On October 21, Judge Victor Marrero of the United States District Court for the Southern District of New York issued an order in Lacewell v. Office of the Comptroller of the Currency (No. 18-cv-8377) striking down the Office of the Comptroller of the Currency’s (“OCC”) special purpose national bank charter for fintechs (“FinTech Charter”). After years of challenging the FinTech Charter—a charter authorizing fintechs to engage in non-depository banking activities—the New York Department of Financial Services (“NYDFS”) has, for now, succeeded in overturning the charter. The OCC defended its authority by arguing that 12 CFR Part 5.20(e)(1) is consistent with the National Bank Act (“Act”) and authorizes the OCC to issue special purpose charters to nondepository banking institutions. The Court disagreed, finding that the National Bank Act only authorizes the OCC to charter depository institutions. The Court concluded that the Act allows the OCC to charter institutions engaged in the “business of banking,” and the “business of banking” necessarily includes accepting deposits. Therefore, the FinTech Charter is beyond the OCC’s authority.
The impact the Court’s decision will have on the fintech industry is uncertain for a variety of reasons:
First, the OCC has said it will appeal the trial court’s decision. Earlier this year the OCC’s motion to dismiss was denied on the grounds that NYDFS had standing and the issue was ripe. Even though no FinTech has applied for a FinTech Charter, the Court held that the OCC had taken sufficient steps toward issuing such a charter. In a somewhat unusual procedural maneuver, and likely to fast track the case to appeal, the OCC and NYDFS negotiated a stipulated final judgment in NYDFS’s favor, but with certain competing proposed terms. The OCC proposed a narrower finding – one that would limit the Court’s holding to only applicants that are chartered in New York or that intend to do business in New York. The Court sided with the NYDFS, however, and set aside the charter regulation to all applications seeking a national bank charter that does not accept deposits.
Second, no fintechs have applied for a FinTech Charter, to-date. Presumably some fintechs chose not to apply for the charter in light of this litigation, but many others decided not to do so after meeting with the OCC about the charter’s requirements, conditions, and benefits.
Third, the ruling does not affect fintech companies’ ability to apply for a full-service national bank charter. Varo Money and Robinhood, for instance, have applied for such a charter.
Fourth, fintechs can pursue state banking charters, including industrial loan company charters. Rakuten and Square are in the process of applying for such charters. Notably, however, the FDIC has not approved an industrial loan company’s application for insurance in nearly a decade, calling into question the viability of such charters for new applicants.
Fifth, most fintechs provide their services by partnering with banking institutions or acquiring alternative licenses, such as money transmitter or consumer loan lender licenses, or trust company charters. Several major cryptocurrency companies, including Coinbase, Gemini, and BitGo, are licensed money transmitters and/or have established state-chartered trust companies. The purpose of the FinTech Charter, in part, was to provide an alternative to this state-based regulatory approach, but the industry has and will likely continue to operate and expand through the bank partner approach.
While the case focuses on the OCC’s authority to issue the FinTech Charter, the Court’s ruling goes beyond the fintech sector, calling into question an established industry: nondepository trust companies. Per the court’s order, “only depository institutions are eligible to receive national bank charters.” Nondepository trust companies are not depository institutions; rather, they are financial institutions that exercise fiduciary powers exclusively. If the Court is correct, the OCC cannot issue special purpose bank charters to these institutions. The order sets aside 12 CFR 5.20(e)(1) “with respect to all fintech applicants,” but the Court’s interpretation sets aside this provision with respect to all nondepository institutions.
The legal fight over the FinTech Charter is far from over, but the S.D.N.Y.’s ruling calls into questions how the litigation will affect traditional nationally-chartered nondepository institutions, such as nondepository trust companies.