The new ruling that will see the US Office of the Comptroller of the Currency (OCC) begin accepting national charter applications from fintech firms – essentially granting tech-first companies bank-like status – could see agile, progressive entities enter the market.
“The OCC has truly opened a window for all those fintech companies who want to get a banking license without having to become a heavy, ineffective bank – like we see around the market today,” says Igal Rotem, CEO, Credorax.
The OCC will be able to accept applications from non-depository fintech firms for a special purpose national bank charter, although it’s thought the regulator has not yet finalised the relevant documentation for submitting applications.
The ruling will benefit segments of the economy currently underserved by major banks. For Credorax, which was the first organisation to receive a merchant acquiring bank status in the state of Georgia with plans to apply for the nationwide license, that’s the ecommerce and SME market. Major banks have shied away from those markets, says Rotem, and fintech organisations are well suited to serve the sector.
“If you are a 50 or 60 or 70 year old bank that has a certain way of doing business - and they may be doing a very good job but they are not catered to deal with a guy whose business is going double digit every year, he’s experiencing hyper growth,” he says. “He needs a different skillset.”
While specific subsets of banking will change, the OCC ruling will not herald a major overhaul for Wall Street banks, says Rotem. “I don’t think that we will see the JPM, or Chase or Citi or HSBC - these giant banking entities are not going to be changed by the recent news. The barrier to entry for these giant activities is something that even a very well run fintech company cannot do.”
However, big banks are still wary of the potential the new market participants could bring to the market, and are lobbying to make changes to the ruling.
“What I’m hoping is that political pressure will not deter the charter, because I think the big banks – without the right justification behind it – are trying to put more constraints on it,” says Rotem. “And there are fearing for it without understanding the dynamic. I don’t think the big banks face any fears with it, and all the community banks in the US definitely don’t – their business is very localised and very centred.”
Much has been made in recent years of the regulatory constraints put on the banking system, which Rotem points out has created a “painful” experience for businesses trying to set up accounts with know your customer (KYC) demands, but has become too generic given the range of services provided by different banks. The OCC ruling, however, is a step in the right direction, and will allow companies an easier route to market.
“It really came from the endless pain that was conveyed to policy makers in the Treasury,” says Rotem. “People are complaining day in day out about how difficult it is to open a bank account for the SME. Especially in the ecommerce space.”
Credorax – which also has banking licenses in Europe and Japan – is an all-cloud bank platform. Its cloud status allows the firm to upgrade its systems with greater ease and move with technology, says Rotem. It’s something many established banks struggle with, he says.
“One of the biggest pains that banks have faced over the past few years has been how they add more technology when the core banking system is outdated,” he says. “The big mainframes that make up 80% of global banks are very difficult. The upgrades are always a challenge.
“If you’re a cloud bank, the ability to upgrade and add more and more technology and to implement the new technology becomes so much simpler. And you remove the burden of maintaining the hardware because you use the cloud and its almost banking as a service as opposed to banking as a physical location.”