Press reports indicate that the Federal Reserve has concerns and reservations about providing fintech companies with access to the banking system through bank charters.
As we have previously reported, the OCC announced last summer that it will begin accepting applications for special purpose national bank (SPNB) charters from nondepository fintech companies engaged in the business of banking. Federal Deposit Insurance Corporation (FDIC) Chairman Jelena McWilliams also announced last year that the FDIC is setting up an Office of Innovation to encourage banks to embrace and adopt fintech and innovation. She explained that the FDIC could encourage innovation in three ways, including through the industrial loan company (ILC), a specialized banking charter supervised by the FDIC.
Some fintech companies appear reluctant to pursue aggressive nationwide expansion efforts without access to the payments system, settlement services, discount window, and other tools that the Federal Reserve offers to banks. Such access would eliminate bank routing fees, which is a significant operating cost for many fintech companies, and would allow them to compete on a more level playing field with traditional lenders. However, some Federal Reserve leaders are reportedly concerned that fintech companies do not have in place the same level of risk management controls and consumer protections that banks have. “[Fintech companies] probably do want access to the payments system, but they don’t want the regulation that would come with that access. I am concerned that fintech will be the source of the next crisis,” St. Louis Fed President James Bullard reportedly told Reuters in November. Some policymakers also appear concerned about the possible systemic risks and consumer harms imposed by providing fintech companies with direct access to the payments system in the event of a fintech company’s collapse or cyber breach.
Even with the OCC and FDIC initiatives, some fintech companies have reservations about applying for a SPNB or ILC charter without more clear guidance from the Federal Reserve regarding what access they would have to the Federal Reserve tools if their applications were approved. “It’s hard to know if it’s worthwhile applying if you don’t know what access you’d have to the Fed services. It would be helpful for the Fed to clarify,” stated Jason Oxman, CEO of the Electronic Transactions Association. The OCC’s SPNB charter does not allow fintech companies to collect federally insured deposits, which remains a precondition for accessing the Federal Reserve payments system.
From the OCC’s perspective, the SPNB charter still offers many benefits for fintech companies, which can continue to partner with banks that can access Federal Reserve services and tools, reportedly stated OCC spokesperson Bryan Hubbard. The OCC has reportedly indicated that it is in discussions with “dozens of firms” and expects to award the first SPNB charter to a fintech company early this year. Fintech companies are hoping that such development might put enough pressure on the Federal Reserve to clarify its position and provide additional guidance. Federal Reserve Board Governor Lael Brainard has previously stated that “[w]when considering financial innovation of any type, our task is to facilitate an environment in which socially beneficial, responsible innovation can progress with appropriate mitigation of risk and consistent with applicable statutes and regulations.”
Stay tuned for further developments!