OCC’s Noreika Continues Conversation on Innovation, Fintechs

Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

Acting Comptroller of the Office of the Comptroller of the Currency (OCC) Keith Noreika continued speaking out on changes in the financial services industry—and the potential for fintech charters—in recent remarks.

What happened

Speaking at the Georgetown Institute of International Economic Law’s Fintech Week, Noreika shared with attendees his “optimism about banks, fintech companies, and the business of banking as a whole,” expressing his belief that the industry is beginning a new period “that is more open to rethinking our approach to regulation, so that we can promote economic opportunity while ensuring the financial system operates in a safe and sound manner and protects consumers from abuse.”

Another source of Noreika’s optimism can be traced to the “significant shift” occurring in the financial services marketplace, which he views as the “natural evolution” of banking itself. For more than 150 years, the federal and state banking systems have been “laboratories of innovation and technology,” he said, from the creation of the checking account to the use of credit cards to the ubiquity of ATMs.

Noreika noted that each of these changes met with resistance, faced operational challenges and required regulators “to revisit older ways of thinking about the risks and regulation of banking.” Demonstrating that the OCC is looking to the future, he highlighted the newly formed Office of Innovation (Office) and the agency’s efforts related to special purpose national bank charters.

The new Office helps the OCC staff understand the latest industry developments—such as the use of artificial intelligence and machine learning—as well as the evolution of lending, Noreika explained. In addition to hosting “Office Hours” and engaging in other outreach efforts, the Office is also developing a framework for bank-run pilots to develop and test products in a controlled environment.

“Pilots can accomplish the same goals as what others call ‘sandboxes,’ and allow us to gain insight into a product and to become comfortable with a proposed product’s controls and risks early in the process,” Noreika said. “The idea behind our effort is to create principles that support the industry’s need for a place to experiment while furthering the OCC’s understanding of innovative products, services, and technologies. Information gathered in the pilots can inform OCC policies and help make sure that we are ready to supervise the new activity when [it is] rolled out on a larger scale.”

The agency is still in the early stages of developing its approach, Noreika added.

He then addressed the OCC’s “continued deliberation” of whether to offer national bank charters to fintech companies, an issue that “seems to get all of the attention” and has been the subject of some misperceptions. Noreika was careful to note that national bank charters are just one choice for companies interested in banking and will never be compulsory.

“That option can exist alongside other choices that include becoming a state bank or state industrial loan company, or operating as a state-licensed financial service provider,” he said. “A fintech company also has the option to pursue partnerships or business combinations with existing banks, or it could even consider buying a bank, if that makes sense.”

If a fintech company makes the choice to seek a national bank charter, then it should be free to do so, Noreika said. Many fintech and online lending business models fit well into the categories of national bank charters and chartering “innovative de novo institutions through these existing authorities enhances the federal banking system, increases choice, promotes economic opportunity, and can improve services to consumers, businesses, and communities,” he told attendees.

As for the initiative to charter nondepository fintech companies, “that remains a work in progress,” Noreika said, referencing the ongoing litigation and noting that the companies expressing interest must fully understand “just what it means to be a bank.”

Some business models are intended to be an experiment that may last only a few years before trying again with a new idea, which is fine for a startup, Noreika said, but does not work for banks. “A national bank charter is a special thing, and the OCC will not undermine its value by granting charters to companies that are not ready to meet our admittedly high expectations,” he added.

Noreika scoffed at the criticism that fintech charters would be a slippery slope toward the inappropriate mixing of banking and commerce. Every application would be considered on its own merits and there are “dozens of examples” where commercial companies are allowed to own banks at the state and federal levels without abuse and harm, he pointed out.

“The folks who suggest that the OCC is granting charters to nonfinancial companies are wrong, and the more sophisticated ones know it,” Noreika said. “We should not let fear prevent a constructive discussion of where commerce and banking coexist successfully today and where else it may make sense in the future. I think this is a topic that deserves a lot more exploration.”

To read Acting Comptroller Noreika’s remarks, click here.

Why it matters

As he has in previous speeches, Acting Comptroller Noreika stressed that regulators should be careful to avoid defining banking too narrowly. “If we take a stagnant view that blindly defends the status quo, the world will pass us by and we will become a footnote to history,” Noreika cautioned. But fintech companies who seek a national bank will need to heed the cautionary warning that “high expectations” from the OCC means a high hurdle to enter the banking community.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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