Fed will have the say on key parts of OCC’s fintech charter

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WASHINGTON — The Federal Reserve is under increasing pressure to provide clarity on whether nonbank fintech firms that receive a special federal charter will have direct access to central bank lending and to the U.S. payment systems.

The Office of the Comptroller of the Currency confirmed in July that it would accept applications from fintech firms for a "special-purpose" national bank charter, although the new license has been legally challenged by state regulators.

But many experts say the OCC's charter would lose value if the Fed did not allow direct entry to fintech firms. Those firms now, for example, can access the payments system only through bank partners.

During early discussions about the OCC charter, a decision by the central bank about allowing fintech firms into the payments system or to become a Fed member "may have been on the back-burner but was certainly on the stove," said former Comptroller of the Currency Thomas Curry, who had initiated the charter plan while at the agency.

But Curry, now a partner at Nutter McClennen & Fish LLP, said the July 31 announcement by current Comptroller Joseph Otting, that firms can now submit applications, requires the Fed to be more involved.

“The fact that Comptroller Joseph Otting announced they would proceed does" give the Fed "more incentive ... as the gatekeeper of the payments system to reach out to the OCC as it considers an applicant,” Curry said.

At a recent fintech conference in Washington, a Fed official said agency staff has been meeting more frequently with fintech firms in the past year and those discussions have included other regulators at the table. He signaled that the Fed will make a decision on access to the payments systems and the central bank's lending facilities for each fintech applicant of the OCC charter.

“The Federal Reserve staff has been coordinating closely with the OCC on this charter issue. And we’re trying to follow all the related developments,” said Jeff Ernst, senior fintech risk manager at the Fed, during the Sept. 6 conference. “For any recipient of a charter, there are going to be really difficult policy and interpretive issues the Federal Reserve is going to have to face, such as whether a charter recipient will become a member of the Federal Reserve System and whether they would gain access to Federal Reserve services.”

To be clear, no firm has yet received the charter, and both the Conference of State Bank Supervisors and the New York State Department of Financial Services have revived legal challenges to block the charter.

But the fintech charter was separately endorsed in a Treasury Department report in July, which called for regulatory coordination between the OCC and the Fed.

"National banks, including special purpose national banks, are required (with limited exceptions) to become members of the Federal Reserve System," the Treasury report said. "The Federal Reserve would have to assess whether an OCC special purpose national bank would be given access to the Federal Reserve payment systems."

It is thought, for example, that the Fed will have a final say on whether the applicant can access the payments system directly or whether its parent needs to form a bank holding company, which would garner some benefits but also require additional shareholder vetting.

Ernst's comments echoed a speech given last year by Federal Reserve Board Gov. Lael Brainard, who said the OCC's charter plan "raises interpretive and policy issues for the" central bank. Those include "whether charter recipients would become Federal Reserve members or have access to Federal Reserve accounts and services, such as direct access to payment systems."

"If the OCC proposal is finalized, the Federal Reserve would have to closely analyze these issues with respect to any fintech firms that express an interest in moving forward with an application," Brainard said.

The OCC charter is designed to allow fintech firms to operate more like a bank on a national scale, rather than have to obtain 50 state licenses. But charter recipients would still be nonbanks in significant respects; for example, they could not receive federally insured deposits. Still, giving fintech nonbanks access to the Fed's payment systems or allowing them access to the discount window and other resources would be a leap from the current norm.

Currently, some fintech firms have tapped the payments system by partnering with banks. But having direct access — either through the OCC fintech charter or the Fed choosing on its own to open its payments system to fintechs — would bring them more into the banking industry.

The benefits to being in the Fed's system are that it provides a sense of security and lower cost because the Fed will back large transactions between member banks and ensure there is enough currency to meet public demands.

Some observers also argue that granting access to more firms on the cutting edge of technology would help speed up the domestic payments system at a time when the U.S. is seen as woefully behind other countries where regulators have more quickly established a faster payments network.

“The Fed is in the center of the payments system globally [and] we have all these tech-driven changes that are swirling around that payments space,” said Jo Ann Barefoot, CEO at Barefoot Innovation Group and a co-founder of Hummingbird Regtech.

As the OCC makes the fintech charter available, Barefoot said, “the Fed needs to be at the table and needs to be thinking it through in light of the concurrent work on a faster payments system.”

Ernst said that the Fed plans to soon release a report on how to create a more real-time payments system in the United States.

“We’ve been assessing various approaches to 24/7, 365 days a year settlement services and so we hope to be able to share our assessments on those approaches in the fourth quarter this year,” Ernst said.

Brad Fauss, general counsel at the payment processor Wirecard North America, said the Fed is “seeing the fact that real-time payment systems are being rolled out around the world and we’re behind everyone in the world right now.”

Fauss and other fintech executives said they have been meeting with the Fed and other regulators more frequently.

The federal regulators “have made it very clear that they are much more open to looking at new ways of integrating fintech” but “as new payments platforms are rolling out, there will be some issues that come up and at that point, the Fed will need to get more involved,” Fauss said.

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Fintech regulations Licenses and charters Faster payments Nonbank Joseph Otting Lael Brainard Thomas Curry OCC Federal Reserve