It’s a mistake to block the OCC’s fintech charter
The Conference of State Bank Supervisors recently announced that it intends to refile a lawsuit against the Office of the Comptroller of the Currency, and the New York State Department of Financial Services has refiled a lawsuit against the OCC, each in an effort to block the agency from offering special-purpose national bank charters to certain fintechs.
The news again raises the potential for a major missed opportunity for the creation of a “dual fintech system” — a system which, if fostered and allowed to grow, stands to benefit all stakeholders and the public.
Charter choice is, and has been since 1864, a key component of the traditional dual banking system — and it is now a key component of the emerging dual fintech system.
As a result of the OCC’s announcement that it will accept applications from fintechs for special-purpose charters, fintechs, just like banks, may now weigh the possible advantages of the special-purpose charter against the existing state regulatory systems. There are several key considerations: having a single regulator versus 50-plus regulators, a single licensing process versus multiple licensing and approval processes, a single “rule book” versus a patchwork of activity-based laws and regulations and uniform federal supervision versus supervision by multiple independent state regulators.
We appreciate why there are and will be continued challenges from the states, prompted in large part by divergent views over, among other things, the meaning of the “business of banking” and consumer protection considerations. Ultimately, however, both sides must recognize that, from a legal and public policy standpoint, a dynamic rather than static definition of “banking” under a dual fintech system is consistent with the National Bank Act. This view creates healthy regulatory competition that promotes excellence in regulation and benefits all stakeholders and the public.
In fact, we are already seeing the benefits of a dual system from a regulatory standpoint. Since the OCC’s launch of its responsible innovation whitepaper in March 2016 [released while Curry headed the agency], the states have responded by trying to better harmonize their disparate licensing and supervision regimes.
The OCC also seems to recognize that fintechs may represent a different banking model that require a different supervisory mindset. The agency’s adoption of receivership regulations and the chartering manual’s emphasis on recovery plans clearly indicates that the agency has a more nuanced risk appetite towards fintechs.
Moreover, there are a variety of types of fintechs that could benefit from the special-purpose charter and dual fintech system, ranging from online marketplace lenders and payment service providers to providers of blockchain technology-based products or services. While fintechs with a national or global market may prefer a federal supervisor, fintechs with niche products or a narrower geographic reach may prefer more local supervision despite its redundancy and cost. The new OCC charter is capable of providing additional flexibility and optionality that fintechs, which are at various stages of maturity and offering a wide variety of products and services, so desperately need.
Nevertheless, the OCC’s accepting applications from fintechs and the creation of a dual fintech system is not the end point. Although proponents of the charter believe the OCC has finally established a clear path forward for fintechs to seek a special-purpose charter, several potential obstacles still need to be assessed. From a basic business model standpoint, for example, a simple question arises: Who’s going to use it? There remains a question as to whether startup or early-stage fintechs will be able to or will want to comply with, among other things, the charter’s capital, liquidity and risk-management requirements.
As in any system that creates and promotes healthy competition, the dual fintech system must stand on its own to flourish or flounder. To thrive, the states must recognize the potential of a dual fintech system and, together with the OCC, leverage that potential to develop a system that promotes regulatory and business competition, innovation, financial inclusion and, most important, protects consumers. The promise this approach holds for burgeoning fintech companies and the banking system as a whole is clear.