On Friday, December 2, Comptroller Curry announced that the Office of the Comptroller of the Currency (the “OCC”) will develop a special purpose national bank charter for fintech companies. This move came after several months of research and review in which the OCC has become the foremost federal banking regulator in the fintech conversation. In October, the OCC announced the creation of Offices of Innovation, which will be in DC, New York, and San Francisco and will hold “office hours” to encourage fintech companies to discuss their products and services with the regulator to better understand their regulatory obligations and develop compliance plans. While the announcement is just the first step in the development of the special purpose charter for fintech companies (“Fintech Charter”), it is encouraging and is a bold step forward in regulatory acceptance of the fintech industry. Together with the Comptroller’s announcement, the OCC released a white paper titled “Exploring Special Purpose National Bank Charters for Fintech Companies” (the “White Paper”). The White Paper reviews the possibilities for the Fintech Charter and requests public comment on various potential chartering and ongoing requirements for chartered fintech companies.
The OCC has determined it does not need any additional rulemaking or statutory authority to issue Fintech Charters because the National Bank Act and Home Owners’ Loan Act provide it with the authority to issue special purpose charters. The OCC already issues several special purpose national bank charters, including community development bank charters and credit card bank charters. The only statutory limitation on the OCC’s chartering authority is that the chartered institution must limit its activities to either fiduciary activities or to any other activity within “the business of banking.” If the company provides services outside of fiduciary activities, it must conduct one of the three core banking functions: (i) receiving deposits, (ii) paying checks, or (iii) lending money. In his speech and the follow-up Q&A session, Comptroller Curry said that though the current focus is on “fintech,” any innovative proposals with regard to those core banking functions will be entertained and could be chartered.
If a fintech company engages in the business of banking and decides to apply for a Fintech Charter, the company must meet the OCC’s rigid chartering requirements. A fintech company would go through the same chartering process as a traditional, deposit-taking national bank. This process consists of four stages: (i) prefiling; (ii) filing; (iii) review and evaluation; and (iv) decision.
Prefiling. Before filing, the fintech company must meet with the OCC, likely with some involvement from the Office of Innovation, both formally and informally to discuss the requirements for chartering and the business of the applicant. Once the parties are comfortable, the applicant will file its application for a Fintech Charter.
Filing. The Fintech Charter application will have the same basic components as any national bank charter application, but the specific requirements may be altered depending on the business model and service(s) provided. The application must include:
- A detailed business plan, which addresses at least the first three years of the fintech company’s chartered life.
- A proposed corporate governance structure, which provides commensurate oversight depending on the company’s risk profile and demonstrates the proposed board and management’s financial acumen and expertise.
- Capital, the required levels of which are very much up in the air for a chartered fintech company. Capital is required to ensure the safety and soundness of both the applicant and the financial system and is dependent on asset size and quality, scope of activities, quality of management, strategic planning, ownership, and risk/risk management.
- Liquidity, which measures the applicant’s ability to meet both expected and unexpected cash and collateral requirements without adversely affecting the operation or safety and soundness of the applicant. Like the capital requirements, the specifics of liquidity requirements for chartered fintech companies are uunsettled – the White Paper provides that ongoing liquidity must be “commensurate with the risk and complexity of the proposed activities.”
- A compliance risk management plan, which provides for a culture of compliance and a commitment to understanding and adhering to legal and regulatory requirements, especially BSA/AML requirements and UDAAP.
- A plan to ensure financial inclusion, which will address potential gaps in Community Reinvestment Act (“CRA”) requirements. The CRA only applies to institutions that are FDIC insured; many chartered fintech companies will not need to have FDIC insurance, but may participate in lending activities. In its application, the applicant must address: (a) how it will identify its relevant market, customer base, or community; (b) its proposed products and services, and the marketing and delivery systems thereof; (c) how the proposed products and services, and the marketing and delivery thereof promote financial inclusion; and (d) a plan to ensure the products and services will be offered on a fair and non-discriminatory basis.
- A resolution plan, which must address how the applicant can wind up its business, including when it would do so (i.e. what would trigger the chartered fintech company’s board to determine the company must dissolve). As most chartered fintech companies will likely not have FDIC insurance, the usual resolution process for banks will not be possible. Comptroller Curry stated that while the resolution plans do not need to be as thorough as the living wills required by Title II of the Dodd-Frank Act, the plans will need to be robust and detailed.
Review and evaluation. Upon receipt of a completed application, the OCC will review and investigate to determine if it believes the applicant: (i) has a reasonable chance of success; (ii) will be operated in a safe and sound manner; (iii) will provide fair access to financial services; (iv) will ensure compliance with laws and regulations; (v) will promote fair treatment of its customers; and (vi) will foster healthy competition.
Decision. After a fulsome review, the OCC may grant preliminary conditional approval. If it does so, the applicant will follow its business plan to raise capital and take the steps necessary to begin operation. Once the company is ready for business, the OCC will conduct a pre-opening exam to ensure everything is in order and in compliance with both the proposed business plan and legal and regulatory requirements. If it is satisfied, the OCC will grant final approval and the chartered fintech company can begin operations.
As stated above, the ongoing requirements for a chartered fintech company have yet to be determined but will include some form of capital, liquidity, and CRA-like requirements. As the world of fintech is so large and varied, the OCC will likely have to have different requirements based on the primary product or service provided (i.e. a marketplace lender would have different requirements than a payments company). However, if the OCC devises capital or liquidity requirements that are either too high or too tailored to a particular business model or applicant, chartered fintech companies are at risk for unequal supervision and/or regulation, which could easily deter fintech companies from applying for a charter.
The most interesting, and likely divisive, ongoing requirement is that of “financial inclusion,” which is the OCC’s term for CRA-like requirements. These requirements are currently undefined and would likely vary from company to company based on the products and services offered. As it stands, the CRA may need to be amended to address the changing landscape of banking, including the rise of online and mobile banking that renders branches less necessary to the banking model. Comptroller Curry said as much during the Q&A after his announcement. At the moment, though, the revision of the CRA seems unlikely, at least in the near term, but its goals of ensuring the provision of credit to underserved communities remains vital. Part of the central premise of fintech is that it expands banking products and services to the un- and under-banked by making the delivery systems more efficient and less costly. Many marketplace lenders have partnered with banks in part to bolster the banks’ CRA portfolio through the wide reach of online lending. Fintech companies have not been examined for CRA, so their actual reach into the underserved community is an unknown variable, but their loan portfolios do seem to provide helpful statistics to their partner banks. If the OCC creates strict CRA-like requirements for chartered fintech companies, particularly those engaged in lending, it could have a chilling effect on bank partnerships since the CRA does not permit loans to be double counted, any CRA benefit banks currently gain from relationships with marketplace lenders may be eliminated. It could also have a chilling effect on Fintech Charter applications altogether, particularly if coupled with high capital and/or liquidity requirements.
In addition, the provision of a Fintech Charter may further drive financial products and services to the Internet, further reducing brick and mortar and in-person provision of financial services. This could box out those without access to a computer, smart phone, or the Internet. It is important, however, to recognize that a certain portion of the populace will remain unserved, no matter the regulatory requirements.
Potential Effects on Bank-Fintech Partnerships
As stated above, most of the specifics of the Fintech Charter requirements and ongoing compliance requirements for chartered fintech companies have yet to be defined. It is important to note, however, that the OCC is merely offering a new option for fintech companies. Comptroller Curry stressed that the dual banking system encourage competition and the options for fintech companies were the Fintech Charter, a state-level license or charter, or doing nothing. In the “doing nothing” basket are those companies whose activities don’t clearly fit within any licensing or chartering requirement, which are becoming few and far between as states (and the federal government) either draft new laws and regulations or expand the scope of current laws, especially in the money transmission space.
In the event a fintech company obtains a Fintech Charter, its relationship with other banks will likely be determined and affected by the yet-to-be-defined requirements for chartered fintech companies. As discussed above, the most obvious change could be relationships of lending companies with banks. Invitation to Comment Given the continuously evolving nature of the fintech industry, the OCC has requested comment on the proposed Fintech Charter generally, and has made thirteen specific inquiries to which it is seeking industry feedback:
- What are the public policy benefits of approving fintech companies to operate under a national bank charter? What are the risks?
- What elements should the OCC consider in establishing the capital and liquidity requirements for an uninsured special purpose national bank that limits the type of assets it holds?
- What information should a special purpose national bank provide to the OCC to demonstrate its commitment to financial inclusion to individuals, businesses and communities? For instance, what new or alternative means (e.g., products, services) might a special purpose national bank establish in furtherance of its support for financial inclusion? How could an uninsured special purpose bank that uses innovative methods to develop or deliver financial products or services in a virtual or physical community demonstrate its commitment to financial inclusion?
- Should the OCC seek a financial inclusion commitment from an uninsured special purpose national bank that would not engage in lending, and if so, how could such a bank demonstrate a commitment to financial inclusion?
- How could a special purpose national bank that is not engaged in providing banking services to the public support financial inclusion?
- Should the OCC use its chartering authority as an opportunity to address the gaps in protections afforded individuals versus small business borrowers, and if so, how?
- What are potential challenges in executing or adapting a fintech business model to meet regulatory expectations, and what specific conditions governing the activities of special purpose national banks should the OCC consider?
- What actions should the OCC take to ensure special purpose national banks operate in a safe and sound manner and in the public interest?
- Would a fintech special purpose national bank have any competitive advantages over fullservice banks the OCC should address? Are there risks to full-service banks from fintech companies that do not have bank charters?
- Are there particular products or services offered by fintech companies, such as digital currencies, that may require different approaches to supervision to mitigate risk for both the institution and the broader financial system?
- How can the OCC enhance its coordination and communication with other regulators that have jurisdiction over a proposed special purpose national bank, its parent company, or its activities?
- Certain risks may be increased in a special purpose national bank because of its concentration in a limited number of business activities. How can the OCC ensure that a special purpose national bank sufficiently mitigates these risks?
- What additional information, materials, and technical assistance from the OCC would a prospective fintech applicant find useful in the application process?
The Fintech Charter will be a game changer for the banking system if it is properly executed and does not contain overly burdensome initial and ongoing regulatory requirements. The Fintech Charter could lend a level of credibility that fintech companies do not currently enjoy. Government chartering and oversight could provide access to an increased pool of consumers who may have been wary of fintech companies and/or fintech relationships with banks. The particulars of a Fintech Charter are something both fintech companies and banks should consider. To the extent you believe some or all of the proposals are onerous or have specific or general ideas or responses to the OCC’s inquiries, we encourage you to comment on the White Paper. The comment period ends on January 15, 2017.