Customers Lose as Fintech Charter Shot Down by US District Court
This week, Judge Victor Marrero of the US District Court for the Southern District of New York, ruled against the Office of the Comptroller of the Currency (OCC), in its ongoing legal battle to utilize a “Fintech Charter”, or special-purpose national bank charters, to provide a federal path for Fintechs seeking to operate across the country to provide banking services. The case was brought against the OCC by the New York State Department of Financial Services (DFS).
Lawyers for the OCC attempted to dodge DFS’s case by limiting it to Fintechs which do not hold deposits to those that “have a nexus in New York State” thus mitigating the damage to New York only.
To quote the federal attorneys:
“OCC’s proposed geographic limitation on the scope of the judgment is also necessary to preserve the ability of other courts to consider this same legal issue. The Supreme Court has explicitly affirmed the importance of allowing for multiple lower court opinions, particularly where the government is involved: “[g]overnment litigation frequently involves legal questions of substantial public importance,” and allowing one court to issue a definitive ruling against the government in such cases “would substantially thwart the development of important questions of law by freezing the first final decision rendered on a particular legal issue.”
In the end, the OCC lost the argument. DFS gained the support of the New York Attorney General which addressed the court in a written document stating:
“… if OCC were to begin issuing national bank charters to Fintech companies that do not currently have a New York nexus, serious questions will arise about whether and how those non-parties will be bound by any final judgment here if they later develop a New York nexus. Ultimately, OCC charters are not limited in geographic scope, and thus, any limitation at the time of licensure is meaningless.”
The odyssey of a well defined, regulated path for Fintechs to gain a national charter is one of many years. First proposed in 2016 by former Comptroller of the Currency Thomas Curry, the attempt to update banking rules in recognition of the internet and digital finance has been assaulted on multiple sides.
In mid-2018, the OCC announced that it would begin accepting Fintech Charter applications following a supportive report by the US Department of Treasury. The initial euphoria of progress soon dimmed. The struggle continues at this moment as various entrenched sectors of banking seek to kill innovation in support of analog finance.
The debate demands a global perspective as multiple international jurisdictions have not suffered from the same parochial battles. In the UK, there are multiple digital-only banks that are now providing services to millions of consumers and businesses. Several have announced services for US customers.
In recognition of the digitization of banking, last year Hong Kong announced a defined path for digital banking and quickly approved eight different applicants to set up Fintech banks. Singapore soon joined the growing herd with a ruling that will see 5 digital-only banks (old banks may provide similar services).
If the US wants to maintain its prominence in the global banking sector it is time for regulators to stop creating unnecessary hurdles and help the country innovate. It is the right decision.
The ultimate outcome of this legal tussle is one where Fintechs win and reactionary regulators and old banks inevitably lose. Whether it comes from a legal decision or Congress decides to step up and address the issue, it is just a matter of time. In the end, consumers and small businesses are the biggest losers for now – an unfortunate truism.
Expect the OCC to file an appeal soon.