Should Fintech companies that offer banking-related products be granted special purpose national bank charters? The answer, from the U.S. Office of the Comptroller of the Currency (OCC), is “yes.”
Things are vastly different from when Abraham Lincoln first established the national banking system and the Office of the Comptroller of the Currency back in 1863. Today’s financial services industry is diverse and evolving, prompting the OCC to say there’s a need to develop a framework to support responsible innovation in the federal banking system.
More than 85 million Millennials have entered into the U.S. financial marketplace and with them came the emergence of thousands of technology-driven non-bank companies offering new approaches to financial products and services. The number of Fintech companies in the U.S. and the U.K. has in five years ballooned to more than 4,000 and grown to $24 billion worldwide.
“New technology makes financial products and services more accessible, easier to use and much more tailored to individual consumer needs,” Comptroller of the Currency Thomas J. Curry wrote in a December 2016 report supporting the concept of setting up a structure to regulate these emerging platforms. “If the OCC decides to grant a charter to a particular Fintech company, the institution would be held to the same rigorous standards of safety and soundness, fair access and fair treatment of customers that apply to all national banks and federal savings associations.”
The OCC currently charters just three specific types of special-purpose national banks that do not accept deposits. Those include bankers’ banks, credit card banks and trust banks. It is now proposing to extend the opportunity to apply for those special purpose charters to firms that participate in lending money, paying checks or receiving deposits.
“Preventing this class of companies from having that same option hurts the nation’s dual banking system and could make the federal banking system less capable of adapting to the evolving business and customer needs of tomorrow,” Curry said.
In general terms, better oversight—albeit voluntary—helps to protect consumers, particularly those who may be vulnerable to predatory lending practices that are unfair or abusive.
It could also help to lower the cost of capital and promote economic growth.
The special charter proposal also allows regulators and companies to vet risks and gauge a company’s change of success. It levels the playing field by applying the same statutes that currently apply to national banks to those Fintech companies that choose to apply for the national charter.
In addition, it would increase supervisory standards to provide enhanced transparency and compliance in the national financial industry. This would include a “top-down, enterprise-wide” commitment to understanding and adhering to applicable laws and regulations, according to the OCC.
While in some ways the national charter option could help reduce the cost of capital in the marketplace through heightened market competition, there are other ways in which it may actually make it more expensive.
Compliance with the national standards can be very expensive, and that could drive up operating costs for Fintech companies deciding to go national. This is particularly true for consumer finance companies that grant unsecured loans based solely on the borrower’s ability to pay. Consumer credit is based in large part on risk-based pricing that with further regulation could become cost-prohibitive to those who need it most: the nation’s most vulnerable borrowers.
This is an issue that will be playing itself out the months ahead. Regardless of the outcome, borrowers and investors should always be prudent in their financial dealings and do their own due diligence before signing on the dotted line.
Gary Bechtel serves as president of Money360. Prior to joining the company, he was chief lending/originations officer of CU Business Partners, LLC, one of the nation’s largest credit union service organizations (CUSO).