Industry groups urge caution on fintech bank licenses

Financial services industry groups have sounded a note of caution – and concern over competition – as bank regulators consider plans to license certain technology companies as they begin to offer banking products and services.

Comptroller of the Currency Thomas Curry on December 2 said the Office of the Comptroller of the Currency (OCC) would move forward with considering applications from financial technology (fintech) firms to become special purpose national banks (SPNBs). The OCC at the time published a paper discussing the issues and conditions the agency will consider in granting charters to such organizations, and asked for feedback.

In a speech announcing the plan, Curry said his agency was considering special purpose national charters for fintech companies for a variety of reasons. ‘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,’ he said.

He also argued that considering fintech charter applications would give businesses a choice without creating an obligation to seek a charter. Companies that do so will be evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection and strong capital and liquidity.

‘Many fintechs will choose to partner with existing banks or provide services to banks and other financial companies, but some will seek to become a bank,’ Curry said. ‘In those cases, it will be much better for the health of the federal banking system and everyone who relies on these institutions if these companies enter the system through a clearly marked front gate, rather than via some back door, where risks may not be as thoughtfully assessed and managed.’

The OCC can grant SPNB charters to fintech firms that conduct at least one of three core banking activities: receiving deposits, paying checks or lending money. If the OCC grants a charter to a fintech company, the institution would be held to the same standards of safety and soundness, fair access and fair treatment of customers that apply to all national banks and federal savings associations, officials write in the December paper.

But they acknowledge that to approve a fintech charter the agency may need to account for differences in business models and the applicability of certain laws. For example, a fintech company with a special purpose national charter that does not take deposits, and therefore is not insured by the Federal Deposit Insurance Corporation, would not be subject to laws that apply to insured depository institutions.


‘FUNDAMENTAL POLICY… ISSUES’
In a January 17 comment letter, the Clearing House Association, Independent Community Bankers of America and Securities Industry and Financial Markets Association write: ‘[A]s is evident in the white paper itself, there are multiple, fundamental policy and other issues that need to be considered and resolved before SPNB charters can be issued to fintech companies.’

Among other things, the groups point to the nature and extent of regulation and supervision of such institutions, the factors supporting issuance of a particular charter, the views of other agencies, financial inclusion and consumer protection, safety and soundness, and competitive equality.

‘This comprehensive analysis of these complex issues is necessary because chartering a new category of national banks as contemplated in the white paper represents a significant shift in the bank regulatory approach and philosophy,’ they say.

Clear and comprehensive regulation is a particularly difficult issue because fintech is not one type of business, but a term that encompasses a multitude of business plans, products and services, the groups argue. For instance, they say, the operations and business considerations of a marketplace lender, a payments processor and a service provider using distributed ledger software – and the potential systemic risks their activities pose – are very different.

‘Accordingly, we believe the OCC and other relevant regulators must provide a clear and comprehensive regulatory and supervisory framework before the OCC charters SPNBs,’ they write. Their recommendations include the following:

• The OCC should give the public more ‘concrete guidance’ on the agency’s expectations about the types of businesses it considers eligible for an SPNB charter
• The regulatory and supervisory framework for SPNBs should be transparent, both for fintech companies considering seeking a charter and for those dealing with fintech SPNBs going forward
• Regulatory co-ordination is necessary to ensure that well-established principles of bank regulatory policy, such as separation of banking and commerce and consolidated supervision, are not undermined as fintech companies are incorporated into the supervised financial services industry
• Issues of consumer protection and financial inclusion must be the subject of ‘consistent, rigorous and transparent application across fintech SPNBs and full-service national banks’
• The OCC must establish a ‘fair and level competitive playing field to address the concern that fintech SPNBs would be able to offer services and products in direct competition with full-service banks, but subject to a more limited and less burdensome regulatory regime.’