The Office of the Comptroller of the Currency recently released supplemental information intended to clarify and put more meat on the bones of its proposed special-purpose charter for fintech firms. Within the constraints of its jurisdiction and mission, the OCC is clearly trying to do its part to address the regulatory issues raised by financial service providers in the technology sector. The agency is not simply pursuing a “bank-lite” charter.
The OCC’s new guidance follows comments from many in the financial industry who stressed that the final product should stay true to the core tenets of the full-freight national bank charter. That charter stresses the importance of safety and soundness, consumer protection, capital and liquidity standards, Community Reinvestment Act compliance, supervision and enforcement, and more.
So will fintech firms go for this new charter?
Let’s consider some context. The regulation of financial services in the U.S. is highly fragmented, and fintech is challenging every aspect of that structure. Federal and state agencies can stake claim over the regulation of fintech, yet both are ultimately limited by narrow lanes and tightly defined jurisdictional boxes prescribed to them by their respective charters. As a result, even the most well-intentioned efforts are only able to address the trees, but not the forest.
The OCC is, by design, amongst the trees (in this case, national banks), which presents a dilemma: The goal of its proposal is to encourage the entry of fintech firms into federally regulated financial services. But if the actual pool of applicants ends up being extremely small, that’s going to be a real problem.
This is not a critique of the OCC or its proposal, but reflects the reality of the fragmentation I described earlier. The OCC can only employ tools and solutions given to it in its role as the chartering agency and regulator for national banks. This toolbox does not include a mandate to step back, take a holistic view and solve the broader fintech issues facing the entire financial ecosystem.
Not only is the OCC constrained by its statutory mission and authority, but it is by definition a regulator, not a cheerleader. And a firm seeking a new charter can reasonably expect one of two outcomes: acceptance or rejection. To put a finer point on it, someone I know at a fintech firm recently relayed the following to me: “Given the choice between dealing with 50 states or having the OCC tell us ‘no’ even one time, we’ll take the 50 states.”
Some fintechs may alternatively decide that a charter from a federal bank regulator does not meet their business profile if that profile is not banklike.
This reticence may not be gospel throughout the fintech ecosystem, but efforts to shoehorn nonbank, Silicon Valley-based innovators into a banklike regulatory regime is not likely to be the solution to the fintech regulatory challenge.
The OCC charter appears aimed at attracting fintech firms. But if it is perceived by some of those firms as unattainable or inconsistent with their business approach, that will exacerbate the policy divide and makes it harder to satisfy all stakeholders with a solution that addresses deficiencies of the current regulatory structure for an evolving financial industry. Again, context is critical: This is a national bank regulator, proposing a new bank charter.
The OCC, to its credit, acknowledges the reality that its special-purpose charter is not a panacea. In the supplemental guidance, the OCC said that “fintech companies that want to operate in the regulated space will choose different ways of doing so," and the special-purpose national bank charter "is one option of many.”
“This Supplement is not intended to discourage these other ways of conducting business but rather to clarify the OCC’s expectations for a particular segment of financial service providers — that is, fintech companies seeking an SPNB charter,” the agency said.
So, where to go from here? Many of the large players in the financial industry are aggressively working to build bridges with the tech community to support customer, business and policy interests that drive the convergence of these two industries. From a regulatory perspective, a common approach to date — where the financial institution that partners with a tech firm assumes the role of regulator through its vendor management and third party due-diligence obligations — has worked well, but is not the solution for the long haul.
The future of financial services regulation requires the hard task of updating, modernizing and streamlining the existing structures, and maybe even some creative thinking on entirely new approaches to regulation that can better address the evolution of the industry and consumers’ demands. This is an opportunity for policymakers and all stakeholders to think beyond how to jam fintech into the “bank” regulatory box. We need to identify the right tools to more fully reshape the regulation of financial services to fit the innovations that are driving the industry in the 21st century.