Fintechs Firms May Soon Get Bank Charters

Even though fintechs in the capital markets space will not be covered at present, this could be a first step toward greater oversight for these companies.

Comptroller of the Currency Thomas J. Curry announced his office will take comments from the public before it decides on applications from fintech firms to get charters. Getting a special-purpose charter allows organizations to undertake some banking activities on a limited basis. This means firms can lend money, collect debt and issue debit cards. What special purpose banks cannot do, however, is trade in securities and commodities.

Curry said the decision to move forward with applications is a way to adapt to changing customer needs that have evolved as faster, more efficient, and more accessible products and services are in high demand.

"Fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and business take more control of their financial matters," Curry said in a speech. "Chartering companies that are finding new and better ways of satisfying needs is another step toward supporting responsible innovation that is good for consumers, good for the federal banking system, and good for the country."

He also noted fintech firms will not be required to seek special-purpose charters but rather will have the option to do so, particularly if these companies do not want to partner with existing banks.

"They are trying to determine what regulatory bucket, if any, should be applicable to the various types of FinTech firms. It appears the regulators do not want to treat FinTech firms as square pegs to be forced into existing regulatory round holes." -- Richard Levin

For the purposes of the charters, the term "fintech" is defined broadly. Even the OCC notes that "fintech companies vary widely in their business models and product offerings. Some are marketplace lenders providing loans to consumers and small businesses, others offer payment-related services, others engage in digital currencies and distributed ledger technology, and still others provide financial planning and wealth management products and services."

The banking sector is the OCC's primary remit. The regulator notes that the number of fintech companies in the US and UK stands at over 4,000, and in just five years investment in this sector has grown from $1.8 billion to $24 billion worldwide. So the OCC's decision could have far-reaching effects.

A Sign of Things to Come?

The OCC's decision acknowledges that fintechs are already competing with national and state banks. Chartering these firms offers regulators the chance to openly vet risks.

Richard Levin, chair of fintech and regulation practice at law firm Polsinelli, tells WatersTechnology that the OCC seems to be making a distinction between certain technologies to see which ones fall into its purview. He says the OCC's formal proposal comes on the heels of other regulatory agencies openly questioning if the sector can, and should, be regulated.

"It is promising to see the OCC publish their paper on special-purpose bank charters, the Securities and Exchange Commission held a fintech forum, and the Federal Reserve recently issued a paper on distributed-ledger technology," Levin says. "They are trying to determine what regulatory bucket, if any, should be applicable to the various types of fintech firms. It appears the regulators do not want to treat fintech firms as square pegs to be forced into existing regulatory round holes."

Levin adds he doesn't consider what the OCC is proposing to be an overreach because it wants to deal only with a limited scope of banking and did not name high-frequency trading and distributed-ledger technology as areas it will look at.

For Levin, only firms with strong capital will be able to survive regulation so startups may have to shut down if they cannot comply.

Ability to Move

Bryan Hubbard, a spokesperson for the OCC, tells WatersTechnology the decision is not rule-making and the office will only use public comments to inform its decision when granting fintechs charters. He adds the OCC is not working on a timeline for chartering fintechs.

"This will give fintechs the ability to operate in all 50 states, relieving them of getting licenses in each state," he said. "It also gives them the value to say to stakeholders that they are regularly examined."

Regulators have recently turned their eye to the possible risks of the fintech boom. The Securities and Exchange Commission's Office of Compliance, Investigations and Examinations (OCIE) asked for additional resources to conduct examinations into stress testing, continuity planning, conflicts of interest, consumer data protection, and recordkeeping.