To Deposit or Not to Deposit: a Question for Fintech Charters

Bryan Cave Leighton Paisner

The fintech industry has justifiably greeted the OCC’s announcement of a national fintech charter with optimism. But one area where we have seen significant confusion is the possibility of the fintech charter being granted without deposit insurance, and the implications thereof.

Background.  On December 2, 2016, OCC Comptroller Thomas Curry announced that the OCC is planning to take applications from fintech companies wishing to obtain a special purpose national bank charter.  These banks would be national banks with the same privileges and obligations as traditional full-service national banks, but with specialized business plans and that may or may not choose to have deposit taking authority.

In his remarks, Comptroller Curry expressed his excitement about the great potential to expand financial inclusion and reach unbanked and underserved populations.  At the same time, clearly recognizing that there are some industry players that are worried about new sources of competition from fintech banks, or that these new banks might otherwise have unfair advantages, Curry took great pains to seek to alleviate those concerns in his remarks and in the OCC’s white paper on the proposal.

Curry acknowledged that it will be difficult for the agency to determine the requirements to charter a fintech bank because of the “diversity of approach” among fintech companies. He noted that, for example, a payments model would be different than a marketplace lending one. However, he said that the OCC is a “firm believer in tailored innovation” and has the existing framework to evaluate these issues in the chartering process.  Consistent with existing OCC regulation, the white paper states that a special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: receiving deposits, paying checks, or lending money.

For all fintech participants, the possibility of federal preemption of certain state laws offers significant benefits.  In addition, fintech lenders will be able to rely on the “exportation” authority of all banks to charge the interest rates permitted in their home states when lending in other states.   However, the ability of fintech lenders to obtain a lower cost source of funds with deposits, or for pre-paid or payment processing fintech companies to operate without a bank partner will be conditioned on the fintech bank also obtaining deposit insurance, which may have significant impact on the feasibility and constraints of the fintech charter.

Focus on Non-Deposit Taking Fintech Charters.  The primary takeaway of the OCC’s fintech white paper is the OCC’s willingness to charter fintech companies that do not take deposits.  Fintech charters without deposit-taking authority would not need FDIC insurance, and would generally not be deemed “banks” under the Bank Holding Company Act.  However, as recognized by the OCC’s white paper, a fintech company that proposes to accept deposits other than trust funds would be required to apply to, and receive approval from, the FDIC.

To the extent a fintech charter is looking at a business plan that would include deposit taking, the OCC’s announcement of a fintech charter may be encouraging, but its impact is likely minimal, as the OCC has long had the authority (and willingness) to listen to fintech organizers about the possibility of starting a full service national bank.  The most significant limitation to such a plan remains the ability to obtain approval for FDIC insurance.  While the FDIC is open to looking at applications for deposit insurance, the regulatory scrutiny remains heightened and the ability of a fintech charter to obtain approval for FDIC insurance remains uncertain, at best.

The OCC’s fintech announcement reverses a recent OCC policy that did not allow the formation of uninsured national charters, but we expect the OCC to continue to require FDIC insurance as a pre-condition of any national bank charter that looks to accept deposits.  Given the broad statutory definition of a deposit, and the historic FDIC guidance on prepaid card accounts as deposits, special purpose banks may find themselves still needing to partner with a full service, FDIC-insured bank.

Between Treasury regulations requiring prepaid cards that receive federal payments to provide pass-through deposit insurance and FDIC Opinion Number 8’s position on the deposit nature of funds underlying prepaid cards, it would appear that a fintech charter in the prepaid industry will need to either accept deposits (and thus obtain FDIC approval for deposit insurance) or continue to  partner with a full service, FDIC-insured bank to hold the master account (but then the partner bank would remain the issuer of the accounts for legal and contractual purposes).  The special purpose bank would still have the benefits of federal preemption, including the particularly valuable preemption of state licensing authority, but that would need to be balanced against the burdens of having to partner with other banks.

This dichotomy between deposit-taking and non-deposit taking fintech charters likely also affects those looking to form a special purpose bank to process payments.  While payment processors can structure their activities so that they do not technically receive deposits, doing so may require that they partner with a full service, FDIC-insured bank.

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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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