On December 2, the Office of the Comptroller of the Currency (OCC) announced that it would “move forward with considering applications from financial technology companies” to become special purpose national banks. Simultaneously with that announcement, the OCC released a paper (FinTech Paper) outlining preliminary parameters for granting special purpose national bank charters for FinTech companies (FinTech charters).
Although the announcement and release of the FinTech Paper are being positively received in the financial services marketplace, the final parameters of a FinTech charter are still being developed. The OCC is seeking public comments on its FinTech Paper to help develop detailed policies, procedures, and standards for accepting, reviewing, and approving FinTech charter applications. As such, FinTech companies and other interested parties have a unique opportunity to help shape the OCC’s review standards for FinTech charters.
It is important to note that the special purpose national bank charter that will be used as a FinTech charter is not new; the OCC currently has the authority to charter special purpose national banks such as trust companies and credit card banks. Thus, the OCC will use its existing chartering authority to consider FinTech companies for the special purpose national bank charter. Due to the statutory limitations of that chartering authority, however, a FinTech company applying for a FinTech charter must be engaged in fiduciary activities or one or more of the activities that the OCC has stated constitute the “business of banking”: receiving deposits, paying checks, or lending money.
A Fintech charter applicant would be free to submit an application for a full-service national bank charter, although such an application would require the applicant to apply to the Federal Deposit Insurance Corporation (FDIC) for federal deposit insurance, and the applicant’s parent (if any) or any controlling person or persons would need to apply to the Federal Reserve Board for approval to become a bank holding company.
The FinTech Paper identifies several areas that the OCC believes need to be addressed in connection with a FinTech charter:
- A “robust, well-developed business plan
- A governance structure commensurate with the risk and complexity of the applicant’s proposed activities
- Minimum and ongoing capital commensurate with the risk and complexity of the applicant’s proposed
- Minimum and ongoing liquidity commensurate with the risk and complexity of the applicant’s proposed activities/li>
- A strong compliance risk management structure
- A commitment to servicing the needs of the community and financial inclusion
- Alternative business and recovery strategies to address various best- and worst-case scenarios
Based on the FinTech Paper, there are a number of issues that a FinTech charter applicant would need to consider when deciding whether to obtain a FinTech charter, including the following:
- A company with a FinTech charter would be subject to the same supervisory standards that are applied to all OCC-supervised financial institutions. The OCC’s charter application processes and procedures are rigorous and will not be relaxed for FinTech charter applicants. Accordingly, a FinTech charter applicant should be prepared to submit a well-developed application with, among other things, a strong three-year business plan that addresses capital, liquidity, and other key issues; financial projections based on reasonable assumptions; and experienced and competent proposed management willing to undergo the required background checks.
- A FinTech charter could be advantageous to nonbank lending companies, as they would not need to obtain state lending licenses. However, a FinTech charter is not a way to avoid all state regulation and laws. Under national bank preemption principles, some categories of state laws—primarily those that address consumer protection—still apply to national banks.
- Because it would be regulated as a national bank, a company with a FinTech charter would only be permitted to engage in activities that are permissible for national banks. In the FinTech Paper, the OCC states that it would consider, on a case-by-case basis, the permissibility of new activities by a FinTech charter applicant. At the same time, potential applicants should bear in mind that the OCC in recent years has approved few new activities. Companies that have a compelling business case and an established history of positive financial and consumer performance will have the best chance at getting the OCC to approve a new activity.
- A FinTech charter applicant for a special purpose charter will need to evaluate its proposed activities to determine whether any legal entity owner of the applicant would need to be registered with and regulated by the Federal Reserve Board as a bank holding company.
- Assuming that the OCC finalizes its proposed rules for the receivership process for uninsured special purpose national banks, a company with a FinTech charter but no deposit insurance would be subject to that receivership process rather than a normal bankruptcy or FDIC bank resolution process.
Choosing to seek a FinTech charter will be a significant business decision for a FinTech company, and will not be a desirable or appropriate path for all companies. It is not clear at this point when the OCC will begin accepting FinTech charter applications, although we expect it could be as early as mid-2017.
Applicants for a FinTech charter will have to coordinate expertise among technology, corporate, and bank regulatory specialists and advisors to assemble the strongest application possible and guide the company through the OCC’s review, approval, and chartering process.