Regulators turning their attention to the fintech space paves the way for smoother partnerships between banks and fintechs, but it could also elevate fintech firms to the status of competitor, rather than potential vendor.
Comptroller of the Currency Tom Curry has said on more than one occasion this year that the agency is considering special, limited-purpose charters for fintech firms as part of its broader goal of encouraging responsible innovation. He brought up the topic before an audience at Harvard University’s Kennedy School, for instance, during a talk in which he unveiled a new white paper outlining the agency’s research into fintechs as well as its guiding principles for evaluating new technologies in the financial services space.
But the agency is still hammering out what that sort of charter might actually entail, experts in the financial services world are curious about the details themselves.
“What I would imagine here is that they might authorize a national bank to engage in certain types of fintech activities,” said William Stern, a partner in Goodwin Procter’s financial institutions group. “If the OCC concludes national banks could own virtual currencies, it could mean engaging in various types of virtual currency activities, which could involve money transmission.”
As an example, he cited the New York Department of Financial Services’ decision last year in May to grant the first charter of its kind to itBit Trust Co., a virtual currency exchange firm. That essentially gave the firm license to operate as a money transmitter. It also meant the company submitted to a rigorous review process, including examination of its anti-money laundering policies and cybersecurity standards.
Stern also noted that a number of years ago, the OCC quietly announced it would no longer issue limited-purpose charters for national bank trust companies that did not also obtain FDIC insurance and wondered whether Curry’s more recent remarks were meant to signal a reconsideration of that policy – or if the agency simply hasn’t crossed that bridge yet.
For its part, itBit does not accept deposits, but instead holds its customers deposits in FDIC-insured U.S. banks.
“Whether a national bank charter makes sense for fintechs requires answering several important public policy questions,” an OCC spokesperson told Banker & Tradesman recently. “Are these companies providing products and services that banks are authorized to offer? What are the prudential requirements for these types of institutions? How does the innovation promote financial inclusion? These are the sorts of questions that the framework we are developing will help answer, as we work to ensure national banks and federal savings associations remain capable of serving their public purpose in an ever evolving financial industry.”
America’s Behind The Curve
U.S. regulators lag their international counterparts in this area. Fintech firms often have a stronger regulatory framework abroad.
Chris Skinner is chair of the European networking forum The Financial Services Club and the author of several books, including Digital Bank and Value Web. He described the U.K.’s fintech sandbox, a regulatory structure in which fintech startups can seek guidance from regulators, test out prototypes and apply for a restricted license to take their product to market in as little as two months.
“Because they want to be leaders in fintech, they’re saying our role is to encourage growth and experimentation in markets that can serve consumers better,” he said.
Devie Mohan, another London-based fintech analyst, said that because the process is so easy, many fintechs there choose to be regulated.
“Most fintechs understand that being regulated helps them with their scaling up, handling customer issues and increasing trust in the market,” she said.
She added that “an OCC-style charter will be absolutely essential to the fintechs going forward, especially as security and privacy concerns will start coming to the forefront in the next few years, but the UK and EU policies and regulatory bodies are so fintech friendly, we are not expecting or desiring major changes in the regulatory ecosystem.”
Friend or Foe?
Back here in America, OCC regulation of fintechs could carry with it both benefits and drawbacks for traditional financial institutions.
On one hand, having that limited-purpose charter could make it easier for banks to partner with fintech companies, said Kevin Handly, a Boston-based banking lawyer.
“I look at everything as a balance sheet,” he said. “On the plus side, there may be the ability to take deposits, there’s the presumptive qualification to do business with banks, your vendor management problems tend to dissipate.”
Stern expressed a similar sentiment.
“I think it’s potentially helpful to banks,” he said. “One of the issues for banks in terms of getting involved with fintech companies is that it’s not always 100 percent clear what fintech-related activities are permissible for banks versus not.”
While a limited-purpose charter from the OCC isn’t going to obviate the need to perform due diligence on fintech firms a bank might want to partner with, it certainly could mean a bank approaches a chartered fintech differently than it would an entity that is totally unregulated, Stern said.
But bringing fintech companies into the regulatory fold could also mean capital requirements and compliance with the Community Reinvestment Act, Handly said. Those could be tricky for fintech companies that tend to be thinly capitalized and have yet to delineate precisely what their CRA market would be.
Obtaining a banking charter could also mean the banking industry views fintechs as competitors more than partners. Handly hit on another age-old problem, too.
“On the minus side, nobody’s done it yet. While Curry has talked about doing it and there is some precedent he would rely on, nobody’s done it yet,” he said. “So the first one is going to be the bleeding edge and is going to have to pay through the nose to get it done.”
