"Technology-based products and services are the future of banking and the economy."
"What excites me most about the changes occurring in financial services is the great potential to expand financial inclusion, reach unbanked and underserved populations, make products and services safer and more efficient, and accelerate their delivery. To live up to that potential, innovators must demonstrate real responsibility – whether innovating within or outside the federal banking system."
With these remarks, Comptroller of the Currency Thomas J. Curry announced on December 2 that the Office of the Comptroller of the Currency ("OCC") would move forward with considering applications from fintech companies that conduct at least one of three core banking activities (i.e., receiving deposits, paying checks or lending money) to become special purpose national banks. Announcement. The Comptroller explained that such fintech companies will have the option to seek a charter but will not be required to do so. The OCC will evaluate applicants to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection and strong capital and liquidity.
The OCC simultaneously published a paper discussing the issues and conditions that the agency will consider in granting special purpose national bank charters. The White Paper.
The Comptroller articulated several policy reasons for this long-awaited decision.
Public Interest. Fintech companies hold the potential to "expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters [and] potentially deliver these products in a safer and more efficient manner."
Economic Growth/ Future of Banking. "Providing a national charter to those responsible innovators who seek one and meet our high standards can help promote economic growth across the country and recognizes that technology-based products and services are the future of banking and the economy."
Regulatory Oversight. "[H]aving a clear process, criteria, and standards for fintechs to become national banks ensures regulators and companies vet risks and that the institutions that receive charters have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity."
Whatever may be the advantages to the availability of a fintech charter from the perspective of the OCC, as described above, fintech companies themselves will need to weigh the advantages and disadvantages of applying for a charter based upon, among other things, their individual business models, operations and competitive environments.
Questions for a fintech company to consider will include, but by no means be limited to, the following.
National Bank Status and Attributes. Is the business currently inhibited by the lack of status and attributes under federal law of a special purpose national bank? (See discussion below, for example, of state law interest rate preemption enjoyed by national banks.)
Cost Savings. What costs of doing business today would be eliminated or decreased by having a special purpose national bank charter?
Or . . . Regulatory Cost Burden. What are the direct and indirect costs of having a special purpose national bank charter? Will such costs make particular businesses noncompetitive?
Comparison to Existing Regulation. How burdensome are state regulations today? How do those burdens compare to the considerable regulatory burdens that would come with a special purpose national bank charter?
Cost of Capital, etc. Will capital or other requirements to be imposed by the OCC be burdensome? Will such capital be available?
Modified Capital and Other Requirements. How will the OCC take into account the particularities of each of the fintech businesses and individual companies in setting capital and other requirements? In most cases, these will not be deposit-taking entities.
Competitors. How will the business be affected if competitors get a special purpose national bank charter?
Operating Considerations. Will certain fintech companies have greater flexibility operating under a special purpose national bank charter? Will others have less flexibility?
Possible Failures? Will we see failures by fintech companies who are not able to obtain charters?
Consolidations/Acquisitions. Will we see consolidations of smaller companies and/or acquisitions by the larger companies?
Bank Secrecy Act/AML. What are the Bank Secrecy Act and anti-money laundering implications of becoming a bank?
State Laws and Regulations. What role will be left for state regulation of fintech companies that obtain special purpose national bank charters?
In a recent statement, New York State Department of Financial Services Superintendent Maria Vullo expressed opposition to any diminution of the role of the states in oversight of fintech firms—a position we expect other states will follow:
"Particularly now, with so much uncertainty at the federal level, New York will not allow consumer protections to fall into the void. The New York State Department of Financial Services (DFS) opposes any effort to federalize what states have been doing - and doing well - for over a century. Any reliance on a federal fintech regulatory framework, such as the proposal contemplated by the OCC, would be irresponsible if it were to ignore the states' historical role and longstanding expertise in this arena. State regulators, like DFS, are best positioned to continue to protect consumers and ensure that dynamic service providers like fintech firms will continue to flourish within an appropriately tailored regulatory regime. History has demonstrated that states, not the federal government, have the requisite knowledge and experience to effectively regulate nondepository financial service providers and guard against predatory and abusive practices." Report.
Trump Administration. Is the OCC fintech charter announcement, made a short time before the change in administration in Washington, consistent with the approach favored by the incoming administration? Will this action be embraced by the new administration?
Issues and Conditions
The OCC paper discusses the issues and conditions that the agency will consider in granting special purpose national bank charters, including the following.
Chartering Authority/the Business of Banking. The OCC authority to grant charters for national banks under the National Bank Act includes granting charters for special purpose national banks that conduct at least one of the following three core banking activities :
Analysis of the business of each prospective applicant will be required to determine whether it conducts one of these three core banking activities.
Once a fintech company is granted a special purpose national bank charter, it may engage in only a limited set of activities permissible for national banks, which have been interpreted and developed over time. The OCC explains in its paper that it "has the legal authority to construe these activities to include bank-permissible, technology-based innovations in financial services" and that it may interpret the National Bank Act broadly to encompass new activities:
"Consistent with legal precedent, the OCC views the National Bank Act as sufficiently adaptable to permit national banks—full-service or special purpose—to engage in new activities as part of the business of banking or to engage in traditional activities in new ways. For example, 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 are the modern equivalent of paying checks. The OCC would consider on a case-by-case basis the permissibility of a new activity that a company seeking a special purpose charter wishes to conduct."
Structure/Rules and Standards. In addition to determining that an applicant's activities are activities within the business of banking, as discussed above, there are numerous requirements for obtaining a national bank charter, including relating to corporate and governance structures, capital, liquidity, compliance risk management, financial inclusion, recovery and exit strategies/resolution plan and authority, and comprehensive business plans covering all of the foregoing. The OCC paper acknowledges that "the agency may need to account for differences in business models and the applicability of certain laws" and that "the OCC may … work with a fintech company to achieve the goals of a particular statute or regulation" by "taking into account any relevant differences between a full-service bank and special purpose bank." This could signal agency flexibility concerning standards for governance structure as well as capital and liquidity requirements.
A special purpose national bank would be subject to the laws, regulations, examinations, reporting requirements, and other supervision to which other national banks are subject. Some of these laws relate to the Bank Secrecy Act and anti-money laundering laws (discussed below), and prohibitions on unfair or deceptive acts or practices.
Even though the provisions of certain laws that apply only to insured depository institutions, such as the Federal Deposit Insurance Act and the Community Reinvestment Act, would not apply to a national bank that does not accept deposits, the OCC could impose requirements similar to those provisions on a special purpose national bank as a condition of granting a charter even if such special purpose national bank does not accept deposits.
Federal Preemption/Applicable State Laws. A special purpose national bank would enjoy the same status and attributes under federal law as does a full-service national bank. This would include preemption of state law to the extent it is preempted by the National Bank Act as amended by the Dodd-Frank Act. For example, a fintech company with a special purpose bank charter would be able to lend to borrowers nationwide at the interest rate permitted by the company's home state, and also would be entitled to transmit money without being subject to state money transmitter license obligations. Note that such a company could still be subject to state laws that would generally apply to national banks, such as state laws on anti-discrimination, fair lending and debt collection.
Coordination Among Regulators
In addition to the OCC as the primary prudential regulator and supervisor for national banks, the following regulators may have oversight roles depending on the structure of the special purpose national bank and the activities it conducts:
Federal Reserve: With rare exceptions, all national banks are required to be members of the Federal Reserve System by subscribing for the stock of the appropriate Federal Reserve Bank. The statutes and regulations that apply to member banks would also apply to most special purpose national banks, which are administered by the Board of Governors of the Federal Reserve System and the Federal Reserve Banks. The Bank Holding Company Act of 1954 could apply if a fintech company operates as a special purpose national bank through a holding company that is the sole or controlling owner of such bank. The term “bank” for these purposes includes national banks if they are FDIC-insured institutions or they both accept demand deposits and make commercial loans.
Federal Deposit Insurance Corporation: A special purpose national bank that accepts deposits (other than trust funds) would be required to apply to and obtain approval from the FDIC.
Consumer Financial Protection Bureau: The Consumer Financial Protection Bureau (“CFPB”) may have supervisory authority over certain special purpose national banks for compliance with federal consumer financial laws, including over an uninsured special purpose national bank engaged in certain activities, such as offering or providing origination, brokerage or servicing of consumer mortgage loans, payday loans or private education loans, etc.
Bank Secrecy Act/Anti-Money Laundering
Regulation as a bank would have significant Bank Secrecy Act ("BSA") and other anti-money laundering ("AML") implications. Many regulated players operating in the fintech space currently do so as money services businesses ("MSBs"). By obtaining a special purpose charter, however, a fintech company that was previously considered an MSB would now be deemed to be a "bank" for BSA purposes.
There are some significant benefits to a "bank" designation from an AML perspective. MSBs must, except in very limited circumstances, not only register as such with the Financial Crimes Enforcement Network ("FinCEN"), but must also embark on the often costly and time-consuming process of obtaining a money transmission license in each and every state in which they operate. If a fintech company is no longer considered an MSB, however, it would be exempt from the federal, and likely most state, registration and licensing requirements.
In addition, while both MSBs and banks must develop an AML program in accordance with the BSA, FinCEN and state regulators subject MSBs to different, and in some ways enhanced, AML requirements compared to banks. For example, federal regulations require banks to file suspicious activity reports ("SARs") for certain transactions that aggregate to $5,000, whereas MSBs must file SARs for certain transactions that aggregate only to $2,000.
Overall, however, banks face more burdensome regulatory requirements and enforcement on both the federal and state level than MSBs. The BSA requirements for a bank are generally significantly more involved than those of MSBs. A fintech company operating as a bank would have to incorporate a customer identification program into its overall AML program and be required to conduct far more robust diligence on all accounts opened with the company. Just this year, FinCEN issued a final rule on customer due diligence requirements aimed at clarifying and strengthening such requirements for banks and certain other financial institutions, but not for MSBs. Additionally, banks are generally afforded increased regulatory scrutiny with regard to compliance with AML requirements by federal regulators. Fintech companies that are not currently MSBs would, if they choose to obtain a bank charter, be subject to extensive AML obligations, including those described above. For those companies exposed to detailed AML requirements for the first time, compliance likely would be a significant undertaking.
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Request for Comment. While the OCC has made it clear that it "will move forward with chartering financial technology companies that offer bank products and services and meet our high standards and chartering requirements," it is also seeking feedback on all aspects of its paper and responses to the following specific questions.
1. Public Policy Benefits/Risks
What are the public policy benefits of approving fintech companies to operate under a national bank charter? What are the risks?
2. Applicable Capital and Liquidity Requirements
What elements should the OCC consider in establishing the capital and liquidity requirements for an uninsured special purpose national bank that limits the type of assets it holds?
3. Financial Inclusion Commitment
What information should a special purpose national bank provide to the OCC to demonstrate its commitment to financial inclusion to individuals, businesses, and communities? For instance, what new or alternative means (e.g., products, services) might a special purpose national bank establish in furtherance of its support for financial inclusion? How could an uninsured special purpose bank that uses innovative methods to develop or deliver financial products or services in a virtual or physical community demonstrate its commitment to financial inclusion?
4. Financial Inclusion Requirement – Non-Lenders
Should the OCC seek a financial inclusion commitment from an uninsured special purpose national bank that would not engage in lending, and if so, how could such a bank demonstrate a commitment to financial inclusion?
5. Financial Inclusion Requirement – No Banking Services
How could a special purpose national bank that is not engaged in providing banking services to the public support financial inclusion?
6. Protections for Individuals/Small Business Borrowers
Should the OCC use its chartering authority as an opportunity to address the gaps in protections for afforded individuals versus small business borrowers, and if so, how?
7. Business Model vs. Regulatory Expectations
What are potential challenges in executing or adapting a fintech business model to meet regulatory expectations, and what specific conditions governing the activities of special purpose national banks should the OCC consider?
8. Safety and Soundness/Public Interest
What actions should the OCC take to ensure special purpose national banks operate in a safe and sound manner and in the public interest?
9. Fintech Chartered Banks and Fintech Companies Without Charters vs. Full-Service Banks
Would a fintech special purpose national bank have any competitive advantages over full-service banks the OCC should address? Are there risks to full-service banks from fintech companies that do not have bank charters?
10. Different Approaches for Particular Products or Services
Are there particular products or services offered by fintech companies, such as digital currencies, that may require different approaches to supervision to mitigate risk for both the institution and the broader financial system?
11. Regulatory Coordination
How can the OCC enhance its coordination and communication with other regulators that have jurisdiction over a proposed special purpose national bank, its parent company, or its activities?
12. Concentration Risk
Certain risks may be increased in a special purpose national bank because of its concentration in a limited number of business activities. How can the OCC ensure that a special purpose national bank sufficiently mitigates these risks?
13. OCC Assistance to Applicants
What additional information, materials, and technical assistance from the OCC would a prospective fintech applicant find useful in the application process?
Written comments to the OCC must be sent by January 15, 2017, via email to the following address: firstname.lastname@example.org
1 A special purpose national bank may also engage in fiduciary activities.
2 New York's regulation requiring a license to engage in virtual currency business activity (commonly referred to as a "bit-license"), however, only exempts banks chartered by the State of New York. Therefore, the OCC charter will likely not release virtual currency businesses in New York from obtaining a bit-license.