Nineteen months have passed since the Office of the Comptroller of the Currency launched its initiative for fintech companies, specifically asserting the OCC’s authority under the National Bank Act to grant a “special purpose national bank charter.”  In his testimony before Congress last month, the Comptroller of the Currency, Joseph Otting, indicated that the OCC would take additional action on the special purpose national bank charter.  Our update is designed to provide a brief summary of the legal context under the National Bank Act, outline key opportunities and challenges for fintech companies, and identify some of the next steps the OCC possibly could take in this area.

National Bank Act:  Core Banking Functions and Licensing Standards

Under the NBA, the OCC may grant a national charter to an association of persons to carry on the “business of banking” and regulate and supervise national banks.  Under the OCC’s regulations implementing the provisions of the NBA, the OCC’s initiative for fintech companies distinguishes a special purpose national bank from a full-service national bank.

A special purpose national bank must conduct at least one of the following “core” banking activities:

• Receiving Deposits;
• Paying Checks; or
• Lending Money.

The OCC’s rule for these three core functions (12 C.F.R. § 5.20(e)(1)) was adopted years ago, and the explanation provided then states only that those are the functions that would “cause a facility to be considered a bank branch.”  68 Fed. Reg. 70,122, 70,126 (Dec. 17, 2003).  The OCC has offered little since to articulate the boundaries of each of these three functions.

In March 2017, the OCC issued a supplement to the Comptroller’s Licensing Manual, entitled Evaluating Charter Applications From Financial Technology Companies (“Supplement”).  The Supplement states that the OCC “has determined that it is in the public interest to consider applications for a special purpose national bank (SPNB) charter from [fintech] companies that engage in banking activities and that meet the OCC’s chartering standards.”  Supplement, at 1.  The determination to accept applications from fintech companies rests, in part, on the OCC’s finding that “providing a path for fintech companies to become national banks can make the financial system stronger by promoting growth, modernization, and competition.”  Id.

A fintech-company applicant that focuses on receiving deposits could be pressed by the OCC on the company’s need to become a special purpose national bank, particularly because that company might just as well pursue a charter to be a full-service national bank or trust bank.  By contrast, the OCC appears to be prepared to apply its application standards to a fintech company that would engage in the core function of paying checks or lending money, but would not  “take deposits within the meaning of the Federal Deposit Insurance Act (FDIA) and therefore [would not be] insured by the Federal Deposit Insurance Corporation (FDIC).”  Supplement, at 2.

Under the standards set forth in the Supplement, a fintech-company applicant whose business activity appears not to have been determined by the OCC as fitting within a core function should be prepared to explain to the OCC the bases for the permissibility of that activity under the NBA, as interpreted by the OCC.  Looking ahead, we should expect the OCC to more definitively explain how certain activities qualify (or not) as “paying checks” or “lending money.”

Opportunities and Challenges for Fintech Companies

The OCC has explained that its existing regulatory and supervisory framework for national banks will apply to a special purpose national bank.  See, e.g., Supplement, at 4 (“National bank charter applicants are held to the same chartering standards and procedures whether seeking to become a full-service national bank, a national trust bank, or an SPNB”); id., App. A, at 17 (“The supervisory framework for SPNBs will incorporate core elements already in place for all national banks.”).  For a fintech company, the OCC’s framework presents an opportunity because, for example, the company generally can expect to conduct its operations under a single, national set of standards—including potentially by the preemption of certain state laws that now prevent or significantly interfere with a national bank’s exercise of its powers under federal law.

But a fintech company should expect to face several challenges when applying for a special purpose national bank charter under the OCC’s existing framework.  First, a fintech company could face procedural obstacles or delays, such as an extended “prefiling phase” during which the staff of the OCC would conduct an iterative process to review the fintech company’s business plan.  See Supplement, at 4-5.  Second, the OCC could raise substantive challenges to the fintech-company applicant, such as whether the company demonstrates a sufficiently strong “commitment” to financial inclusion for consumers or small businesses.  In this regard, the OCC has indicated that there could be variable criteria to judge the sufficiency of a fintech company’s financial inclusion plan (“FIP”).  See, e.g, id., at 13 (“The nature and scope of an FIP developed by an applicant for an SPNB charter will vary depending on the SPNB’s business model and the products or services it intends to provide to consumers or small businesses.”)

As the OCC continues to develop its policies and procedures for licensing and supervising special purpose national banks, we believe that fintech companies should remain alert to the following regulatory issues:

• What will be the level of capital that a fintech company must hold to be approved as a special purpose national bank?
• Will the OCC establish liquidity requirements and what will they be?
• And how will the OCC adopt internally consistent standards so that different fintech companies operating within the same core banking function are subject to both consistent regulatory standards and supervisory expectations?

Possible Next Steps for the OCC

Even if the OCC builds on its existing regulatory framework for fintech companies, the OCC could take different types of steps to promote the special purpose national bank charter.  Here are three possible approaches:

Adopt Final Licensing Standards

The OCC issued its standards for evaluating applications by fintech companies under the title of “Draft Supplement,” and the OCC invited comment on the Supplement until April 14, 2017.  One step the OCC could take would be to adopt a “Final” Supplement that more definitively establishes the licensing standards the OCC will apply under its existing regulations when processing an application for a special purpose national bank charter.

New Rule(s) for Licensing or Supervision

As an alternative to—or in conjunction with—adopting final standards for processing applications by fintech companies, the OCC could issue one or more proposed rules that would (subject to public comment and the agency’s final action in accordance with administrative law) modify the OCC’s regulations for licensing or supervising to better fit the circumstances of a special purpose national bank.  For example, the OCC has provided only a handful of general examples of activities that fit within one or more of the core banking functions; proposing a rule that more fully describes the types of activities that would qualify as “paying checks” or “lending money” would provide substantially greater certainty to a fintech company that is evaluating whether to start the process of applying to become a special purpose national bank.

If the OCC adopts a final set of licensing standards or proposes new rules, one key area will be the factors the OCC would consider when determining whether a fintech-company applicant’s proposal represents an “inappropriate commingling” of banking and commerce.  The Supplement states that the OCC “will collaborate with other regulators” to assess whether an application by a fintech company could inappropriately mix banking and commerce.  Supplement, at 7.  And if the applicant’s proposed banking activities cross that threshold of commercial activities, then the OCC will not approve the application, due to the apparent risks posed to the banking system.  Because the business of banking already runs into several dimensions of commerce (see, e.g., 12 C.F.R. § 7.1002 (authorizing a national bank to act as finder, i.e., engaging in a range of activities that bring parties together for transaction that the parties themselves consummate)),   drawing the lines for the “inappropriate” commercial activities that may not be conducted by a national bank will be a significant regulatory action for fintech companies—as well as for national banks and financial holding companies.

Grant Special Purpose National Bank Charters to Fintech Companies

The OCC already has made the determination that receiving an application from a fintech company to become a special purpose national bank is consistent with the public interest and the OCC’s regulations under the NBA.  An emphatic next step for the OCC would be to grant conditional approval to one or more fintech-company applicants that navigate all of the elements of the application process.

As the OCC continues to pursue its stated mission of promoting responsible innovation in the banking system, the terms and conditions the OCC attaches when approving fintech-company applicants to engage in core banking functions will disclose the limits—as well as the opportunities—for the special purpose national bank charter.

We and our colleagues at DWT will continue to be closely engaged with this area.