The Treasury’s Office of the Comptroller of the Currency (OCC) announced earlier this month that it will give financial technology, or “fintech,” companies the opportunity to apply for a special purpose national bank charter. The charter, designed to bring the emerging fintech industry under federal oversight, is the most significant regulatory action in this space to-date.
But it’s not the only regulatory action the fintech industry can expect. Regulatory bodies have lately hinted at their desire to clarify the oversight roles for fintech companies. For example, the:
- Consumer Financial Protection Bureau (CFPB) released “Project Catalyst” report in October 2016, encouraging the development of innovative consumer financial products that meet regulatory requirements. The CFPB is also writing rules affecting small dollar loans which would affect these online lending firms. The industry is very concerned about limits from the CFPB in this area and beyond.
- Federal Deposit Insurance Corporation (FDIC) has also established a steering committee to consider fintech.
- Securities and Exchange Commission (SEC) hosted a fintech conference in November 2016, which informed the SEC’s fintech working group.
- Federal Reserve released a white paper in December 2016, signaling it’s plans to monitor financial innovations (such as blockchain).
This OCC announcement marks a pivotal moment in the evolution of fintech companies, particularly in the current, uncertain regulatory climate. There is by no means a guarantee for the next administration to be more friendly to financial services, and as many groups vocalize opinions about how to handle the emerging fintech industry, companies have pondered best how to respond.
Below are four key takeaways fintech companies must keep in mind regarding the OCC’s bank charter announcement:
1. Fintech companies should establish solid relationships with regulatory agencies, as the OCC shows its good will toward the new industry.
In a growing industry with competing interests, the OCC’s decision to give fintech companies the opportunity to apply for a charter – instead of mandating application – strikes the right balance between encouraging innovation and implementing supervision to support it. Companies applying for a special purpose national bank charter must conduct one of the three core banking activities: taking deposits, paying checks or lending money. The OCC understands that, just as financial institutions have varying business goals, so to do fintech companies.
2. Fintech companies should look to the OCC’s supervisory guidelines for the special bank charter, even if they decide against applying as other regulatory agencies will look upon them favorably.
Companies participating in banking activities will also have to meet several baseline supervisory expectations before applying for a national charter. Those expectations include a detailed business plan, a well-established governance structure, sufficient capital levels, minimum and ongoing liquidity, a strong compliance risk management infrastructure, commitment to financial inclusion, as well as recovery and resolution planning. Companies becoming chartered will face anti-money laundering controls, consumer protection regulations, and anti-discriminatory lending laws, but they would ultimately benefit by being regarded as an established entity in the eyes of the federal government.
3. The OCC’s decision is a victory for small fintech start ups, but only if they move to take advantage of it.
The OCC’s decision is a victory for smaller fintech firms, which will now have the opportunity to operate nationally with one license. Many fintech companies that are now household names, such as PayPal or Lending Club, have grown without a national charter. For smaller fintech upstarts, a national charter would allow them to operate nationally without getting state-by-state permission and would allow them to forego partnering with a traditional brick-and-mortar bank in order to expand.
4. The OCC’s decision should serve as concrete evidence for why fintech companies need to begin familiarizing themselves with Washington, DC. Otherwise, fintech companies risk being caught flat footed when competing interests intervene.
Not everyone is excited about the new opportunity for fintech companies. Both banks and consumer groups have expressed their concerns about new fintech companies operating outside of federal supervision. Financial institutions fear that the charter will allow fintech firms to have the advantages of a bank without banks’ regulatory obligations, while consumer groups worry about fintech companies growing too quickly without proper consumer protection measures.
This conversation is just beginning. There is a lot of momentum built up around impending fintech regulation and regardless of the incoming cabinet appointments, we will continue to see regulators push to establish their roles in the fintech space. Just as larger technology companies are meeting with the incoming administration, fintech companies should be making similar moves to establish a presence in D.C.