A Consensus 2017 panel discussed a proposal by the Office of the Comptroller of the Currency (OCC) to issue special purpose national bank charters for FinTech companies. Panelists included Ted Rogers of Xapo, Patrick Murck, a fellow at the Berkman Klein Center at Harvard University, David Cotney with Cross River Bank, and former FDIC attorney Pratin Vallabhaneni. Jerry Brito, executive director of Coin Center, moderated the discussion.
In December 2016, the OCC issued a written paper in which it proposed to issue special purpose national bank charters to FinTech companies pursuant to its regulatory authorities under the National Bank Act and Home Owners’ Loan Act. The OCC believed this action would be in the public interest, because it would ensure that FinTech companies operated safely and soundly, it would promote consistency in the application of law across the country, and it would provide a path for FinTech companies to be national banks making the federal banking system stronger.
The OCC has authority to regulate entities that engage in fiduciary activities, or activities that include receiving deposits, paying checks, or lending money. The OCC has interpreted the National Bank Act to be “sufficiently adaptable” for it to regulate national banks that “engage in new activities as part of the business of banking or to engage in traditional activities in new ways.”
If the proposal goes through, FinTech companies applying for a special purpose national bank charter will have to have a robust, well-developed business plan, and a governance structure, capital levels, and liquidity that take into account the risks and complexity of its activities and services. The OCC also expects that these companies will have plans for compliance risk, financial inclusion, and exit strategies.
According to the proposal, the OCC would coordinate with other applicable regulators, such as the Federal Reserve, Federal Deposit Insurance Corporation, and Consumer Financial Protection Bureau, depending upon the nature of the FinTech company.
On March 15, 2017, the OCC published additional documents providing details on the proposal and the evaluation process for charter applicants, and explaining the proposal was limited to entities “engage[d] in a limited range of banking activities, including one of the core banking functions, but does not take deposits and is not insured by the Federal Deposit Insurance Corporation (FDIC).”
Consensus 2017 Panel
Vallabhaneni stated that the United States is falling behind on FinTech innovation and suggested that the OCC’s proposal was a result of a shift in attitude of OCC regulators who were criticized for being too conservative.
Rogers said that if the charter happens, it would be a huge game-changer, but that the requirements to receive it and comply with it would be burdensome. Any company taking this route would incur a lot of expense. However, he went on to say that for some companies the cost may make sense because only one agency will be primarily regulating the business.
The panel also discussed the necessity to have uniform requirements, and the problem with current regulations that were written in response to various crises over the years that fail to synergize as effective guidelines. A regulation may have made sense in the ecosystem in which it arose, but may no longer be relevant in a more dynamic ecosystem. To that end, the panelists argued that a streamlined federal regulatory process needs to be established as opposed to opening the charter process to FinTech companies, as proposed by the OCC. Currently, different requirements by different federal regulatory entities create unnecessary burdens for companies in the business of interstate transmission of currency. On top of that, these FinTech companies face disparate state requirements. One might question the efficacy of having a variety of regulatory frameworks where a company may meet one state's regulation but be unable to meet another’s due to a lack of legislative synonymy.
The OCC’s proposal is not without legal challenge. The panel discussed a lawsuit filed by the Conference of State Bank Supervisors, which claimed that the OCC lacked authority to issue charters to FinTech firms. The state regulators argued that the OCC granted itself authority by redefining what a bank is to include FinTech firms, which do not engage in the business of banking. The lawsuit challenges the OCC’s procedure as a sham to avoid the Administrative Procedures Act, alleging that the OCC acted as if it was simply amending its licensing manual. Essentially, the OCC was downplaying the nature of the change it was attempting to make.
Murck drew parallels between banking technology and the rise of voice over internet protocol (VOIP) providers, such as Skype, in the world of telecommunications. He pointed out that landlines were regulated by the Federal Communications Commission. As a result of the rise of the Internet, VOIP communication was developed, leading people to question, does the FCC govern VOIP providers the same way it does with telephone providers? Murck suggests that regulators are now faced with a similar question, should FinTech companies that are engaged in banking activities, but are not regulated by the OCC, be subject to federal banking regulations?
"This is a business that, if we regulate at a state level it will be a state level business. The business model will be state level too," said Murck. "If we can figure out a framework to regulate it at a national level then it will be a national level business and the business model will be national and to some degree global. We need to create another path."