WASHINGTON – The Office of the Comptroller of the Currency's plan to offer a national charter for fintech firms immediately sparked a battle between consumer advocates and state regulators, who see it a dangerous move, and fintech firms and certain banks, which hailed it as the future.
Yet many issues about how the charter will work – and what regulations fintech firms will have to agree to in order to be granted it – remain in limbo.
Some observers predicted the OCC would ultimately devise a charter in which firms face many of the same rules with which national banks must comply.
"The fintech charters will be subject to the full load of compliance, consumer compliance, safety and soundness regulation," said Julie Williams, a managing director at Promontory and former top official at the OCC. "There's no regulation-lite available for a fintech charter."
As envisioned in an agency paper published Friday, the new charter would allow fintech companies – particularly those that do not seek to take deposits – to apply for a limited-purpose bank charter.
As such, they will not be immediately subject to a number of traditional bank requirements, including the Community Reinvestment Act, but the OCC stressed that it would use its discretionary powers to ensure that the fintech companies would be well capitalized and appropriately supervised.
Many bankers were split by the announcement. Some hoped that the agency would impose banklike requirements that ensure fintech firms are on a level playing field with financial institutions.
"They've been looking at the powers that come with being a bank for quite some time," said Rob Morgan, the vice president of emerging technologies at the American Bankers Association. But they are finding out now, he added, that "You can't have your dessert until you've eaten your veggies."
But there were also concerns that the OCC will not follow through on its pledges.
"Any limited fintech charter must hold these companies to the same standards of safety, soundness and fairness as other federally chartered institutions," said Camden Fine, the president of the Independent Community Bankers of America. "Our nation's fintech regulatory framework should be no less stringent than that which applies to insured depository institutions."
Yet even for banks wary of fintech companies encroaching on their turf, there might be a consolation prize in the charter – the promise of advances in reevaluating how the CRA is implemented.
Comptroller of the Currency Thomas Curry reiterated Friday that the CRA, which was established in 1977 to combat redlining, needs to be updated to come to terms with technological innovations.
"I do think we need to look at that geography anchor to the CRA for all the institutions that are subject to it," Curry said.
He added that the process of evaluating applicants for the fintech charter could help develop new ideas for CRA implementation.
Though nondepository institutions do not have to comply with the CRA, the OCC said it would require fintech companies to establish financial inclusion measures as part of the chartering process.
"This has great potential for giving us some insight into how to approach it for both an on-the-ground supervisory standpoint and in terms of recommending any legislative changes to Congress," he said.
The OCC also hinted that it could impose higher capital standards on fintech companies than it does on banks, by accounting for off-balance-sheet activities – or sources of risks beyond the typical loans-to-asset ratios, like the possibility of transactional breakdowns.
"They seem to be signaling that a fintech charter should be expected to be required to carry more capital than a typical bank based on the asset size of a bank," Williams said.
For their part, the fintech industry – ranging from online lenders to virtual currency and payments company groups – broadly applauded the move, though they held reservations about certain requirements the charter would impose on applicants.
OnDeck praised the OCC's decision as "a positive development" for the industry, saying it was "open to considering a fintech charter program from the OCC."
The charter appeared particularly well tailored for some of the more established marketplace lenders, which already have to comply with Bank Secrecy Act requirements and consumer protection laws because of their partnerships with banks.
"Most of the requirements we already comply with, based on our existing banking relationships both as a bank partner, a bank vendor in the U.S. and on our platform as a global technology vendor," said Sam Taussig, the head of government relations and community banking at Kabbage.
However, it appears the charter would not apply to one subset of fintech companies: online lending exchanges, which connect borrowers to lenders but do not themselves originate loans. None of their activities are covered by the OCC's categories for the charter: fiduciary activities, lending, paying checks or receiving deposits.
"We wouldn't qualify for the charter because we don't do any of the three areas that OCC regulates," said John Henson, the chief compliance officers at LendingTree. "As our current business stands we wouldn't fall under it."
And the move is not likely to immediately attract large tech companies like PayPal, Apple or Intuit, which have already built up a robust compliance infrastructure based on the current state licensing system.
"The members of Financial Innovation Now are compliant wherever they operate and are bringing products and services to market with the licenses and the compliance measures in place that they see," said Brian Peters, the executive director of the group, which represents five large tech companies involved in the payments business.
Still, the companies are watching the OCC's initiative carefully. "We don't think that the internet should be delivered differently state to state and the same should apply to financial services," Peters said.
The industry also lauded the OCC for its intention to treat different business models differently – whether in terms of requirement to obtain the charter or supervision.
"They're not really saying things in black and white terms," said Peters. "They're saying it depends on the business model."
But state regulators expressed strong concerns that this discretionary process would allow the OCC to disrupt the marketplace by single-handedly deciding what companies can obtain the privileges of a federal charter.
"If five get it, then five will get an advantage over 5,000 and it will impact the competitive marketplace," said John Ryan, the president and CEO of the Conference of State Bank Supervisors.
State regulators had previously warned that a fintech charter delivered by the OCC would pre-empt various state consumer protection and usury laws, questioned the agency's authority to start regulating fintech companies.
"This is really a historic expansion of the role of the federal government into broad and undefined areas of the economy with real risks and consequences," Ryan said.
States also contend that they are better positioned to regulate new industries like fintech.
"History has demonstrated that states, not the federal government, have the requisite knowledge and experience to effectively regulate nondepository financial service providers and guard against predatory and abusive practices," said Maria T. Vullo, superintendent of the New York State Department of Financial Services.
Consumer protection groups also warned that allowing companies to avoid several state rules could place consumers at risk.
"The most effective consumer protection laws at the state level should not be undermined by bad new financial products that could open the doors for predatory lending," said Courtney Robinson, policy counsel at the Center for Responsible Lending. "A federally chartered fintech lender would avoid state interest rate caps, leaving people vulnerable to financial services abuse."