The OCC wants to Modernize National Charters for Fintech Companies
By: Miles Pringle
Banking and financial services have changed greatly over the past decade or so. Instead of brick and mortar buildings with vaults, customers can make deposits and move funds on their phones. Loans are extended from unconventional sources, such as peer-to-peer lenders like Lending Club or Prosper. Bank accounts are linked to mobile apps so friends can pay each other back for dinner the night before. Money itself is no longer only government issued funds, but can be a virtual currency like bitcoin or dogecoin. Regulators continue to attempt to get their arms around this rapid change.
On July 31, 2018, the Office of the Comptroller of the Currency (OCC) announced that it would begin accepting applications for national special purpose bank charters from non-deposit-taking financial technology companies (fintech) engaged in the business of banking. In explaining its decision, the OCC stated that the “federal banking system must adapt to the rapid technological changes taking place in the financial services industry to remain relevant and vibrant and to meet the evolving needs of the consumers, businesses, and communities it serves.” [i] This is an idea the OCC has been considering since at least 2016 when it posed the questions: “Is the nation better served when banking products are provided by institutions subject to ongoing supervision and examination?” and, “Should a nonbank company that offers banking-related products have a path to become a bank?”[ii]
Special purpose charters are not a new concept to the banking industry. To date, most special purpose charters are trust companies and credit card banks. Thus, any trust company with the initials “N.A.” at the end of its name is a nationally chartered special purpose bank. The OCC – however – believes that it has the authority to provide charters to a much wider array of companies.
In order to obtain an OCC special purpose charter, a company must: i) conduct fiduciary activities; ii) take deposits; iii) pay checks; or, iv) lend money.[iii] The OCC is defining these functions very broadly. “For example, [the OCC considers] discounting notes, purchasing bank-permissible debt securities, engaging in lease-financing transactions, and making loans are forms of lending money. Similarly, issuing debit cards or engaging in other means of facilitating payments electronically may be considered the modern equivalent of paying checks.”[iv] If companies provide one of these core services, they may be eligible for OCC charters.
There are several reasons why a fintech company would want to be a special purpose bank, primarily being the desire to capitalize on preemptions afforded to banks with respect to some state laws. It can be a costly and complicated web for companies to comply with laws and regulations on a state-by-state basis. Taking money transmitters as an example, currently non-bank money transmitters must obtain licenses in more than forty states to provide services nationwide.[v] Banks are preempted from some of those regulatory burdens. As you would expect, fintech companies are applauding the OCC’s announcement.
Come traditional banks, and many state regulators, oppose the OCC’s move and have previously filed law suits to stop the OCC from accepting fintech charters. They argue that fintech charters exceed the OCC’s chartering authority. Those suits were dismissed on ripeness grounds, but this latest announcement may spur a new round of litigation.
The OCC’s attempt to modernize is likely prompted not only by its recognition of the revolution in banking services, but also the loss of many nationally chartered institutions. As you are likely aware, the U.S. has a dual banking system. Banks may be chartered nationally, by the OCC, or by states. Many banks are opting to switch from a national charter to a state charter (e.g. “Of the 780 community banks that changed charters between 1995 and 2015, 529 left the [OCC]”).[vi] In the past, a national charter provided benefits to in addition to those provided by a state charter, e.g. the ease of inter-state branching. “Today, the primary differences between a state and national charter are the assessment fees charged to supervise the bank and the role of federal preemption over certain state laws.”[vii] Thus, while OCC is stepping up to new challenges of technology based financial services, it may also be attempting to remain more relevant in the banking world.
This Article was originally published in Oklahoma County Bar Association’s Briefcase Vol. 51 No. 8 in August 2018.
[i] OCC, “Policy Statement on Financial Technology Companies’ Eligibility to Apply for National Bank Charters”, July 31, 2018, p. 2, available at https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-other-occ-policy-statement-fintech.pdf.
[ii] OCC, “Exploring Special Purpose National Bank Charters for Fintech Companies”, p. 1, December 2016, available at https://www.occ.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf.
[iii] OCC, “Evaluating Charter Applications From Financial Technology Companies”, p. 5, published March 2017, available at https://www.occ.gov/publications/publications-by-type/licensing-manuals/file-pub-lm-fintech-licensing-manual-supplement.pdf.
[v] Smith, Jim, Dun, Blue, Whalen, Mike, “FinTech, Regulation, and the Law”, published February 26, 2018, Medium.com, available at https://medium.com/fintech-sandbox-the-weekly/fintech-regulation-and-the-law-8ee3b26956bf.
[vi] Hudson, Gregory J. and Killgo, Kory, “Community Banks are Flipping Over a State Charter”, Financial Insights, Vol.6, Issue 1, Federal Reserve Bank of Dallas, available at https://www.dallasfed.org/~/media/documents/outreach/fi/2017/fi1701.pdf.