereby becoming a “national bank” that can operate nationwide under federal rules and oversight.
The OCC also charters “special purpose national banks” (SPNBs). Until now, these have included trust banks, which engage solely in fiduciary activity; credit-card banks; and banker’s banks, created by community banks to help them compete with larger institutions.1 Nationally chartered fintech banks would be another type of SPNB. But, at least at first, they wouldn’t accept deposits and wouldn’t be subject to Federal Deposit Insurance Corporation (FDIC) restrictions.
The OCC believes there are four potential benefits to chartering national fintech banks.
1. Giving fintechs a clear national regulatory framework will help ensure that they operate safely.
2. National charters will promote consistency in how fintech-related laws and rules are applied, reducing costs of entry and promoting industry growth.
3. National charters could strengthen the federal banking system.
4. It would encourage fintechs to “explore new ways to promote fair access and financial inclusion.”2
As other observers note, fintech banks with a national charter wouldn’t need to establish a physical presence and deal with separate bank examiners in every state in which they operate. They could consolidate compliance functions, set interest rates that would apply nationwide, and advertise more efficiently.3
Observers expect potential candidates for national fintech bank charters to include money transmitters and payment processors. However, some fintech companies say the OCC’s initiative should have gone further, giving fintechs equal access to ACH, FedWire, and other payment rails.4
Other candidates for a national charter might include marketplace lenders that provide online platforms connecting borrowers to potential lenders.5 The Marketplace Lending Association quickly praised the OCC’s decision, as did one of the industry’s most prominent firms.6
During the first several weeks after the OCC announced its plans, no applications for SPNB status have been publicly reported, though one fintech startup recently met the full federal requirements for becoming a traditional national bank that can also accept deposits.7
Fintechs that apply for a special purpose national bank charter face a complex approval process. The OCC requests substantial information even before application, which, itself, must be accompanied by detailed business plans. The OCC also requires plans for how the fintech and its customers will be protected if financial events threaten the bank’s viability. The OCC says it won’t approve applications to provide services with “predatory, unfair, or deceptive features,” or applications that might introduce serious non-banking risks, reduce competition, or create “undesirable concentrations of economic power.”8
As bank attorney Kalin Bornemann puts it, some fintech banking startups “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.”9
State regulators have objected vociferously to suggestions that the OCC might federally charter fintech banking companies. Until now, however, their lawsuits to prevent it have been dismissed as premature. Now that the OCC has formally announced its intentions, they are trying again.
On September 14, 2018, the Superintendent of the New York State Department of Financial Services filed suit, claiming the federal government had overstepped its authority. Maria T. Vullo argues that the OCC’s action will allow fintechs to sidestep state laws on usury and predatory lending; enable fintechs to consolidate offerings into new institutions that become “too big to fail”; and disadvantage competitors who play under New York’s more rigorous rules.10
The Conference of State Bank Supervisors – also threatening litigation – notes that the OCC intends to create individualized operating agreements for each fintech bank it approves. “This lack of transparency and certainty leaves the general public and potential applicants completely in the dark as to the rules and requirements in key areas,” it argues.”11,12
Time will tell how the courts will react to these arguments, or whether some potential fintech banks delay applying until they’re confident that national charters will be permitted. In the meantime, some state regulators are attempting to simplify the process of applying for multiple state licenses, and some fintechs are prioritizing partnerships with traditional financial institutions that already have the approvals they need.13 Experts suggest that, while the best pathway deeper into banking might vary among fintechs, it seems likely that many will find a way.
Federal regulators will offer special national fintech bank charters to financial technology companies that don’t accept deposits. If the federal initiative survives states’ lawsuits, observers suggest that it could accelerate innovation in payment processing, lending, and more.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Banker’s Bank,” Investopedia; https://www.investopedia.com/terms/b/bankers-bank.asp
2. “Exploring Special Purpose National Bank Charters for Fintech Companies,” Office of the Controller of the Currency; https://www.occ.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf
3. “The Banking Evolution Continues: OCC Opens Its Doors To Fintechs To Obtain A Special Purpose National Bank Charter,” Clark Hill; https://www.clarkhill.com/alerts/the-banking-evolution-continues-occ-opens-its-doors-to-fintechs-to-obtain-a-special-purpose-national-bank-charter
4. “We're A Long Way Off From The U.S. Being A Utopia For Fintech,” Forbes; https://www.forbes.com/sites/sarahkocianski/2018/08/07/were-a-long-way-off-the-us-being-a-utopia-for-fintech/#65fbab0b7607
5. “Understanding online marketplace lending,” Consumer Financial Protection Bureau; https://files.consumerfinance.gov/f/201603_cfpb_understanding-online-marketplace-lending.pdf
6. “Silicon Valley's Invasion of Banking Just Got Key U.S. Go-Ahead,” Bloomberg; https://www.bloomberg.com/news/articles/2018-07-31/tech-firms-can-win-bank-charters-as-occ-unveils-fintech-policies
7. “Fintech bank announces preliminary OCC approval of national bank charter,” Ballard Spahr; https://www.consumerfinancemonitor.com/2018/09/05/fintech-bank-announces-preliminary-occ-approval-of-national-bank-charter/
8. “Comptroller’s Licensing Manual Draft Supplement,” Office of the Controller of the Currency; https://www.occ.gov/publications/publications-by-type/licensing-manuals/file-pub-lm-considering-charter-applications-fintech.pdf
9. "The OCC Doubles Down on Fintech Banks," Bank Law Monitor; https://www.banklawmonitor.com/2018/08/the-occ-doubles-down-on-fintech-banks/
10. “Vullo v. OCC” Complaint; https://www.covfinancialservices.com/wp-content/uploads/sites/19/2018/09/Vullo-v-OCC-SDNY-No-18-08377.pdf
11. “Letter to Office of the Comptroller of the Currency (OCC),” Conference of State Bank Supervisors; https://www.covfinancialservices.com/wp-content/uploads/sites/19/2018/09/Vullo-v-OCC-SDNY-No-18-08377.pdf
12. “CSBS To Oppose OCC Fintech Charter (Again),” Ballard Spahr; https://www.consumerfinancemonitor.com/2018/09/13/csbs-to-oppose-occ-fintech-charter-again/
13. “Payment and lending fintechs gearing up for OCC’s “fintech charter” decision,” MarketWatch; https://www.marketwatch.com/story/payment-and-lending-fintechs-gearing-up-for-occs-fintech-charter-decision-2018-07-19