Granting bank charters to fintech companies

A new OCC policy intended to support responsible innovation

Last week, the Office of the Comptroller of the Currency (OCC) signalled that some financial services warrant a novel regulatory approach when it announced that it will begin to issue special bank charters for fintech companies. The announcement comes after a series of indications that the OCC was trying to encourage innovation found in fintech companies while also protecting consumers. Some see the announcement as a boon for fintech, legitimizing the role they play within the financial services ecosystem. The decision also comes on the heels of the CFPB affirming policies to protect consumers’ right to access personal financial data in third-party platforms, a tenet of the fintech ecosystem.

Under the new OCC approach, some fintech firms will be able, but not required, to apply for a “special purpose national charter.” A regulator-issued charter is required for any firm to operate as a bank in the United States. Once approved, the charter subjects a firm to certain standards such as liquidity and capital requirements, which can be enforced by the relevant regulator -- in this case, the OCC. Charters can be granted at the federal or state level.

Eligibility for the new fintech charter will be limited to firms that have a fiduciary responsibility or perform an essential banking activity — namely, taking deposits, paying checks, or lending money. The OCC has previously applied the “special purpose” designation to trust and credit card banks, among other types of entities.

In general, fintech firms that qualify would be subject to the same regulatory requirements as any other national bank, such as anti-money laundering (AML) laws. However, statutes specific to FDIC-insured banks would likely not apply to these special purpose national chartered banks since they are not benefiting from insurance. Applying only the relevant laws needed to protect consumers would make it easier for newer fintech firms to responsibly participate in this ecosystem.

The OCC move is generally favored by those promoting responsible innovation in the digital financial services ecosystem. By enabling a national charter, the OCC is attempting to strike a balance between regulatory clarity and consumer protections. Whereas many fintech companies have partnered with banks in the past to offer critical financial services, they will soon have the option to be recognized as a distinct type of bank. Digital lenders such as On Deck Capital are considered particularly likely to apply for a charter.

The fintech charter announcement caps what has been a busy year for the OCC and fintech. In March, the agency released its eight guiding principles for responsible innovation in firms regulated by the OCC. These principles were operationalized this autumn with the establishment of an Office of Innovation within the OCC. The innovation office resembles the CFPB’s Project Catalyst, which has emerged as a useful conduit between the CFPB, fintech firms, traditional financial institutions, and consumers.

The OCC is now seeking public comment on the specific criteria and process under which it will consider fintech charter applications. The comment period will run through January 15, 2017, and more information can be found in the OCC’s whitepaper accompanying last week’s announcement. The bureau is expected to begin accepting charter applications sometime in 2017.

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