Banks, credit unions pan OCC idea to create charter for payments firms
WASHINGTON — Several bank and credit union trade groups sent a stark warning to the Office of the Comptroller of the Currency: They would fight the agency if it tries to create a new charter specifically tailored for payments providers.
The OCC for years has pursued efforts to establish a special-purpose fintech charter, but has run into legal challenges from state regulators and a no applicants have come forward.
Since taking office in May, acting Comptroller of the Currency Brian Brooks has hinted at the idea of a more narrowly focused bank charter for payments companies like PayPal, Stripe and Square. Such a charter at the federal level would make it significantly easier for fintechs focused on payments to deploy their products nationwide.
But seven groups representing banks and credit unions are raising a red flag.
“We have serious concerns around the recent discussion of a narrow-purpose payments charter. These charters could introduce serious risks that would undermine the valuable role that national banks play in our dynamic economy,” the financial trade groups wrote in the letter dated Wednesday. It was signed by the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Independent Community Bankers of America, Clearing House, Credit Union National Association and National Association of Federally-Insured Credit Unions.
The letter outlines a bevy of potential consequences from a payments charter for the financial system, including regulatory arbitrage and ambiguity around whether companies granted the charter would be supervised as bank holding companies.
“Given the concerns outlined above, we would oppose any effort by the OCC to offer a narrowly focused payments charter,” the groups said.
They released the letter the same day that Brooks spoke at a Brookings Institution virtual event on the role of banks and fintechs in the payments system. A longtime banking lawyer, Brooks has shown a keen interest in fintech policy.
In a recent interview with the American Bankers Association, Brooks suggested the OCC could first introduce a “national version of a state money transmission license” designed to give nonbank payment firms a federal preemption option. After about 18 months, Brooks said, the agency would unveil a new enhanced version in which nonbank firms could have access to the Federal Reserve's payments system, according to the ABA interview.
In his remarks Wednesday, Brooks argued that payment services should remain under the supervisory umbrella of an agency like the OCC.
“The OCC is the only agency that provides comprehensive nationwide supervision of institutions. There's no other organization that does that in the banking system, and given that payments is one of the core banking functions, we don't want it to leave the supervisory field of vision,” Brooks said. “We want to be able to continue to ensure the safety and soundness of the system without letting the core activities bleed into the shadow banking system, where it has now gone."
By contrast, he added, regulators at the state level may be well-positioned to focus on other activities, such as lending.
“Lending, you could argue, is something that can be done on a state-by-state basis if you wanted. Plenty of local credit unions, small banks and others, they gather the deposits inside of one state, only lend to the customers in one state,” Brooks said. “But when it comes to payments, payments really are inherently borderless."
But the bank and credit union groups said regulators should instead focus on honing their policies to allow traditional financial institutions to adopt new technologies.
“The benefits of financial innovation are only realized when they are delivered responsibly, in a way that does right by customers. This means getting regulation right is critical,” the trade groups wrote. “Regulation must be flexible enough to allow innovations to be driven from within traditional banks.”
Overall, the groups urged Brooks and the OCC to proceed cautiously, specifically by making time for "robust public comment well before considering a new charter."
“The issues being considered have broad implications for the banking system and longstanding policy determinations," they wrote.
They made clear that the OCC will likely face stiff opposition from the industry if such a charter materializes.
The letter echoed some of the earlier resistance the OCC has faced in trying to craft a narrow-purpose charter for fintech firms that do not want to become full-service banks.
“The OCC contemplates the possibility of a narrow purpose bank charter applicant that would not take deposits and, therefore, would not have FDIC insurance, or meet the definition of a bank,” the letter said.
The groups said such a framework should still require Fed supervision of the parent company under the Bank Holding Company Act.
“Through its authority under the BHCA, the Federal Reserve Board serves an important role in supervising banking organizations on a consolidated basis (i.e., banks together with their owners and affiliates),” the letter continued. "If this kind of oversight matters for full service national banks, that same oversight would be important for a special purpose national bank.”