WASHINGTON — The proposed charter for fintech firms — and what requirements should come with it — is rapidly becoming a massive battle that pits state regulators, consumer protection groups and even some banks against a broad assortment of fintech firms and financial institutions.

In dozens of letters to the Office of the Comptroller of the Currency, which announced the creation of the charter in December, players on both sides of the debate agreed only on one thing — that it could significantly impact the future of the financial system.

Marketplace lenders “are subject to a patchwork of state laws that can be challenging to navigate and have the unintended consequences of increasing cost, complexity, and limiting market reach,” said Nat Hoopes, executive director of the Marketplace Lending Association. “A fintech charter would allow certain [marketplace lenders] to operate on a nationwide basis.”

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“State-chartered financial institutions in the states with robust consumer protections will seek to ‘even the playing field’ by weakening or repealing state consumer protection laws” if the OCC creates a fintech charter, warned Illinois Attorney General Lisa Madigan. Bloomberg News

The varying degree of comments suggest the OCC will face a challenge in devising final requirements for the charter.

Following is a guide to the specifics of the debate:

What requirements should fintechs face?

Fintech groups and traditional financial players starkly disagreed on how far the OCC should go in stipulating new requirements for firms that opt for the new charter.

Groups like the Electronic Transactions Association, Financial Innovation Now and the Marketplace Lending Association called for the OCC to account for fintech companies’ differences in business models when deciding what requirements to impose on them.

“ETA encourages the OCC to take a case-by-case approach to the application process that is based on requirements tailored for the unique attributes and variable business models of the fintech industry,” wrote Scott Talbott, the group’s senior vice president of government affairs.

For example, fintech industry champions warned that raising the bar too high for capital and liquidity requirements could create barriers to entry. Analysts at the Mercatus Center even argued that for institutions that do not hold deposits – a category primarily targeted by the OCC’s proposed charter – elevating capital requirements to avert a potential failure could be useless.

“Capital regulation for depository banks protects depositors and the Federal Deposit Insurance Fund by ensuring that there is enough equity in place to absorb any losses and helps to moderate the harmful effects of banking crises,” they said in their letter. “High capital requirements, therefore, are not necessary for fintech firms that are not backed by government deposit insurance and do not hold customer funds.”

Financial Innovation Now, or FIN, which represents several large technology companies involved in financial services, also advised the OCC to take a different approach to cybersecurity requirements with fintech companies than it does with banks.

“The OCC’s supervision of fintech banks should account for this attunement to cyber risks and ensure that any supervisory standards are technology-neutral and principles-based, such that companies can freely adopt new technologies as rapidly and radically as necessary to mitigate risk,” wrote Brian Peters, FIN’s executive director.

But bank and credit union industry representatives, even those that support the charter, also asked the OCC not to let fintech firms off the hook.

“Any fintech company that is granted a national bank charter will receive the instant credibility that comes with being a bank,” wrote Rob Morgan, vice president with the American Bankers Association. “The OCC must … ensure fintech institutions adhere to equivalent charter responsibilities, including anti-money laundering and [Community Reinvestment Act]-like financial inclusion responsibilities, backed by vigorous examination.”

Andrew Morris, the regulatory affairs counsel with the National Association of Federally-Insured Credit Unions, supported the charter with similar reservations, writing that “fintech companies should be held to the same consumer protection laws as chartered banks and credit unions, and that the OCC should only deviate from such uniformity in extraordinary circumstances.”

Other traditional financial industry player groups also pushed back on the argument that fintech companies should face lower capital or liquidity requirements than their more established peers.

“Two core elements of safety and soundness are strong capital and liquidity. ... Existing fintech companies often have atypical funding models and complex equity and ownership structures due to their venture capital and private equity investors,” representatives of The Clearing House, the Independent Community Bankers of America and SIFMA said in a joint letter. The letter was signed by John Court, the managing director of The Clearing House; Christopher Cole, the executive vice president and senior regulatory counsel at the ICBA; and Christopher Killian, the managing director of SIFMA.

Fintech charter applicants “in many cases will also have nontraditional balance sheet compositions that do not fit readily into the existing capital frameworks for full-service national banks,” they added.

Consumer protection concerns

State regulators were harsher in their assessment of the OCC’s charter proposal. Along with consumer and small business protection groups – ranging from the NAACP to Americans for Financial Reform and the Main Street Alliance – they raised concerns that the charter could undermine local laws such as interest rate caps.

“In extending bank preemption to fintech companies, the OCC would exempt chartered companies from state interest rate laws,” the Main Street Alliance wrote. “Given the absence of any federal rate cap, the OCC proposal would effectively nullify existing state rate caps.”

Though the OCC has sought to dispel the notion, consumer protection groups also said that the charter could sanction payday lenders even in states where they are not today allowed to operate.

“The OCC charter throws the door to the hen house wide open for the payday loan foxes that have long sought to dig their way into our states,” wrote PaydayFreeLandia, a coalition of consumer rights groups across 15 states. “Most of our states have never permitted payday lending.” And some “have moved to expel financial predators from their borders.”

Illinois Attorney General Lisa Madigan added that the competing charters could pressure states to weaken their own consumer protection laws in order to accommodate companies licensed locally.

“State-chartered financial institutions in the states with robust consumer protections will seek to ‘even the playing field’ by weakening or repealing state consumer protection laws,” she said.

Legal challenges to the OCC’s authority

In a strongly worded 21-page analysis, the Conference of State Bank Supervisors also argued that the OCC does not have the power to grant fintech charters in the way it has proposed.

“The OCC lacks any statutory authority to charter a special purpose national nonbank,” John Ryan, the bank supervisor group's president and CEO, said in a letter accompanying the policy paper.

The bank supervisors group was joined by other critics of the charter in questioning what could be the consequence of fintech companies becoming members of the Federal Reserve System, and whether it could undermine the separation of commerce and banking.

“As a general matter, the regulatory scheme for U.S. banking organizations has been to distance institutions with special or limited purpose business plans from access to the federal safety net,” Cole, Court and Killian wrote. “The OCC’s new chartering policy may represent a departure from this framework.”

In a separate letter, the ICBA raised the specter of its perennial nemesis—Walmart, which has applied unsuccessfully for banking charters in the past.

Cole and James Kendrick, the first vice president for accounting and capital policy at the ICBA, wrote that the group was “concerned that large commercial entities such as Walmart or Google would be allowed to own, as subsidiaries, special purpose national banks, therefore mixing commerce with banking.”

Additionally, financial industry groups criticized the OCC for a lack of transparency in determining the requirements for a charter.

“In the absence of generally applicable federal banking laws to govern the operations of special purpose nonbanks, the OCC will have absolute discretion as to whether and to what extent otherwise inapplicable rules will be made applicable” through the chartering process, Ryan said in the CSBS letter.

The ICBA, The Clearing House and SIFMA called on the OCC to allow the public to comment on the charter in a more formal process.

“The OCC should engage in a robust outreach program for the [fintech charter] proposal, which could include convening a public hearing as well as a formal rulemaking process subject to the Administrative Procedure Act,” they wrote.

Should fintechs comply with CRA?

Another major point of contention is the applicability of the Community Reinvestment Act, a 1977 anti-redlining law.

Comptroller Thomas Curry has indicated that the fintech charter could be an opportunity to experiment with more modern applications of the CRA – for which compliance is still measured along geographic markers.

"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 in December, after he announced the charter initiative. "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.”

This idea has garnered cautious support from progressive lawmakers. In an American Banker op-ed last week, Reps. Gregory W. Meeks, D-N.Y., and Cedric L. Richmond, D-La., called on the OCC to ensure the charter preserve the spirit of the CRA.

“If the OCC requires fintech firms to set measurable and enforceable financial inclusion goals that leverage consumer-friendly technology, the agency will likely give new energy to the spirit of the CRA, albeit in a new regulatory framework,” they wrote.

Technology companies expressed interest, too. “The OCC should be creative with charter applicants to discern novel approaches to realizing its financial inclusion goals,” Peters of Financial Innovation Now said.

But others were more skeptical of the OCC’s promises.

“The OCC falls short of explaining whether fintech charter applicants would be subject to financial inclusion requirements similar to CRA, and how such requirements would be met,” the ICBA's Cole and Kendrick said. “These expectations should be spelled out in the chartering rules so it clear to all special-purpose national bank applicants what the financial inclusion requirements are for a fintech charter.”

Can the charter apply to virtual currency?

Virtual currency advocates also urged the OCC to clarify its stance on whether and how the charter would apply to such firms.

“What is unclear from the OCC’s proposal is how it would treat digital currency companies’ activities and how it will determine if those activities fall within the required four core banking functions” delineated by the OCC, said Rep. Jared Polis, D-Colo.

Coin Center, an advocacy group for virtual currency companies, recommended that the OCC include those activities by interpreting them creatively.

“The OCC should utilize that discretion and explicitly find that digital currency exchanges and hosted wallet providers perform one of the core banking functions—check paying,” said Peter Van Valkenburgh, Coin Center’s research director.

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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.