WASHINGTON — The Office of the Comptroller of the Currency's decision to offer a special-purpose charter for fintech firms may entice more players than expected – including mortgage lenders and even some payday lending shops – but it has also caught the interest of credit unions.
In the lead up to the charter's release last month, most had expected it to focus on marketplace lenders and others with a more technologically oriented business model. But the wording of the charter is broader, potentially allowing other nonbank players a way to enjoy the benefits of federal pre-emption and avoid state-by-state registration.
For many fintech firms, both big and small, the missing ingredient from respective business models, and as such the ability to grow, has been a banking license.
"One reason fintechs have been hesitant to seek licensing is due to the regulatory environment," said John Best CEO of the Tampa, Fla.-based Best Innovation Group (BIG), a technology innovation and development company focused on the financial services industry. "Many believe that President-elect [Donald] Trump will be removing many of the regulations that have constrained innovation in the banking industry, so it seems that this will be a favorable environment for fintechs to flourish."
Good news or bad news?
But is a flourishing fintech sector, replete with would-be disruptors of traditional financial services providers, a good thing or a bad thing for credit unions?
Washington State Employees Credit Union Chief Technology and Operations Officer Ben Morales said that his credit union and others could actually benefit from the creation of a fintech charter.
"I see an opportunity for credit unions, just as when the original CUSO structure was created," he said. "If we can ensure that the credit union state regulatory environment keeps up with these new developments, credit unions could be well positioned to deliver new capabilities and create new revenue streams."
CU insiders have expressed concern that fintech charter regulations could negatively impact innovation and competition. Historically, Best said fintechs firms have evolved by specializing in a particular piece of the financial institution's business. This approach allows for the focusing on a single aspect of the business and to innovate without trepidations about the "tedious aspects" of being a financial institution.
"It will be interesting to see which fintech's rise to the opportunity and which will topple under the weight of having to provide other services that aren't as profitable, but necessary to support the business they have created," said Best. "In that regard, I predict that many will partner with existing financial institutions and use the license to ease integration."
'Substantial Disadvantage'
Allowing mortgage lenders to apply for the charter would also address what some view as an unequal treatment by regulators of mortgage lenders and national banks.
The state-by-state licensing system "puts nonbank mortgage lenders at a very substantial disadvantage to national banks that do mortgage lending," said Gerard Comizio, partner and head of the banking practice at Fried Frank.
Some attorneys are even hearing interest in the charter from payday lenders. Though it might be a long shot for them to obtain the OCC's blessing, observers say that the agency might at some point prefer to handle these companies through direct supervision.
"If the [Consumer Financial Protection Bureau's] payday lending proposal is ultimately implemented, it's going to steer a lot of those companies into a more regulated and — from the CFPB's perspective — consumer-protective space," said John ReVeal, a partner at international law firm Bryan Cave. This "could make the OCC more comfortable" in dealing with payday lenders.
In a statement, OCC Chief Counsel Amy Friend cast doubt on the possibility of payday lenders ever obtaining a national charter, but seemed to leave a door open to other types of companies not explicitly cited in the agency's fintech charter paper in December.
"The national banking charter does not dictate business models," Friend said. "But, to be clear, the OCC took steps in the early 2000s to eliminate abusive practices common to payday lenders at the time. As a result, abusive payday lending was virtually eliminated in the federal banking system. The agency has no intention of allowing these abusive practices to return."
Who regulates fintech?
But even as the OCC's fintech charter indicates a potential pathway toward regulatory clarity, there are still concerns about which entities — federal, state or both — should regulate fintech charters.
"We need no fintech access until the OCC and states are empowered by financial institutions to do it correctly. They can't do it alone; they need to do it together," said Sabeh Samaha, CEO of the Chino Hills, Calif.-based Samaha Associates, a technology consulting group for financial institutions. "We need strict regulations – it's a risky environment. Risk and fraud management have to be very strong around the financial industry. We cannot have fintech coming into our space and creating banks without oversight."
Since the final form of the OCC license hasn't yet taken shape, analyst Glen Sarvady, managing principal at payments consultancy 154 Advisors, said a finalized license would provide fintech startups with an added degree of legitimacy.
"This should help in striking partnerships with the mainstream players and perhaps more importantly, will enable them to raise capital at more favorable rates," said Sarvady.
For Sarvady, variations in state-by-state regulations is the biggest pain point for operators, especially in the money transfer license space.
"The need to navigate 40-plus state regimes is a major inhibitor. If an operator wants to operate in a single state or small group of states that's fine, but it's also quite uncommon," he said. "If the new OCC license doesn't relieve the state-by-state burden, its impact will be limited."
Samaha said the fintech charter shouldn't be a wait-and-see process because there's no room for error, with risk and fraud management a paramount concern.
"Our presidential election process was tampered with by a foreign government. If fintech firms become financial institutions, they will also be tampered with," said Samaha. "It's not a matter if they will be hacked; it is a matter of when. The question is: Who will be in charge and how will the consumer be protected when it happens?"
