From robo advisers to digital-only banks to mobile payments, technology is revolutionizing the financial industry and creating a wealth of new business opportunities. To date, a primary roadblock for the financial technology (fintech) industry has been regulatory uncertainty.
The Office of the Comptroller of the Currency (OCC) recently gave the industry a significant boost by announcing that it will begin accepting applications for national bank charters from “nondepository financial technology companies engaged in the business of banking.” The decision is the culmination of a two-year period of study and public comment.
“The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America,” Comptroller of the Currency Joseph M. Otting said in a press statement. “Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”
Fintech Bank Charters
The OCC will use its existing chartering standards and procedures for processing applications from fintech companies. In its policy statement and Comptroller's Licensing Manual Supplement, the OCC also highlighted the following:
- The OCC will evaluate each application on its unique facts and circumstances.
- Fintech companies which obtain special purpose national bank charters will be supervised like similarly situated national banks, to include capital and liquidity commitments as appropriate.
- Acceptable contingency plans to address significant financial stress that could threaten the viability of the bank will need to be submitted by fintech companies seeking national bank charters. Such plans must outline strategies for restoring the bank’s financial strength and options for selling, merging or liquidating the bank in the event the recovery strategies are not effective.
- The OCC will expect each fintech company receiving a national bank charter to demonstrate a commitment to financial inclusion. The nature of that commitment will depend on the company’s business model and the types of planned products, services, and activities.
- New fintech companies that become special purpose national banks will be subject to rigorous ongoing oversight, similar to other de novo banks.
U.S. Treasury Report Supports Fintech Industry
The U.S. Treasury Department also recently published a report that is favorable to the fintech industry. The report on nonbank financials, fintech, and innovation is the fourth in a series on the Administration’s Core Principles for Financial Regulation. (Coverage of prior reports can be found here.) “American innovation is a cornerstone of a healthy U.S. economy. Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector,” said Secretary Steven T. Mnuchin.
The Treasury report, which spans 222 pages, highlights the rapid changes that have taken place in the financial sector in recent years. From 2010 to the third quarter of 2017, more than 3,330 new technology-based firms serving the financial services industry have been founded, 40 percent of which are focused on banking and capital markets. “In the aggregate, the financing of such firms has been growing rapidly, reaching $22 billion globally in 2017, a thirteen-fold increase since 2010,” the report states.
The Treasury report also makes more than 80 recommendations regarding how to modernize the country’s financial regulations to keep pace with technology. Notably, it supports the OCC’s decision to create a fintech charter. “Treasury recommends that the OCC move forward with prudent and carefully considered applications for special purpose national bank charters,” the report states. With regard to how fintech firms receiving such a charter should be regulated, the Treasury report recommends the following:
“OCC special purpose national banks should not be permitted to accept FDIC-insured deposits, to reduce risks to taxpayers. The OCC should consider whether it is appropriate to apply financial inclusion requirements to special purpose national banks. The Federal Reserve should assess whether OCC special purpose national banks should receive access to federal payment services. It is important that a charter not provide an undue advantage to newly chartered firms relative to the banks that have operated within the existing regulatory system for years. Striking the right balance to appropriately enable a tailored regulatory framework is important.”
Among its recommendations regarding other aspects of the financial industry, the Treasury encourages banking regulators to better tailor and clarify guidance regarding bank partnerships with nonbank financial firms, particularly smaller, less-mature companies with innovative technologies that do not present a material risk to the bank.
Opportunities for Fintech Startups
The fintech industry is poised to rapidly expand in the coming years. For startups and investors, the growth presents many opportunities. However, it is important to recognize that additional compliance burdens will likely remain, even as the industry becomes more mainstream. As always, businesses are encouraged to consult with experienced counsel regarding how the many ongoing proposals to amend our financial regulations may impact their business plans.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Robert A. Marsico, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.