Concerns over fintech firms

Regulators are proposing a special-purpose bank charter for fintech companies, raising more questions than answers and sparking concern
in the banking sector.

By Chris Cole

Federal banking regulators have begun tackling the vexing question of how to oversee financial technology companies. These “fintech” firms, which use mobile devices and app-based software to offer services that banks have traditionally provided, are lightly regulated and not subject to an annual safety and soundness examination, as banks are.

With the Office of the Comptroller of the Currency (OCC) now accepting applications from fintech companies to become special-purpose national banks, the regulatory process for fintech companies is coming under more scrutiny. The OCC’s decision to issue a fintech charter has raised a number of concerns among banks about whether the playing field will be level between banks and fintech-chartered institutions. There even have been questions about whether the OCC is legally authorized to issue a charter.

Getting up to speed
Fintech firms, such as PayPal, Square and Lending Club, have exploded onto the financial services scene in recent years. These rapidly growing startups are attracting tens of billions of dollars in global investments each year, with new companies coming online virtually every day.

An increasing number of consumers enjoys the benefits of these firms, which offer services such as online marketplace lending, small-business and merchant payments, and data analytics. However, fintech companies offer banking services without bearing much of the cost of regulation, enjoying a competitive advantage over community banks and other traditional financial institutions that must comply with an alphabet soup of regulatory requirements.

But the gears of federal regulatory oversight have begun to turn. The OCC’s plan for special-purpose charters has kicked off the process of applying a bank regulatory framework to fintech companies.

Regulatory application
In a white paper about its plan, the OCC said its special-purpose charter would allow fintechs to engage only in activities that are permissible for national banks. The agency noted that the National Bank Act is adaptable to permit national banks to engage in new activities; however, it said it would consider the permissibility of new activity by special-purpose applicants on a case-by-case basis.

ICBA cannot support the OCC’s plan without further clarification and a more in-depth explanation about
the vital components of its special-purpose fintech charter.

The OCC also noted that while banks with special-purpose charters are subject to the same laws and regulations as other national banks, those without deposit insurance would not have to meet statutes that apply only to FDIC-insured institutions. That includes the Community Reinvestment Act and safety-and-soundness standards in the Federal Deposit Insurance Act, among others, though the OCC could impose requirements on uninsured special-purpose banks as a condition for granting a charter.

Overall, the OCC’s process is designed to extend a bank regulatory oversight framework to fintech companies, albeit one that is more limited than that which applies to community banks and other depository institutions. Announcing the decision, comptroller Thomas Curry said fintech companies have the potential to expand financial inclusion and empower consumers.

“Preferences and needs of consumers, communities, and business are changing,” Curry said in announcing the application process. “And chartering companies that are finding new and better ways of satisfying those needs is another step toward supporting responsible innovation that is good for consumers, good for the federal banking system, and good for the country.”

Curry said having clear criteria and standards for fintech firms to become national banks allows the agency to openly vet risks and ensure the companies that receive charters have a reasonable chance of success, effective consumer protections, and strong capital, liquidity and risk management. He also noted that the OCC’s application process does not mandate that fintech companies seek a national charter, leaving the door open for fintech companies to operate with a state bank charter or to operate without a bank charter at all.

Growing concerns
Nevertheless, ICBA and others in the financial services industry quickly raised concerns about endowing nonbank financial firms with a federal bank charter. In response to the OCC’s announcement, ICBA noted that while it supports oversight of these unregulated firms, granting a federal charter to these nonbanks poses risks to taxpayers and the financial system.

“ICBA has been deeply concerned that nonbank online lenders’ lack of oversight has provided them with regulatory advantages over other institutions—such as highly regulated community banks—while putting consumers and the financial system at risk,” ICBA president and CEO Cam Fine said. “Any limited fintech charter must hold these companies to the same standards of safety, soundness and fairness as other federally chartered institutions.”

In a subsequent comment letter to the agency, ICBA elucidated its concerns while noting that the OCC lacks explicit statutory authority to grant such charters. Special-purpose banks are expressly limited to providing fiduciary services or certain other types of specialized activities, such as community development banking and bankers’ bank services, ICBA noted. There is no explicit authority under the National Bank Act to charter a fintech company as a special-purpose national bank. Furthermore, other federal laws such as the Bank Holding Company Act, federal tax laws and federal bankruptcy laws define banks more broadly than the OCC does. These statutes say banks must not only be in the business of making loans but also must accept deposits. Therefore, the OCC should slow down, back up and seek specific congressional authority before issuing a special-purpose fintech charter.

The OCC should slow down, back up and seek specific congressional authority before issuing a special-purpose fintech charter.

In addition to seeking congressional authority, the OCC needs to institute a more formal rulemaking process before proceeding with its fintech plan. In its comment letter, ICBA said the OCC should propose rules for public comment spelling out its examination and supervision expectations and other regulatory requirements under the special-purpose charter. It also said the agency should consult with the other banking agencies, particularly the Federal Reserve, concerning such issues as access to the Fed’s payment systems and its discount window.

“ICBA opposes the OCC approving fintech charters on a case-by-case basis pursuant to a broadly worded policy statement that could be changed at the discretion of the agency or tailored based on the types of entities seeking national bank powers,” ICBA wrote.

In its letter, ICBA also called on the OCC to:

  • ensure large commercial entities are not allowed to own special-purpose national banks as subsidiaries,
  • clearly define what is a “fintech” company and which companies would be eligible for such a charter,
  • ensure that any new chartered institution is subject to the same supervision and regulation as are required of community banks.
    ICBA has not been alone in raising concerns. Among the opponents of the OCC plan is the Conference of State Bank Supervisors, which said the agency lacks statutory authority, has a history of preempting state consumer-protection laws, and is taking an approach that would distort the financial marketplace by centralizing authority for perhaps all non-depository activities within a single regulator. The OCC’s plan puts the agency in the position of picking winners and losers among fintech providers to the detriment of consumers and providers. Meanwhile, the Clearing House and the Securities Industry and Financial Markets Association joined ICBA in a separate joint letter calling for greater OCC transparency, a formal rulemaking process and a level competitive playing field with special-purpose fintechs.

What’s next?
The OCC’s white paper acknowledges the need to hold fintech firms to the same high standards of safety and soundness, fair access and fair treatment that apply to national banks and federal savings associations.

However, ICBA cannot support the OCC’s plan without further clarification and a more in-depth explanation about the vital components of its special-purpose fintech charter.

Although much remains to be seen about the progress of the OCC’s project—such as whether fintechs will actually apply for the special-purpose charter and how the agency will proceed after it gets its initial applications—ICBA will continue working with regulators to address the community banking industry’s considerable concerns


Chris Cole (chris.cole@icba.org) is ICBA executive vice president and senior regulatory counsel.

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