US fintech charter: banks to get on the defensive?

Editorial: Banking landscape and innovation among fintechs threatened

By Michael McCaw | 1 August 2018

On July 31, the US Office of the Comptroller of the Currency announced it would begin accepting national charter applications from fintech firms, granting them federal rather than state oversight for the first time.

The impact could be seismic for financial service providers in the country.

For fintech and online lenders, it should come as welcome news: instead of complying to rules in each state in which they have presence, they have the opportunity to be governed by a single, nationwide regime.

From an operational perspective, it could mean easier and cheaper compliance protocols. The savings could be passed onto their clients and allow for better services where they also cross state borders.

The OCC will now be able to accept applications from non-depository fintech firms for a special purpose national bank charter. It means fintech firms will no longer be forced to partner with a traditional bank to attempt nationwide growth rather, they can operate under the single federal license across the country.

In a report endorsing the OCC’s announcement, the Treasury said the charter could support non-bank financial institutions and foster technological innovation. But not everyone is convinced.

The Independent Community Bankers of America has previously said a fintech charter could allow smaller lenders to circumvent the country’s onerous and expensive banking rules. In order to contain any risk associated with a wider reach of lenders, the OCC will only accept applications from non-depository fintechs, and while that in itself puts some sectoral firms at a disadvantage, it also overlooks the innovative nature of the fintech industry.

“Since fintech companies are notorious for changing their business plans frequently, it is beyond reasonable belief that a fintech national bank will not at some point accept deposits—which changes it into a run-of-the mill national bank,” said Joseph Lynyak, partner at Dorsey & Whitney, a law firm.  “If that occurs and it fails, will the FDIC step in if it has not granted deposit insurance?"

While the rule change will be embraced by fintech firms across the US, any such optimism could be short lived. Even though President Trump recently paved the way for Washington to roll back the Dodd Frank Act, the country’s major banks have been subject to a growing list of rules and regulations over the past decade. They’re unlikely to put up much of a fight should smaller, nimbler lenders breeze into the market and bypass the rules.

As Lynyak puts it: "It is hard to conceive that insured national banks will allow the OCC to allow a fintech entity a national bank charter without insisting that all national bank obligations apply—which is what fintech companies want to avoid". 

Coming soon: Dodd Frank rollback: Capital rewards and US markets | webinar | August 7 

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