The issuance of a banking charter to digital bank Varo this month could inspire US fintechs to reconsider their strategies, according to Michael Breslin, partner and Fintech Industry Team chair, Kilpatrick Townsend and Stockton LLP.
“I do think that we’re going to start seeing more charters issued to entities like Varo and if the [Federal Reserve] can monitor them properly and they want to accept the testing requirements that the federal government will put on them, that is probably where we’re going to start seeing things go. We’re on the cusp of seeing what is going to be the impact of that,” says Breslin.
On August 13, the OCC defended its special purpose national bank (SPNB) charter, also known as the fintech charter, before the Second Circuit, following a challenge by New York’s Department of Financial Services (NYDFS). The appeal follows 2018’s Lacewell v. OCC trial, which concluded that the OCC did not have the authority to grant National Bank Act charters to nondepository institutions.
“One of the reasons you’re not seeing a lot of applications for the SPNB [charter] is because of this cloud of litigation that’s over it. Why should companies put all this effort into filling out the application, going through hiring lawyers to put all this stuff together, if we don’t even know if this is going to be a valid thing? It could be all for not,” says Breslin.
According to Jeffrey Naimon, partner, Buckley LLP, Varo’s decision take on a full purpose charter may signal a shift in the industry.
“It is unclear whether the issuance of this charter for Varo is going to be the new path,” he says.
“The long timeframe makes it difficult for [the fintech charter] to be a saviour, but on the other hand the prospect of having one charter is so attractive … I think we’ll continue to see successful fintech companies look very seriously at either getting a full purpose charter like Varo did, or applying for the fintech charter if they really can’t see themselves using the full charter.”
The ongoing litigation follows a persistent wave of state backlash over regulatory jurisdiction and the changing business of banking. The NYDFS’s position is that deposit taking is integral to banking, a tenet that would be changed fundamentally by the fintech charter.
“Until the litigation concern is wrapped up and addressed one way or the other, it’s going to be difficult for a fintech to put millions of dollars and management resources into pursuing a charter that it’s not sure it will ever use,” says Naimon.
“Even then, it’s going to sign up for a multi-year process of getting a charter – it’s a slow process because bank regulators are very careful in how they vet applicants for a bank charter.”
Fintech’s future in the US
If the current appeal goes on the thwart the fintech charter, Naimon believes the US will become a more hostile environment for fintechs.
“We have fewer fintechs per capita here than in the UK because we have such a difficult, fragmented regulatory environment,” he says, referencing long-standing difficulties between state-level and federal regulators.
But some believe the US could still be lucrative.
“The States continue to be an attractive place for fintechs,” says Breslin.
“I don’t think the outcome of this lawsuit will make the States less attractive, I just think it’s going to either solidify the regulatory landscape in a way that could make it easier for certain types of fintechs to operate the way they want. But at the same time, all of these companies are unique, so some may not care,” he says.
Despite uncertainty, Breslin points out that OCC continues to take a strong pro-fintech position that breeds encouragement. In May, the regulator announced plans for a special purpose payments charter for payment companies.
“They announced the payments charter while the fintech charter lawsuit is pending … even while the case is pending and who knows how it’s going to come out, the OCC is continuing to try to find alternate ways to make the States a more welcoming, more consistent, unified regulatory landscape for companies that are going to operate across the country,” says Breslin.
According to Naimon, the US regulatory structure will need to change in order to keep up with tech innovation.
“The technology is moving and the consumers are moving, so the bank regulatory structure will have to react to that or it will lose out. It’s not about the OCC doing this crazy new thing; it’s that they absolutely need to keep pace because customers aren’t going to be waiting around,” he says.