The Office of the Comptroller of the Currency's fintech charter will do more than just remove one of the business moats protecting incumbents. It will also give rise to fintech-versus-bank competition.
Before the OCC announced last month that it would consider applications from fintech companies, traditional financial institutions such as commercial banks were the only ones that obtain charters enabling direct lending in all 50 states. Fintech companies, by contrast, have needed to obtain a separate lending license in every state, making it almost impossible to operate efficiently nationwide. This is a burden that no bank experiences today.
Of course, fintech companies will likely still have a choice whether or not to pursue a charter. (The OCC is accepting public comments on the plan and many of the details have yet to be worked out.) Not all fintech companies will apply for the charter. The OCC charter, after all, will impose many new regulatory and compliance responsibilities. Chartered fintech companies will need to prove to the OCC and other regulatory bodies that they are managing risk and keeping a healthy reserves balance to preserve appropriate liquidity.
For some, the benefits will outweigh the increased scrutiny. For others, the costs of more regulation might be too steep. Indeed, a possible outcome of this new ruling will be a thinning of the ranks of fintech companies. The truly innovative companies that invest in new technologies have the resources and scale to take on a national charter. For example, machine learning algorithms are enabling fintech companies to underwrite applicants previously untouched by banks. These new market opportunities bring scale through automation and a customer's willingness to pay through the uniqueness of the offering.
Let's consider consumer lenders that are investing in new underwriting and payment approaches that allow consumers to pay for their purchases over time. Many of these consumers wouldn't have this payment flexibility through traditional FICO and credit card models. This is great for consumers. It is also great for retailers in reaching new previously unaddressed markets. A national charter will allow these companies, if they choose to apply, to accelerate their growth by streamlining their operations under national regulations instead of state-by-state regulations or by using expensive bank charter partnerships. A national charter could help separate them from the pack.
Others that could benefit from the proposed charter are the hedge funds and banking partners that issue credit facilities to fintech companies. A few of these players include Victory Park Capital, Jeffries and Fortress. Many fintech companies use some of their own cash in their financing arrangements with customers, and fintech companies supplement the rest from a credit or warehouse facility from a larger institutional lender. As fintech can scale and operate in all 50 states, these credit facilities will grow under tighter inspection and controls from the regulator. Hence these lenders would benefit from a decreasing risk, while growing origination volumes.
National charters could increase the gap between the healthy and unhealthy fintech companies while narrowing the gap between the incumbents and the new generation of companies. This proposal also sets the stage for more solid collaboration between fintech companies and regulators.
The national fintech charter is not the end of the road, signaling that fintech has "arrived" and disrupted the incumbents or one another. But it is a step toward narrowing the moats around banks and credit card companies, and establishing the true leaders in the fintech industry.