WASHINGTON — Among federal bank regulators, the Office of the Comptroller of the Currency has been the most active on fintech chartering options. But another agency, the Federal Deposit Insurance Corp., may provide crucial guidance for fintechs in the shorter term.
The FDIC still has pending an application by Square for an industrial loan company, a limited-purpose bank typically chartered in Utah that receives deposit insurance. While it has been rare to see ILC entrants during years of controversy over the charter, observers hope incoming FDIC leadership will advance Square's bid, potentially opening the door for others.
“I suspect how Square handles this [charter process] can provide a template for other firms,” said Brian Knight, director of the program on financial regulation and a senior research fellow at the Mercatus Center at George Mason University.
Some in the fintech industry hope the Trump administration's regulatory appointees, who have generally been more supportive of the financial services industry, back some type of charter for the industry for the first time. The OCC has been developing a specialized fintech charter, but it is still unclear if the agency intends to move forward with accepting applications.
Jelena McWilliams, Fifth Third Bank's chief legal officer who is awaiting confirmation as the FDIC's new chair, did not voice any hesitancy about approving new ILCs at her nomination hearing. If she and other FDIC board members approved the Square application, it would result in the first ILC approval since 2008.
“Given what appears to be this administration’s general approach to deregulation, I would surmise that means the FDIC will give them (Square) a charter,” said V. Gerard Comizio, a partner in the corporate department and chair of the banking practice at Fried Frank’s office in Washington.
In a Washington speech Monday, former acting Comptroller of the Currency Keith Noreika said McWilliams' confirmation, which is likely, would create an "essentially brand new" FDIC board, also including Comptroller Joseph Otting and Mick Mulvaney, acting head of the Consumer Financial Protection Bureau.
Noreika said he expects the new board members to be more willing "to approve de novo insurance applications for traditional, as well as for limited purpose, institutions, including for industrial loan companies."
"We may also start to see change in control applications for existing ILCs start to be processed and approved again after a long hiatus," said Noreika, a partner at Simpson Thacher & Bartlett.
"As a result, we may begin to see a changing banking industry with more new entrants to the market — unlike the period of consolidation and lack of entry that has characterized the past decade. The diversity of new entrants could make things interesting especially if the so-called 'fintechs' gravitate toward industrial loan company charters."
Deposit insurance applications require a majority of the FDIC board's support. Nothing so far has suggested that Mulvaney or Otting would oppose Square's bid, and in her testimony before Congress on her nomination, McWillliams sounded supportive.
“The job of the FDIC is to give each ILC application due consideration and, if appropriate proceed with the approval,” McWilliams said in testifying before the Senate Banking Committee on Jan. 23.
An FDIC board more welcoming to ILC bids would be a departure from what effectively has been a freeze on the charter for over a decade.
Much of the controversy around ILCs has centered on the fact that nonfinancial owners are legally eligible for the charter in addition to financial owners. (Square is financial in nature.)
Walmart's 2005 ILC application triggered a flood of opposition, forcing the retailer to withdraw. The charter is also appealing to nonbanks since it exempts them from having to register as bank holding companies.
But even the Square bid has drawn criticism, with the Independent Community Bankers of America telling the FDIC in a letter last fall that it opposed the application and “Congress should immediately address this issue and permanently close the ILC legal loophole before it is too late and we have huge commercial or technology firms like Amazon, Google or Wal-Mart owning FDIC-insured ILCs.”
Yet at her nomination hearing, McWilliams said she shared the view of past FDIC officials that ILCs do not pose a greater risk than other firms.
"If [an application] meets the ILC standards, as currently set up by the FDIC, I believe there should be no obstacles in the application program," she said.
Yet despite a potentially more welcoming approach by the Trump administration, few firms have rushed to the gates in the past year to apply and test the regulatory waters.
“Applying for a bank charter can chew up time, resources and money” and it “exposes a company to both governmental and public scrutiny,” Knight said. “Interested applicants need to ask whether the benefits to a charter line up sufficiently with their business plan and is it worth the cost you’re going to be taking on.”
For now, fintech firms are “more so watching how Square will clear that hurdle,” he added.
Scott Pearson, head of the marketplace lending team at Ballard Spahr, said most marketplace lenders might have reservations about the process due to how regulators might scrutinize their business model.
“There aren’t a lot of companies that have the financial wherewithal to go forward” and apply for a charter, said Pearson. “With new regulators coming on board, I think they’re more interested in issuing charters . . . but that doesn’t mean there won’t be scrutiny.”
Republicans and industry groups have criticized the FDIC in general for the dearth of new bank charter approvals since the financial crisis, but the FDIC has argued that few groups have applied. Part of the holdup in ILC activity was also due to the 2010 Dodd-Frank Act, which placed a three-year moratorium on ILCs, and other specialized charters, owned by commercial firms.
In her testimony, McWilliams said that as FDIC chair she would look into what was behind the slowdown in activity.
“I don’t know how much work has been done on the ILCs in the past few years — I assume not a lot, because I’ve not seen any new charters,” said McWilliams, responding to questioning by Sen. Dean Heller, R-Nev. “If confirmed . . . I’m happy to work with your office to understand where the holdup has been in the approval process.”