On July 31, 2018, the OCC announced that it had finalized parameters for its new limited-purpose financial technology national bank charter and is ready to begin taking applications.  This release follows several years of formal deliberation on the topic and coincided with the release of a 222-page U.S. Treasury report on innovation.  Industry reactions have been wide-ranging – will this level the playing field or usher in a FinTech “apocalypse“?

Highlights of the OCC notice include:

• Designation of the charter type as a national bank.  Like its other special-purpose charters, including the non-depository trust company or the credit card bank, the FinTech charter will be a “national association” in the National Bank Act sense of the term.  As the saying goes, membership will have its privileges (and burdens):  capital requirements, examinations, and federal preemption of certain state laws.
• Eligibility for qualified applicants that plan to conduct activities “within the business of banking.”  Pursuant to existing OCC regulations, a limited-purpose national bank not engaging in fiduciary activities “must conduct at least one of the following three core banking functions:  receiving deposits; paying checks; or lending money.”  In its FinTech charter announcement, the OCC notes that it “views the National Bank Act as sufficiently adaptable to permit national banks to engage in traditional activities like paying checks and lending money in new ways.  For example, facilitating payments electronically may be considered the modern equivalent of paying checks.”
• A requirement for a commitment to “financial inclusion.”  We will see how this element is administered.  In theory it provides a non-depository parallel to the Community Reinvestment Act (“CRA”).
• Publication and comment period.  Just as for other types of national banks, applications will feature newspaper publication requirements and will be generally subject to public review and comment.

The OCC stated that its decision to open the door for this new form of national bank “is consistent with bi-partisan government efforts at federal and state levels to promote economic opportunity and support innovation that can improve financial services to consumers, businesses, and communities.”  Comptroller Otting added:

Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition.  It also provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.

Treasury’s report is consistent with these themes, noting, “A forward-looking approach to federal charters could be effective in reducing regulatory fragmentation and growing markets by supporting beneficial business models” and that the OCC should proceed with “thoughtful consideration” of FinTech charter applications.  Treasury also calls out specifically the need for updating regulations that relate to data aggregation, for addressing those which have become “outdated” in light of technological advances (e.g., in the mortgage lending and servicing space, according to Treasury), and for a regulatory approach that enables “responsible experimentation” in the financial sector.

While the OCC indicates that any applicant for a FinTech national bank charter will need to meet high standards generally applicable to a national bank applicant, it explicitly recognizes the emergence of innovative companies that are capable of delivering technology-driven financial products and services that are “more accessible, easier to use, and more tailored to the needs of customers than ever before.”  Among the application requirements:

• Well-qualified organizers, management, and directors;
• A detailed, comprehensive business plan;
• At a minimum, capital meeting leverage and risk-based requirements applicable to all national banks;
• Liquidity management plans; and
• A contingency plan to address significant financial stress that could threaten the viability of the bank.

In addition, referencing its own statutory mandate to assure “fair access to financial services” and “fair treatment” of customers by the institutions it regulates, the OCC calls for a commitment to what it refers to as financial inclusion.  It is unclear how, exactly, the OCC’s application of this mandate will play out over time or across what may be very disparate business models.  As an applicant will need to, for example, (i) identify the needs of underserved markets that could be met by its proposed products, services, and activities; (ii) specify inclusion milestones and metrics it will use to measure its progress against inclusion commitments; and (iii) develop policies and procedures necessary to meet such commitments.  Whether ongoing requirements will broadly resemble a non-depository analog to the CRA or will take a more tailored approach depending on the particular business of a given FinTech national bank remains to be seen.  However,  the greater the volume of prospective applicants, the more likely we are to see a more standardized approach, if only as a matter of efficiency.  This could prove challenging to apply in practice if numerous charters are granted across a diverse set of business models.  On the other hand, a more ad hoc approach may discourage applicants given its uncertainty.

As with other national bank charter applications, an applicant’s required newspaper notice will be followed by a 30-day public comment period, and the OCC states an intention to make a decision within 120 days of submission of a completed application.  The OCC cautions that “review of a special purpose charter application, however, may require additional time and scrutiny.”  Like other OCC banks, approved FinTech limited purpose banks will be subject to ongoing OCC examination and rulemaking pronouncements.

We will see if the culmination of the OCC’s focus on a FinTech charter will be matched with anything like the level of interest that lead up to it, including challenges to OCC’s legal authority to issue this type of charter.  Will U.S. states continue to streamline what Treasury describes as an “existing patchwork” of licensing and oversight requirements?  Whatever the regulatory overlay, these OCC and Treasury publications reflect the ongoing disruption of the financial services marketplace by the pace of technological change, and we expect that innovative providers will continue to set customer and investor expectations.

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