After years of discussion, and multiple attempts by traditional finance to block a Fintech Charter offered by the Office of the Comptroller of the Currency (OCC), in a surprise move the OCC announced this week it would begin accepting applications from Fintechs to gain a national charter. The announcement came almost immediately after a report published on Fintech by the US Department of the Treasury said the OCC should “move forward with prudent and carefully considered applications for special purpose national bank charters.”
So why is this so important? Because the US currently suffers under the weight of an antiquated regulatory environment for financial services. The convoluted compliance process impacts traditional finance as well, but in recent years the regulatory process has emerged as a competitive moat that slows Fintech innovation for firms that seek to challenge entrenched incumbents.
If a firm seeks to provide financial services nationwide, too frequently they must apply in each individual state to offer these services. The process is inevitably quite time consuming and expensive. Regulations differ from state to state and compliance is an ongoing issue so it is not a one time event. You have to keep paying the toll. This punitive cost is inevitably born by consumers and businesses alike as it is passed on by these firms to their customers thus representing a draconian tax upon the nation.
While everyone recognizes the need for financial services to be regulated the current environment is duplicative and in need of a good dose of modernization.
But a Fintech Charter in itself may not be the panacea it needs to be. While an important step forward that recognizes the strategic importance of being competitive in Fintech innovation, only time will tell if Fintechs now have a better path to provide new and better services to the nation.
To gain further perspective on the topic, CI reached out to Brian Korn, a partner at the law firm of Manatt. Korn, and his firm, represent some of the biggest names in Fintech including online lenders.
Our discussion is shared below.
The Treasury Fintech report clearly called on the OCC to move forward with a Fintech Charter while simultaneously criticizing the fragmented regulatory environment for financial services. Is it necessary to have regulatory harmonization for a Fintech charter to be effective?
Brian Korn: Fintech charters will not be effective if full federal preemption is not available to holders.
The most important regulators of the Fintech industry so far have been the FDIC and the state banking regulators. FDIC is out of the picture if one does not accept deposits. However, the states have publicly stated and sued the OCC over its authority here. The case was dismissed because nobody had applied yet, and therefore wasn’t ripe.
However, if someone applies – and I believe this is a strategy to get the litigation settled in favor of the OCC – the court will presumably resolve the state-federal dispute. Madden aside, states do not have the best batting average against the federal government when it comes to banking. The largest known unknowns on Fintech charters are:
- How hard is it to get?
- Will I have the same capital requirements as a federally chartered bank? (presumably not or else why not sign up as a bank)
- Can I access the fed discount window and borrower at the fed funds rate? This would solve capital issues at several firms and make the fintech charter very compelling.
- How much easier / harder is it than my current situation? Why not stay with a bank partner where I can currently passport into states on national basis.
- Will Madden and other cases where the states have won vs. federal preemption have a chill on the charter and make it less valuable than using a bank partner(Cross River/Webbank) which is not subject to Madden because they operate in the state under the FDIA, not the NBA which was challenged in Madden.
The banking industry has been the biggest opponent of a Fintech Charter – how will they react?
Brian Korn: Hard to say now that Goldman is in the Fintech business and Bank of America is preparing with its Erica product.
I think many banks continue to believe this is a bad idea.
Gates to entry are high for a reason, and even the largest banks are not immune to capital pressure as we saw in 2008.
Giving banking powers to a Fintech firm simply because it’s new and different is hard to wrap your arms around philosophically. But, I had thought banks would be against marketplace lending and they actually were pretty ho hum about it because they didn’t see marketplace lenders as a threat to their core business, and much of the technology innovation has been acquired or adapted by larger banks.
Any predictions on who this benefits the most? Will it be big online lenders, big tech, emerging firms or all of the above?
Brian Korn: If online lenders can be banks without large amounts of capital and can lend seamlessly across the country, they will benefit. But there are a lot of “ifs” and barriers to that day and the question is who is going to be first to run the gauntlet and fight through certain litigation and harsh regulatory treatment.
Isn’t this a natural step to keep the US competitive in the Fintech sector?
The US market is driven by borrower demand and willingness to overpay for credit. That is what’s driving global investment to US products, which ultimately stimulates availability.
Most Americans are aware of the panoply of online credit options, including payday. I don’t think the current regulatory market is squelching volume or innovation. Having said that, in other countries, notably China and the UK, the reduction in regulatory barriers is key to making innovative products more available.
States, case law, and the number of federal agencies that touch banking put the US at a disadvantage in terms of absolute output and innovation. However, some believe they also act as a meaningful check against the market crashing and burning.