Fitch Ratings is out with a note on the recently announced Comptroller of the Currency (OCC) Fintech charter. The OCC has crafted a document to allow digital banks to become regulated entities by receiving federal bank charters. Fitch is of the opinion the Fintech charter could have significant impacts on the operating strategies and regulatory environments of these innovative firms. And the impact may not be all good.
According to Fitch, choosing to pursue a Fintech charter to become a special purpose bank would mean greater regulation and capital requirements, albeit less than those imposed upon a bank that takes insured deposits.
“Increased reporting and compliance burdens, as well as capital costs, could weigh on profitability, all else being equal. The requirements of a charter could also affect the agility and lower-cost business strategies of some fintech firms that have leveraged their less regulated status into comparative advantages over banks.”
Fitch believes that not all Fintech firms will be interested in applying for th Fintech charter because of the regulatory risk. Fitch states that many view themselves as purely tech-driven, which makes sense. The higher capital and other costs that would act as a distinct disincentive. Fitch also says that equity investors have also historically assigned higher valuation multiples to technology companies than to balance sheet lenders that generally employ greater leverage and are more capital intensive, which could dissuade some fintech companies from this approach.
Fitch also says that equity investors have also historically assigned higher valuation multiples to technology companies than to balance sheet lenders that generally employ greater leverage and are more capital intensive. Another deterrent to the Fintech charter.
As for benefits, some Fintech firms such as marketplace lending platforms may no longer have to partner with banks to facilitate loan origination. This echoes a similar comment that Moody’s made just a few days back. A Fintech banking charter may also reduce uncertainty regarding state usury rate caps that have become a more prominent issue recently following the Madden versus Midland decision in June, which stated that agreed upon interest may not be enforceable in certain circumstances.
A special purpose digital bank charter may not allow for insured deposit-taking, which would require FDIC approval and regulation, but in Fitch’s opinion, it could be an initial, gradual step in that direction.
Insured deposit funding would be a much more significant shift for Fintech companies’ credit profiles, as reliance on wholesale funding is a primary constraint for many business models.
Fitch states that marketplace lending that targets the high end of the credit ladder may find lower cost and more stable funding with insured deposits – but competition may increase as margins narrow. Of course the regulatory oversight and compliance would increase thus off-setting benefits further.