For two years the Office of the Comptroller of the Currency (“OCC”) solicited comments on how it can support responsible innovation in the financial services industry in order to meet the evolving needs of the consumers, businesses, and communities it serves. Based on the stakeholder feedback and public comments received, the OCC developed an agency-wide framework to support responsible innovation throughout the federal banking system and established the Office of Innovation to serve as a clearinghouse for innovation-related matters and a point of contact for OCC staff, banks, and nonbanks to facilitate innovation-related activities. The OCC now has issued a policy that includes considering applications for special purpose national bank (“SPNB”) charters from financial technology (“fintech”) companies that are engaged in the business of banking but do not take deposits.
Should a fintech company apply for an SPNB?
Fintechs are not a homogenous group. They might be money transmitters, payment processors, online lenders, partner with depositories to provide products or services, or engage in some other financial activity. Each entity will make its decision to apply for an SPNB based on its unique characteristics, but the bottom line still will be profitability, which is a critical criterion that the OCC will review in its examination of any application.
All applicants can expect a rigorous analysis by the OCC, but the benefits of obtaining an SPNB charter can be substantial. A recent GAO report noted that for a non-deposit financial entity that has operations in all 50 states, it could expect to undergo multiple state examinations within a given year due to the particular requirements in each state. The GAO report quoted staff from a state regulatory association acknowledging that “states may examine fintech firms subject to coordinated multistate exams 2 or 3 times per year, and as many as 30 different state regulators per year may examine firms that are subject to state-by-state exams.” Trading 30 examinations per year for a single examination, no matter how strict, can be an appealing factor for many companies.
Being an SPNB also would make it easier to export interest rates nationwide, consolidate compliance functions and eliminate a physical presence that many states require, all of which improve profitability. This new national bank charter will bring with it a certain status or cache, perhaps allowing the entity better access to capital to fund operations and growth since it will not have access to low cost deposits that are otherwise available to traditional banks.
What to Expect When Applying
The OCC application process will be rigorous, as it currently is for traditional national bank charters. The OCC will consider whether the proposed bank has a reasonable chance of success, will be operated in a safe and sound manner, will provide fair access to financial services, will promote fair treatment of customers, and will ensure compliance with laws and regulations.
Factors to be considered in the application process will include the applicant’s business model and proposed risk profile, whether the proposed bank has adequate capital and liquidity to support the projected volume of business, as well as management and staff with appropriate skills and experience. These are the same criteria that the OCC would apply to any organization seeking a national bank charter.
The policy statement and new additions to the Comptroller's Licensing Manual Supplement stress:
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Every application will be evaluated on its unique facts and circumstances.
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Fintech companies that apply, qualify for, and receive special purpose national bank charters will be supervised like similarly situated national banks, to require capital, liquidity, and financial inclusion commitments as appropriate.
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Fintech companies will be expected to submit an acceptable contingency plan to address significant financial stress that could threaten the viability of the bank. The plan would 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.
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The expectations for promoting financial inclusion will depend on the company’s business model and the types of planned products, services, and activities.
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New fintech companies that become special purpose national banks will be subject to heightened supervision initially, similar to other de novo banks.
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The OCC has the authority, expertise, processes, procedures, and resources necessary to supervise fintech companies that become national banks and to unwind a fintech company that becomes a national bank in the event that it fails.
Bumpy Road Ahead?
The NY State Department of Financial Services and the Conference of State Bank Supervisors previously filed separate suits against the OCC to stop it from issuing SPNB charters. These suits were dismissed primarily because they were not ripe for consideration. Now that the OCC has invited fintechs to submit applications for an SPNB, it is expected that these suits will be refiled. One of the claims made in the previous suits was that the process the OCC used did not follow the requirements of the Administrative Procedure Act in that there was no formal rulemaking employed in the process.
In inviting SPNB applications, the OCC has relied on its existing chartering authority found in (12 CFR 5.20(e)(1)). That regulation provides that:
(1)In general.
(i) The OCC charters a national bank under the authority of the National Bank Act of 1864, as amended, 12 U.S.C. 1et seq. The bank may be a special purpose bank that limits its activities to fiduciary activities or to any other activities within the business of banking. A special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: Receiving deposits; paying checks; or lending money. The name of a proposed national bank must include the word “national.”
The OCC has stated that no SPNB charter will be issued for any applicant that proposes to take deposits. Eligible applicants will have to either make loans or pay checks (which could broadly be defined by the OCC to include payment processing, transmitting funds or other activities that utilize the payments system). Whether or not any legal challenge to the OCC proposal to issue an SPNB occurs, it is expected that the OCC will process applications as they are submitted.
Typically, regulation of financial innovators lags behind the development of creative ways to provide financial services to consumers and businesses. As the banking industry changes, the OCC recognizes that companies that engage in the business of banking in new and innovative ways should have the same opportunity to obtain a national bank charter as companies that provide banking services through more traditional means. While an SPNB might not be the answer for many fintechs, for entities that operate on a nationwide basis, it could provide an opportunity to serve a broader community of consumers and businesses in a more efficient and profitable manner.
