Industry Groups Express Support for OCC Fintech Charter

The Office of the Comptroller of the Currency announced in December that it was moving ahead with special-purpose national charters for fintech firms that provide similar services to those offered by traditional banks.

OCC issued a white paper in December outlining the proposal for the fintech charters and accepted public comment on the proposal until Jan. 15. Fintech firms that take deposits, pay checks or make loans could apply for a special-purpose national charter, according to the white paper.

Several industry groups have responded in support of the plan, while some lawmakers have expressed doubt over the need for such a charter.

Financial Innovation Now (FIN), which comprises Amazon, Apple, Google, Intuit and PayPal, submitted a letter supporting the move and lauding the agency's creation of the Office of Innovation.

"The OCC's decision to issue special-purpose bank charters to fintech companies is recognition that the current regulatory environment must evolve to provide different options for meeting the financial needs of consumers and small businesses," FIN wrote in the letter dated Jan. 17. It added that the charters could help "foster responsible innovation, including through partnership with other chartered institutions, and maintain traditional policies separating banking and commerce."

Many fintech firms are subject to multiple states' licensing requirements and regulations. FIN noted that while state-by-state monitoring may be appropriate for some firms, fintechs should have the option of a federal choice. The OCC charter would be optional for fintech firms that choose to apply for it, not a mandatory licensing requirement for all fintech firms.

FIN expressed concern that fintech firms should not be subject to a greater level of scrutiny or regulation simply because they are new. It urged OCC to tailor regulations to an individual firm's risk and business model, a policy it already pursues in overseeing national banks.

Specific areas where OCC should tailor fintech risk metrics, according to the letter, include risk-based capital; risk analysis of products and services, which tend to be more narrow at fintechs than traditional banks; data security, to which FIN says fintech firms are especially attuned; and financial inclusion.

On this last point, FIN wrote that inclusion should not be based on geographic or physical access. The Community Reinvestment Act requires that regulators examine insured banks' compliance with the act in areas where they have branches or a "substantial portion" of its loans are made.

However, part of what makes fintech such a powerful way to increase access to banking services is its lack of branches. FIN noted in its letter to OCC that 30% of American households are either unbanked or underbanked, according to a 2015 survey by the FDIC. However, those household have widespread (and growing) access to smartphones, making mobile banking tools an easy way to reach those consumers.

(Click here to read FIN's letter.)

The Financial Services Roundtable and its technology policy division, BITS, submitted a letter to OCC on Friday, commending the development of the proposal.

"Just as the financial industry needs to evolve with technology and changing customer preferences, so, too, must financial regulations and the regulators themselves," according to the letter, signed by Richard Foster, senior vice president and senior counsel for regulatory and legal affairs at FSR, and Christopher Feeney, president of BITS.

They noted that the need for a special fintech charter "is not isolated to the microcosm of nonbank fintech firms." Traditional banks are "actively engaged in the digital transformation," they wrote in the letter.

FSR called for balance between accommodating innovation and maintaining "the integrity of the national banking system, which has operated for over 150 years."

"In other words, this initiative should not result in a two-tiered national banking system under which special-purpose fintech banks are subject to compromised supervisory standards," according to the letter.

The FSR called for regulatory standards under a special fintech charter to be consistent with those that full-service national banks and federal thrifts must adhere to, including standards regarding capital, liquidity, risk management, consumer protection and privacy, and data security.

Underwriting and board qualification standards should also be maintained across fintech and national banks, FSR wrote.

FSR believes parity between traditional institutions and fintech firms doesn't equal identical standards and supervision. If the OCC's objective in extending special-purpose charters to fintechs is to "empower consumers, and help families and businesses take control of their financial matters," as Comptroller Thomas Curry said in remarks at Georgetown University Law Center in December, applying standards that don't fit a fintech firm's business model or risk profile defeats the purpose of the new charters.

"It is possible the small pool of fintech firms with the scale and resources to even consider applying for an OCC charter may find such regulatory and supervisory standards difficult to achieve, or more likely, not worth the cost," FSR wrote.

FSR made several recommendations the OCC should follow for finding that parity:

Remain measured in enforcement of statutes and regulation, addressing obvious violations but providing a degree of latitude to allow for innovation through targeted experimentation
Refrain from holistic, comprehensive rulemaking as a first order, and instead look to formulate an environment with clear rules and expectations in which innovation can occur
Approach new guidance or rulemaking in collaboration with industry stakeholders, and with an eye toward filling overt regulatory gaps that could expose consumers or the broader economy to manifest harm
Coordinate and synchronize all efforts designed to support innovation with peer agencies in a way that is based on principles that can evolve with changes in technology and customer preferences, remains technology agnostic, and ensures uniform prudential regulation and supervision of financial products and services, regardless of the legal status of the provider
Develop a consistent, yet adaptable, common language and approach to improve efficiencies, reducing regulatory arbitrage and providing legal clarity in many circumstances

(Click here to read FSR's letter in Google Docs.)

Opponents of the charter include Sens. Sherrod Brown, D-Ohio, and Jeffrey Merkley, D-Ore. In a joint letter to the comptroller on Jan. 9, they argued that a charter for nonbank companies "seems at odds with the goals of financial stability, financial inclusion, consumer protection and separation of banking and commerce."

They noted that the criteria presented by OCC to be approved for a fintech charter don't specify whether the firm must create a new technology to qualify as a fintech. The new charter isn't limited only to fintech firms, either, they wrote. Furthermore, Brown and Merkley questioned why some fintechs, "which would necessarily be engaged in a core banking function to be eligible for an alternative charter, would not already be eligible to apply for a national bank charter under the OCC's existing authorities and procedures."

Under the proposal, fintech firms would not be subject to every financial regulation banks are subject to; for example, those that don't make loans would not have to adhere to the Equal Opportunity Credit Act. The senators objected to a piecemeal application of laws, arguing that the proposed charter would allow fintech firms to "negotiate which provisions of a national banking charter they want, including preemption of consumer protection laws, while avoiding the rules and regulations that would apply to a full-service bank."

Brown and Merkley worried that a special fintech charter would make it easier for firms to offer "a la carte" financial services, which could actually decrease consumers' access to a full range of banking services.

They asked OCC to "refrain from offering any alternative or special purpose charters. It is up to Congress to take action on these important matters, and while it does, we would encourage the OCC to devote its resources to collaborating with other federal and state regulators to aid innovative financial services providers in navigating the current landscape of laws."

(Read the senators' letter here.)

— Read 5 Predictions for Advisor Fintech in 2017 on ThinkAdvisor's TechCenter.