Banking charter remains a long way off for fintechs after court ruling

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WASHINGTON — Fintech firms continue to face a murky path into the banking system after a federal court ruling that threw out the Office of the Comptroller of the Currency's special-purpose charter, observers said.

The charter has already been on unsteady ground. No firm has yet applied with the OCC facing legal challenges. But the decision Monday out of the U.S. District Court for the Southern District of New York shines an even brighter light on potential alternatives for fintech companies seeking a national licensing solution.

"Unfortunately, this court decision may make it harder for smaller fintech companies to compete to deliver products on a nationwide basis, hurting U.S. innovation and competitiveness," said Nathaniel Hoopes, executive director of the Marketplace Lending Association, which represents many fintech lenders.

Still, observers said fintech firms remain interested in finding a solution. Fintech applicants, most notably Square, are awaiting approval from the Federal Deposit Insurance Corp. to operate an industrial loan company, an FDIC-insured charter. Others have attempted to obtain the OCC's traditional national bank charter. Yet both would likely result tougher regulation.

"The uncertainty that has existed around whether fintech nondepository banks were going to be legally viable has already put a real damper on companies exploring that option," said Julie Williams, a former senior official at the OCC and now managing director at Promontory Financial Group. "Folks are going to look at two avenues: either the ILC charter, or going the route of a full national bank charter. But both those options require deposit insurance."

Another path is to engage closely with state regulators on their efforts to streamline the multistate chartering process.

“We hope that state and federal agencies will continue to collaborate on a regulatory ecosystem that promotes innovation and financial inclusion by providing emerging fintech companies options to safely scale,” said Sam Taussig, head of policy for Kabbage, an Atlanta-based fintech that lends to small businesses.

Taussig said the effect of the ruling by Judge Victor Marrero is "a missed opportunity to create more efficient supervision options that tailor regulation to the actual risks presented by certain fintech business models."

The OCC has already said it will appeal the ruling to the 2nd U.S. Circuit Court of Appeals. But Linda Lacewell, head of the New York Department of Financial Services, which brought the lawsuit, said the ruling reinforces state regulators' authority to oversee fintech companies.

"We believe strongly that states are the best regulators when it comes to issues of consumer protection," said Lacewell, speaking at an event on Capitol Hill Tuesday.

"We do it every day," she continued. "We’re closer to the ground. We know how to do it. And federal regulators are good at a number of things, including sort of the high-level risk management, but they don’t really have the capacity to be dealing with every issue of consumer protection."

Thomas Curry, the former comptroller of the currency who first proposed the charter idea, said the court decision at least gets fintech firms closer to some certainty about what options are available to them under the law. But those firms are still under a regulatory cloud, he said.

"This delays the outcome by months or years out," said Curry, now a partner at Nutter McClennen & Fish LLP. "It’s one step forward, but it’s still too long for a road."

To many, Marrero's decision did not come as a surprise. He had made clear in May, when he rejected the OCC’s motion to dismiss the case, that he was skeptical that the OCC could provide a banking charter that did not require an entity to receive deposit insurance. Monday’s ruling simply confirmed that.

“This isn’t a game changer,” said Amy Friend, former chief counsel to the OCC and now a senior adviser at FS Vector. “The OCC has been operating under a cloud of uncertainty that every fintech company interested in the charter has had to deal with.”

Williams agreed that "the uncertainty around noninsured deposit charter is perpetuated by this ruling," but she said firms will still try to seek the solution that works best for them.

"The interest in exploring alternative charters and exploring alternative structures is enhanced and reinforced," she said.

Neil Haggerty contributed to this article.

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Fintech regulations Licenses and charters State regulators Court cases Litigation ILCs Joseph Otting Thomas Curry OCC FDIC