WASHINGTON — Not so fast.

That was the message industry observers were sending to acting Comptroller of the Currency Keith Noreika after he suggested last week that commercial firms, including Google and Amazon, could legally obtain a fintech charter if they applied. They said that if the OCC opened the door to such a move, it would set off a political firestorm.

"It may be legally permissible, but politically, it raises very serious concerns," said Joseph Lynyak III, a partner at Dorsey. "This may become Walmart 2.0."

Noreika said Thursday that the fintech charter, which is targeted at financial institutions that do not take deposits, could be granted to companies owned by a parent that engages in nonfinancial activities. His comments were a reversal from the previous position of former Comptroller of the Currency Thomas Curry, who suggested he would never allow commercial firms to apply.

Keith Noreika
A fintech charter “wouldn’t be subject to those affiliation restrictions and also it wouldn’t necessarily have to wait in the long queue” to be approved by the Federal Deposit Insurance Corp., said acting Comptroller Keith Noreika. Bloomberg News

Under the fintech charter, a financial institution “wouldn’t be a bank for purposes of the Bank Holding Company Act,” Noreika said Thursday at a fintech conference organized by the Federal Reserve Bank of Philadelphia. “It wouldn’t be subject to those affiliation restrictions and also it wouldn’t necessarily have to wait in the long queue” to be approved by the Federal Deposit Insurance Corp., Noreika added.

His argument relies on the fine print of the Bank Holding Company Act, which comes with strict limitations on the commercial activities of a bank's parent company. Under that law, a bank is an entity that both engages in lending and takes deposits.

“The Bank Holding Company Act has a precise definition of ‘bank’ that is different from the definition used elsewhere under federal law,” said Scott Cammarn, a partner at Cadwalader.

But because the fintech charter is designed for firms that do not take deposits, it may not be subject to the Bank Holding Company Act or its restrictions on ownership.

In further comments, the OCC suggested that the matter has not been determined yet.

"Whether the company meets the definition under the BHCA would depend on the specific activities of its bank subsidiary and is a determination for the Federal Reserve Board," OCC spokesman Bryan Hubbard said in an email this week.

With regard to its apparent change in policy, the agency noted that the fintech charter is still only a proposal, and could be modified.

Hubbard added, "As is the case with any application for a de novo bank charter, the OCC would proceed on a case-by-case basis."

Still, the OCC's ability to grant the charter to commercial firms, even in theory, is already being challenged by critics.

Granting the fintech charter to a commercial company is “legally possible, only if the OCC has authority in the first place,” said Arthur Wilmarth, a law professor at George Washington University, who argued that the OCC’s power to charter banks extends only to depository institutions, with few exceptions.

“They don’t have the authority to hand out nondepository charters to whatever company,” he said.

In a lawsuit filed in April, state regulators argued that the limited number of nondepository national banks — mainly trust companies — that the OCC has chartered in the past had required “specific authorization” from Congress. The OCC’s move to charter a broader range of companies was beyond its statutory powers, they argued.

That lawsuit and one filed individually by the New York State Department of Financial Services have succeeded in stalling the charter so far. The outcome of the state regulators' lawsuit could help determine whether or not firms like Google could get a fintech charter.

It “doesn't now involve the issue of a nonfinancial owner,” said John Beaty, a partner at Venable. But if the OCC wins, it will "establish [the fintech charter] for nonfinancial institutions as well.”

Even then, a major advantage of the fintech charter — direct use of the federal payments system — would seem to be inaccessible to a company that is not allowed to take deposits.

“It's very difficult to structure it to avoid bank holding company status,” Lynyak said. “If a commercial entity gains access to the payments system, does it hold onto what is a deposit under the FDIC’s definition? Once that occurs, you have to have FDIC insurance, and you likely become a bank for Bank Holding Company Act purposes.”

Lynyak added, “Businesspeople being businesspeople can easily change their models.”

There are other potential pitfalls for commercial firms hoping to buy a fintech charter. Since any firm granted a charter would have access to the Federal Reserve's discount window, a source of cheap funding, that could potentially carry economic risks in a crisis, making the move politically risky.

“If you have a link to the federal safety net, you have the implicit backing of the U.S. government,” said Wilmarth. “If the institution gets big enough, there could be big problems from the failure, even if it's not a deposit-taking institution.”

But other industry observers argued that the fintech charter would come with restrictions that might alleviate such concerns.

For one, a fintech-chartered institution would be a national bank under the National Bank Act, meaning that it would have to be a member of the Federal Reserve System. (The Fed declined to comment for this story, because the fintech charter is still only a “proposal.”) As a result, it would be supervised to some degree by the Fed.

“It's not the day-to-day supervision that you would see the OCC regulating, but the Fed would have a seat at the table,” Cammarn said.

Additionally, as national banks, any entities would be subject to the Federal Reserve Act, which limits the types of lending that banks can engage in with their commercial affiliates.

Under that law, “there are quantitative and qualitative restrictions on banks engaging in certain transactions with their affiliates,” said Cliff Stanford, a partner at Alston & Bird. The restrictions, he said, are “intended to protect the bank from being abused by its affiliate.”

Some say that the companies likely to be interested in the charter — including online lenders and large payments processors — are already able to avoid restrictions on the separation of banking and commerce, simply by getting licensed at the state level.

“States are now creating what I call ‘synthetic banks,’ that are competing with banks and can avoid banking and commerce limitations,” said Pratin Vallabhaneni, a partner at APKS.

“The process of operating a synthetic bank is very inefficient, which is why most companies don’t do it, but the end result is the same — banking and commerce are mixed," he added.

As for some in the banking industry, they argue that the OCC has not officially changed its position from earlier this year when it said it would not consider commercial companies for the fintech charter.

The American Bankers Association “supports the OCC’s special purpose charter,” as long as “the current policies that separate banking and commerce are maintained,” Rob Morgan, vice president of emerging technologies, said in a statement. “We did not interpret the acting Comptroller’s remarks as signaling a shift in the line separating banking and commerce nor would we support a change here.”

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Lalita Clozel

Lalita Clozel covers fintech regulation, anti-money-laundering, cybersecurity and the Federal Deposit Insurance Corp. in American Banker's Washington bureau.