The Office of the Comptroller of the Currency (OCC) has confirmed its intention to explore issuing limited-purpose national bank charters to fintech firms engaged in banking activities — commonly called the “fintech charter.” Earlier this year, the OCC had signaled this possibility. Now, through the release of a policy paper titled “Exploring Special Purpose National Bank Charters for Fintech Companies” (FinTech Paper) and a speech by the Comptroller on Dec. 2, the OCC has taken a more formal step.
The FinTech Paper
The FinTech Paper explains the OCC’s authority to issue limited-purpose charters, which have been used to charter trust banks and credit card banks. The FinTech Paper takes the position that under the National Bank Act, a limited-purpose charter can be issued to a bank engaged in at least one of three core banking activities — receiving deposits, paying checks or lending money — or in trust activities. A new fintech charter would create a bank organized under the National Bank Act rather than state corporate law, and the bank would be subject to the regulations and limitations that generally apply to banks under the National Bank Act. A limited-purpose bank would only require Federal Deposit Insurance Corp. (FDIC) insurance if it accepts deposits. The bank would likely need to become a member bank of the Federal Reserve System, but its parent company(ies) would become subject to the Bank Holding Company Act only if the bank’s activities met the thresholds under that statute (for example, by accepting insured deposits). The jurisdiction of the Consumer Finance Protection Bureau (CFPB) over a limited-purpose bank would depend on whether the bank is FDIC-insured. An insured limited-purpose bank would be subject to CFPB jurisdiction to the same extent as other national banks (supervisory oversight beginning at $10 billion in assets), and an uninsured bank would be subject to CFPB jurisdiction to the same extent as state-licensed entities (supervisory oversight based on particular activities as well as larger participant rules).
The OCC has outlined a number of baseline regulatory expectations that would apply to any banks with a fintech charter — including a business plan, corporate governance structure, capital plan (including capital requirements commensurate with the risk and complexity of both on- and off-balance sheet activities), liquidity plan, robust compliance management system, plan to address financial inclusion (although the Community Reinvestment Act would not apply to banks that are not FDIC-insured) and recovery and resolution plans. The chartering process would generally follow the process for a full-service national bank, though with tailored requirements to address the special circumstances of the fintech charter.
The OCC has requested comments from the public on the FinTech Paper and the proposal to issue fintech charters. The FinTech Paper includes a specific list of 13 questions for public comment. Comments are due by Jan. 15, 2017.
Observations and Issues
The OCC’s FinTech Paper and the possibility of a fintech charter have generated significant interest from companies engaged in many different fintech activities — from online lending programs to money transmission businesses to prepaid cards to bitcoin participants. The federal charter may provide a more efficient authority to conduct business than obtaining state licenses from each applicable state. However, the new FinTech Paper is only one step in the process, and the issuance of the first fintech charter does not appear imminent. In addition to the comment period and development of a final policy document contemplated by the OCC, any initial licensing process is likely to be lengthy as both the OCC and the charter applicant evaluate particular requirements and conditions. In addition, the change in administration and the upcoming expiration of the Comptroller’s term of office could affect the OCC’s ultimate decisions and timing in this area.
Many questions have been raised about the precise parameters, benefits and risks of a fintech charter, including the following:
- What minimum activities and limitations would apply to a special-purpose bank’s activities? The FinTech Paper indicates that the National Bank Act requires that the entity engage in at least one of the three core banking activities or in trust activities, but it is unclear what the OCC would consider to fall within the scope of those baskets. Similarly, the proposal leaves substantially open the range of activities that the OCC may consider appropriate for the special-purpose charter.
- If a national bank (even with a limited charter) holds deposits, that would trigger application of FDIC deposit insurance and the Bank Holding Company Act requirements. This could be an issue for stored value card or even some payment companies, if they are holding any funds that would qualify as deposits. Prior FDIC opinions have concluded that stored value card funds are deposits.
- The requirement that a bank with a fintech charter address financial inclusion issues is not fully developed in the FinTech Paper. It may prove to be a part of the price that applicants are willing to accept for the benefits of the charter, or it may prove substantial enough to discourage some applicants.
- As noted in the FinTech Paper, federal regulation of banks is quite robust and comprehensive. While a fintech charter may be more efficient because it replaces 50 state licenses with one federal charter, OCC regulation of the business may be intrusive and detailed.
- The manner in which the OCC will set capital requirements for banks with fintech charters is unclear. While capital requirements may vary depending on the bank’s specific business plan, it appears that applicants should generally expect to maintain substantial capital. Moreover, it is very possible that the OCC will require any company in the chain of control to commit to be a source of capital and liquidity for the fintech charter bank, and it may seek some financial assurances to support such a commitment.
- The licensing timeline for obtaining a charter is unclear. The timeline to obtain state licenses is highly variable — in some states it can take just a few months, but in other states obtaining a license may take a year or more. The comparative timelines may influence whether new fintech companies choose a state or federal model for their business.
A national bank fintech charter creates a new potential path for companies to obtain authority to conduct banking-related activities, but many questions remain. FinTech companies should monitor these developments as they consider potential paths for conducting their business.