The Conference of State Bank Supervisors (CSBS) has been rebuffed once again in its attempt to stymie looming Fintech banking competition.
In a decision issued yesterday (September 3, 2019), the US District Court for the District of Columbia ordered that the CSBS pursuit of a lawsuit against the Office of the Comptroller of the Currency (OCC) and the issuance of “non-bank charters” was denied. The defendant’s motion to dismiss was granted and dismissed without prejudice.
John Ryan, President & CEO of the CSBS, issued the following statement following the defeat:
“The Conference of State Bank Supervisors’ suit against the OCC seeks to make clear that the OCC may not flout Congress and preempt state laws by granting national bank charters to nonbanks. Yesterday’s decision did not rule on the merits of the case, and our position that receiving deposits is an indispensable part of the business of banking is unchanged. State financial regulators continue to support the New York Department of Financial Services’ (DFS) case against the OCC, which is proceeding over the same objections the OCC raised in the CSBS suit.”
This is the second time the CSBS has seen a similar lawsuit tossed out by the courts, largely because not a single Fintech Charter has ever been issued due to these politically motivated challenges by special interest groups.
The Court, under Judge Dabney Friedrich, granted the motion to dismiss “because CSBS continues to lack standing and its claims remain unripe. And the Court will deny CSBS’s motion for discovery because the OCC has agreed to provide the information necessary to establish standing and because that information is publicly available.”
Judge Friedrich pointed out, somewhat ironically, something that should have been obvious from the beginning:
“CSBS still “fails to plead an injury in fact” that is either actual or imminent.”
There has been no harm as there has not yet been a single Fintech Charter issued.
The court noted that, in the previous ruling, the rationale for denying the CSBS still stands:
“[T]he identification requirement serves an important gatekeeping role. It highlights the challenge of determining whether any particular state will be injured before a particular Fintech, if any, receives a charter. A national charter could injure Indiana without injuring Alaska, or vice versa. As it stands, the complaint does not equip the Court to decide which state to consider when evaluating standing, what role the CSBS member has in that state’s regulatory system, or whether there are any Fintech companies within that state that are likely to receive a national charter. And the identification requirement ensures that the Court considers the likelihood of injury to individual members of the organization, thus preventing the organization from gaining standing by combining several alleged injuries that are inadequate separately.”
The court stated that any Fintech Charter applicant would be public information as the OCC provides notices of new applications in a weekly bulletin.
Perhaps the biggest loser in all of this remains the consumer and small business. Digital banking is growing rapidly in multiple jurisdictions outside the US. Digital banks in the UK, such as Revolut, Monzo, and more, are lining up customers with their mobile-friendly platforms that are light on fees and high on service and convenience. Some of these digital-only banks are pushing into the US having already cut their teeth in more innovation-friendly country’s.
In Hong Kong and Singapore, regulators have created specific virtual bank or digital bank licenses that are ONLY available for Fintechs (non-bank entrants). The goal is to enable innovation and competition as policymakers recognize the benefits of change for consumers which is facilitated via balanced and appropriate regulation.
In the US, many Fintechs have leveraged regulatory arbitrage to provide banking services by partnering with a chartered bank. While clumsy, the workaround has been effective for some early entrants as they build out their platforms and user base. A single US digital bank appears to be poised to gain a bank charter but the process has taken years (and is still not finalized) and untold sums of money.
But still, the byzantine labyrinth of both state (all 50 of them) and federal regulations creates an almost insurmountable hurdle for new entrants unless they are exceptionally well-capitalized. It is this mish-mash of analog rules the CSBS seeks to maintain to the benefit of their members.
The CSBS has previously stated that the OCC’s attempt to preempt state law “breaks the chain of accountability between regulator and consumer.” Supposedly, this is because the OCC is unable to regulate banks effectively.
Of course, the OCC has pointed out in the past that Fintechs applying for a charter will be held to the same rigorous requirements that any other federally chartered bank would necessitate be they digital or brick and mortar based.
The CSBS probably, quietly, recognizes the folly of the polemic and appears to be seeking a way to maintain relevance while perhaps enabling innovation.
In 2018, the CSBS created a “Fintech Advisory Panel” in a claimed attempt to “harmonize their licensing and supervisory practices.” Since the announcement of the Panel, the CSBS has been oddly quiet regarding any meetings or progress.
In June of this year, the CSBS revisited its “Vision 2020” plan where, initially, 23 states committed to a “multistate agreement that standardizes key elements of the licensing process for money transmitters and other money services businesses.” But by providing a harmonized regulatory approach, isn’t the CSBS admitting a single federal path for regulation makes more sense? Go figure.
The OCC is still not out of the woods yet. As previously mentioned, the New York Department of Financial Services (NY DFS) continues to pursue a similar lawsuit. Meanwhile, the OCC Fintech Charter remains a distant possibility instead of reality in the fast-growing global realm of digital financial services.