In a decision long anticipated by the fintech industry and opposed by multiple state regulators, on July 31 the Office of the Comptroller of the Currency (OCC) announced it will accept applications for special purpose national bank charters for fintech companies.
The decision ends months of speculation over whether the Trump administration’s OCC would follow through on an initiative begun in 2016 by Obama-era officials. The announcement came hours after the Treasury Department released a lengthy report endorsing fintech charters as “effective in reducing regulatory fragmentation and growing markets by supporting beneficial business models.”
As we have written previously, the availability of special purpose national bank charters could profoundly alter how financial technology companies deliver financial services to consumers and small businesses in the United States.
Fintech companies, particularly those serving customers in multiple states, would be well-advised to consider whether obtaining such charters could meaningfully reduce the administrative and compliance challenges posed by the existing patchwork of state licensing requirements.
In an effort to streamline financial regulation and create a national framework for oversight and licensing of nonbank financial institutions, the OCC originally floated the idea of special purpose bank charters for fintech companies in December 2016.
In March 2017, the OCC published a draft supplement (the Supplement) to its licensing manual that described how applicants would seek such charters. The Supplement explained how the OCC would apply existing licensing standards and requirements—originally crafted with traditional financial institutions in mind—to the nascent and rapidly evolving fintech industry.
In a companion summary, the OCC explained that fintech charter recipients would be held to the same operational standards and be subject to the same oversight as federally chartered traditional banks. Recognizing that fintech companies operate differently from traditional banks and therefore pose different risks to the banking system, the Supplement also described how the OCC could impose special conditions on fintech companies during the application process.
Following the departure of the OCC’s Obama-era leader in May 2017 and the filing of lawsuits (that were later dismissed on procedural grounds) by state regulators and other industry participants, the future of fintech charters appeared in doubt.
What Happens Next?
Barring a successful challenge to its recent decision, the OCC will become the primary regulator of chartered fintech companies, with state and other federal regulators such as the Bureau of Consumer Financial Protection playing secondary roles.
As a result, significant portions of state banking regulation as applied to chartered fintech companies stand to be preempted by federal law. This would enable charter holders to operate predominantly under a single set of rules nationwide, similar to how traditional national banks now operate.
In a revised version of its Supplement, the OCC reiterated that firms operating under fintech charters will be held to the same standards and subject to the same oversight as national banks, including with respect to capital, liquidity, financial inclusion commitments and risk management.
The revised Supplement also outlines an intensive, four-phase process to obtain a fintech charter, including multiple stages of regulatory review and analysis before a charter may be issued and the recipient may open for business. During its review, the OCC will consider (among other things) whether the prospective bank will operate in a safe and sound manner, promote fair treatment of customers, and foster healthy competition in the financial services industry.
Not surprisingly, state banking regulators have expressed their strong disapproval of the OCC’s decision, arguing that issuance of fintech charters exceeds the OCC’s authority under the National Bank Act.
In a strongly worded statement, the superintendent of New York’s Department of Financial Services condemned the move on jurisdictional and substantive grounds, noting that “a national fintech charter will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape.” The president and CEO of the Conference of State Bank Supervisors described the OCC’s announcement as “a regulatory train wreck in the making” that could lead to taxpayer bailouts of failed fintech companies.
Perhaps anticipating these objections, the OCC concurrently issued a Policy Statement asserting its authority to issue fintech charters under the National Bank Act and explaining that fintech companies “will be subject to the same high standards of safety and soundness and fairness that all federally chartered banks must meet.”
Among fintech entrepreneurs, the OCC’s decision was generally praised, with many supporters touting fintech charters’ promise of regulatory uniformity and echoing the OCC’s expectation that the industry will enjoy greater efficiency and innovation as a result. Others, however, sounded notes of caution that the extensive chartering process may not be worth the effort.
Why It Matters
The availability of fintech charters may lead to a single set of rules nationwide for eligible fintech companies. This would dramatically simplify administrative and compliance challenges faced by firms operating in multiple states and subject to each state’s separate requirements.
While the new charters will exempt recipients from significant portions of state banking regulation, they come with their own compliance regime. Like national banks, chartered fintech companies will be subject to stringent reporting and ongoing supervisory requirements, which may prove especially onerous for smaller firms. For this reason, it remains unclear whether fintech charters will be widely adopted.
If fintech charters do prove popular, we anticipate they will encourage dramatic growth in the financial services industry by streamlining regulation and establishing a single source of operational supervision. It remains to be seen, however, whether the OCC’s oversight will ensure the same level of consumer protection from harmful and deceptive practices as the existing state-by-state regime provides.
Until now, many fintech companies have opted to partner with traditional, nationally chartered institutions to avoid state-by-state regulation (an arrangement sometimes known as “rent-a-charter”). We expect that the level of difficulty in obtaining fintech charters will determine the impact on these partnerships going forward. If special purpose national bank charters become the path of least resistance for fintech companies, national banks may find their competitive advantage in this space greatly diminished.
Given the immense implications of the OCC’s recent announcement, we urge all members of the financial services industry to monitor the implementation of fintech charters closely and to consider taking steps now to take advantage of (or to protect their businesses against) their imminent availability.
Office of the Comptroller of the Currency, Press Release, “OCC Begins Accepting National Bank Charter Applications From Financial Technology Companies” (July 31, 2018), available at https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html
Office of the Comptroller of the Currency, Comptroller’s Licensing Manual Supplement, “Considering Charter Applications From Financial Technology Companies” (July 2018), available at https://www.occ.gov/publications/publications-by-type/licensing-manuals/file-pub-lm-considering-charter-applications-fintech.pdf
Office of the Comptroller of the Currency, “Policy Statement on Financial Technology Companies’ Eligibility to Apply for National Bank Charters” (July 31, 2018), available at https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-other-occ-policy-statement-fintech.pdf
U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” (July 2018), available at https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financi....pdf
Office of the Comptroller of the Currency, “Evaluating Charter Applications From Financial Technology Companies” (March 2017), available at https://www.occ.treas.gov/publications/publications-by-type/licensing-manuals/file-pub-lm-fintech-licensing-manual-supplement.pdf
Office of the Comptroller of the Currency, “OCC Summary of Comments and Explanatory Statement: Special Purpose National Bank Charters for Financial Technology Companies” (March 2017), available at https://www.occ.gov/topics/responsible-innovation/summary-explanatory-statement-fintech-charters.pdf
Office of the Comptroller of the Currency, “Exploring Special Purpose National Bank Charters for Fintech Companies” (December 2016), available at https://www.occ.treas.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf
Manatt Financial Services Law Newsletter, “Curry in a Hurry: OCC Publishes Fintech Charter Standards” (March 20, 2017), available at https://www.manatt.com/Insights/Newsletters/Financial-Services-Law/Curry-in-a-Hurry-OCC-Publishes-Fintech-Charter-St