WASHINGTON — The Office of the Comptroller of the Currency has put itself at the forefront of the fintech revolution, actively considering whether it will create a specialized charter for these new companies.
The idea remains controversial in the financial sector, with some fintech players hopeful a charter would allow them to avoid the entanglement of 50 different state regulatory systems, while banks want to ensure a charter comes along with banklike requirements.
Since unveiling a white paper in March calling for "responsible innovation" in the financial industry, and openly discussing the possibilities of a charter, the OCC has taken one concrete step in that direction. It published a plan last month outlining how the agency would take over a failing nondepository institution chartered by the OCC. The plan would apply to only a handful of trust banks now, but would likely affect any future fintech players if the agency created a charter.
Following is a discussion with Amy Friend, the OCC's general counsel, on the agency's overtures to fintech companies and what steps it might take next to address the rise of such firms.
What is the purpose of the OCC's receivership proposal?
AMY FRIEND: In proposing the rule, the comptroller wants to make certain we have the authority and process we need to resolve any uninsured company we charter. Because a number of national trust banks don't take deposits and are uninsured, the [Federal Deposit Insurance Corp.] isn't involved in their resolution… But the National Bank Act does give us resolution authority that predates the FDIC. The proposal is our attempt to put together something that is comprehensive with respect to the potential issues, such as the priority of claims, and set out a proposal in a methodical way.
We included the discussion of a special purpose charter because we want to ensure that if we do offer charters in this area, we have the tools we need to supervise and resolve the institutions. You don't want to plan for failure, but you have to understand that it's possible. We would still only charter a company that meets our standards for having a reasonable chance of success, but, if resolution becomes necessary, we need to know what authorities we would rely on to resolve a company in an orderly way. That's why we put the proposal out for comment.
What would a fintech limited-purpose charter look like?
We've been thinking about what a special purpose charter would look like. It could come in the form of a national trust bank, if it meets the criteria of a trust bank, or it could be something else. We're not limited to a limited-purpose charter that is just a trust bank. We have authority beyond that as reflected in our regulations.
And what would the chartering process entail?
We have a chartering process today and recently published an updated booklet on that general process. That process for traditional banks includes looking at whether they have a robust business plan, and expert management and directors. We look at capital. There's a number of things that we look at, and that's what gives us comfort that they have a reasonable likelihood of success, will operate in a safe and sound manner, and will treat their customers fairly.
We're still working through the issues of whether or not to go down the route of granting special purpose charters that provide banking services. If we did, every charter would be considered on a case-by-case basis, and we would see whether their application fits within the framework we would establish for a special-purpose charter.
We're still national banks regulators at the end of the day; we're not fintech regulators. So the fintech seeking a national bank charter would have to fit within certain contours.
What if a deposit-taking institution sought a limited-purpose charter?
It's up to them. So, let's say a company approached us with a plan to take deposits in connection with marketplace lending. "OK," we would say, "We'll assess your business plan, your expertise, and so on, and you need to apply for deposit insurance with the FDIC." There's nothing that says the company couldn't do this type of business, but if they were taking deposits they would need deposit insurance.
What are the other issues you're exploring around the idea of a fintech charter?
We're doing a couple things. We're looking at more of the big-picture issues without focusing on any specific type of company. We're thinking of legal permissibility, and policy implications.
For example, we are considering sources of funding, risks associated with monoline companies, and the need to be diversified. We're also looking at more traditional licensing criteria such as the companies' expertise, strategy and business plan. Then we are looking at whether we have the skills to supervise the new business. Are they presenting something that we have never supervised before? Do we need training or new supervisory tools? It starts at the macro level, but we're really digging into a lot of those issues and are doing a deep dive into these areas.
What types of fintech companies would be initially targeted by a fintech charter?
We're not encouraging applications at this time as we seek to identify and address the larger issues. We're also not targeting types of companies. But, there are many different types of fintech companies out there. So far, we've been talking to companies that are just interested in learning about the OCC, and we're learning about them. It's not like a strategy at this point to say, "Let's start with something simple that looks like X." We're trying to get our arms around the big picture, and come up with our recommendations, and then we would figure out how to proceed on an operational basis.
Nobody's in our sights. We're in their sights.
How many fintechs have been approaching you?
Is the crisis still fresh in your minds when you're thinking about new types of charters?
We can provide a single charter with some uniformity, and that makes it very appealing. But, we also take that authority very seriously, and understand its implications. The comptroller has made it clear that if we decide to grant a national charter in this area, the institution that receives the charter will be held to the same high standards of safety, soundness and fairness that other federally chartered institutions must meet.
We are risk-averse by nature. That's what we're trained to do. Bank examiners are trained to look for risk, and how it's managed. Our responsible innovation initiative is about saying, "Yes, there are risks, but there are opportunities too," and as long as a company can appropriately manage those risks, it doesn't mean they have to be risk-free. Banking is not risk-free.
So you're also trying to preserve the "sanctity of the charter."
You know, there's a lot of fintechs that fail. Part of innovating is taking risks, and sometimes you've got to throw things against the wall and see what sticks. That's OK for a Silicon Valley startup. It's not OK for an institution that has "national bank" in its name. I can't imagine chartering a company that's just throwing things against the wall, that doesn't really know what it is, that morphs multiple times, that departs from its business plan. I mean, that to me would say, "You're not ready for a charter like this."
You've got to come to the OCC just as any bank does, with an understanding of regulation and how the system works and with a sound business model. It might be a very iterative process.
Can you tell me more about what type of pilot program you might envision for financial innovation?
We're still developing our concepts, but what I can tell you is that we're not interested in granting a safe harbor that would entail waiving a consumer protection law. We're happy to work through issues of clarity and interpretation, but banks are ultimately responsible for complying with the law and providing products and services that treat customers fairly.