Fintech companies could become special purpose banks under an invitation and proposal released Dec. 2 by the Office of the Comptroller of the Currency, a move that some payment and legal experts welcome but whose scope they question.
“It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters,” said Thomas J. Curry, comptroller of the currency. The OCC says the move will help ensure that fintech companies operate in a “safe and sound manner,” promote “consistency in the application of law and regulation,” and make the “federal banking system stronger.” The OCC is accepting public comments on its proposal until Jan. 15.
Fintech companies seeking charters would have to fulfill multiple requirements under the proposal, including performing core banking services. “With the OCC moving forward with its plans, the Apples of the world can simply become special purpose banks so long as they engage in at least one of three core (banking) activities: receiving deposits, paying checks or lending,” wrote Henry Meier, general counsel, New York Credit Union Association, in a blog post.
What that means for the Apples of the world—that is, if they will have to spend more on compliance as does a traditional bank—is so far hard to determine without final rules for the fintech chartering process, Judith Rinearson, a partner at K&L Gates who focuses on consumer financial services, tells Paybefore. “There will be an interesting weighing of costs and benefits,” she says. “Companies that have already gone through the cost and burdens of obtaining licenses on a 48-state basis will need to decide whether maintaining those licenses will be less burdensome then obtaining a single national bank charter.”
Other payment and legal experts, who spoke on background because they’re still discussing the OCC announcement with clients, tell Paybefore that it’s unclear what exactly is new about the OCC’s proposal, given that fintech companies technically could apply for such charters already. They welcome, however, the clear invitation and proposal, with one calling it “helpful and interesting,” and saying, “it certainly shows movement.”
Rinearson calls the OCC proposal a “significant development (that) could help the U.S. become more competitive in payments innovation globally. On the other hand, the bar that any potential applicant will have to reach sounds very high. Certainly this is not a charter that many startups will be able to easily obtain.”
The OCC proposal also will impact state banking regulators, Meier said. “The OCC’s announcement is likely to set off a mad scramble among state regulators. After all, why should states give the federal government a monopoly over an entirely new type of financial institution?”
One thing the proposal does not offer is what’s commonly called a regulatory “sandbox” for fintech, experts suggest. Under such a scenario—recently proposed in a bill by Rep. Patrick McHenry (R-N.C.)—regulators such as the Federal Reserve and Treasury Department would operate an office that would help fintech companies with regulatory questions and issues during the development of new products. The bill would require those regulators to share data and regularly report to Congress about their efforts. The bill also would pressure regulators to make it more efficient and less costly for firms to win the approvals needed during product testing. That program would be similar to fintech sandbox operations in the U.K. and Hong Kong.
The OCC’s special charter plan follows its announcement of opening a new division to help banks and financial services providers develop fintech products that comply with federal law and meet consumer protection standards, while helping the agency itself better understand the latest fintech developments.
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