Community Banking Advisor: Should There be National Bank Charters for “Fintech” Companies?

The Office of the Comptroller of the Currency (OCC) is considering issuing special-purpose national bank charters to financial technology (fintech) companies, such as online lenders, payment processors and digital currency firms. This initiative has been criticized both by community banking advocates concerned about unfair competition and state banking regulators who fear their authority will be preempted.

OCC: It’s in the Public Interest

According to an OCC white paper outlining its proposal, granting charters to fintech companies is in the public interest because:

  1. Applying a bank regulatory framework to fintech companies will help ensure that they operate in a safe and sound manner,
  2. The OCC’s uniform supervision over national banks, including fintech companies, will promote consistency and ensure consumers are treated fairly, and
  3. Providing fintech companies with a path to becoming national banks will make the federal banking system stronger by a) ensuring their safe and sound operation and b) promoting fair access and innovation.

Fintech companies welcome the proposal because it would relieve them of the burdens associated with state-by-state licensing requirements and regulatory frameworks.

Must-Haves for a Fintech Company

To be eligible for a special-purpose national bank charter, a fintech company would have to conduct at least one of these three core banking functions: 1) receiving deposits, 2) paying checks, or 3) lending money. In addition, it would have to meet certain “baseline supervisory expectations,” including having:

  • A robust, well-developed business plan reflecting a commitment to fair access to financial services,
  • A governance structure that’s commensurate with the risk and complexity of its activities,
  • Minimum and ongoing capital levels and liquidity commensurate with the risk and complexity of its activities,
  • An effective compliance risk management program, and
  • Well-developed recovery and exit strategies.

The white paper also describes the rules and standards that apply to special-purpose national banks and outlines the charter application process. At press time, the OCC was considering comments on its proposal.

Community Bank Reaction

Many in the community banking industry are worried that granting special-purpose national bank charters to fintech companies will give them an unfair competitive advantage. In a comment letter, the Independent Community Bankers of America (ICBA) said that it welcomes changes that will encourage innovation and make it easier for community banks to collaborate with fintech firms. (Many community banks see partnerships with fintech companies as a cost-effective strategy for adopting technological innovations that will help them compete with larger banks.) But the ICBA also expressed strong concern about issuing such charters “without spelling out clearly the supervision and regulation that these chartered institutions and their parent companies would be subject to.”

The OCC’s white paper states that special-purpose national banks are “subject to the same laws, regulations, examination, reporting requirements and ongoing supervision as other national banks.” But, as the ICBA points out, there may be some exceptions. For example, nondepository fintech banks wouldn’t be subject to the Bank Holding Company Act, raising the possibility that large commercial entities would be allowed to own banks as subsidiaries, thus creating worrisome conflicts of interest.

In addition, the ICBA argues that the OCC’s proposal doesn’t clearly define the scope of fintech companies eligible for charters, nor does it adequately define the regulatory capital, liquidity and other requirements that would apply.

Stay Tuned

Community banks should monitor the OCC’s continuing exploration of charters for fintech companies and evaluate the potential impact on their business strategies. Regardless of the outcome, community banks should explore partnerships with fintech companies as a strategy for making cutting-edge banking technology available to banks’ customers.