First Look at the OCC Special Purpose Charter: Good or Bad for Fintech Companies?

On Friday, the Office of the Comptroller of the Currency (OCC), the agency within the U.S. Treasury Department that regulates national banks, announced it will begin accepting applications for special purpose national bank charters from financial technology firms.

Reception of this news has been generally positive, with industry organizations such as the Electronic Transactions Association and American Bankers Association issuing statements in support of such a charter.

But the early take on the news from industry insiders indicates that it is a mixed bag for individual companies. Applying for the charter may be either a smart move or a bad idea, depending on who you are and why you want it.

The public interest

For the industry, some say, the concept of a single body to oversee companies previously operating in a bit of a regulatory no-man’s-land is a welcome development that acknowledges the impact of this rapidly rising sector on consumers.

“The new fintech special purpose bank charter breaks new ground in the development of fintech,” said Holli Targan, attorney and chair of the Electronic Payments Group within the law firm Jaffe Raitt Heuer & Weiss. “It legitimizes the fintech business model by affirming that fintech companies are active and important participants in the delivery of financial services.”

Jeff Szyperski, CEO of Chesapeake Bank, a community bank in Williamsburg, Va., thinks this is a positive development for consumers. He said that he is encouraged that a regulator – particularly the OCC with its national oversight – is prepared to provide some supervision that will impose some of the requirements of the banking system, including consumer protection and financial inclusion, onto companies that are increasingly the ones delivering financial services to consumers.

“At the end of the day, if you’re looking for consistency in a product to a consumer that has adequate protections to it, I think this is a good thing.  If you’re customer-focused, this adds a little less volatility to the system,” Szyperski said.

In a speech Friday night at Georgetown University, Comptroller of the Currency Thomas J. Curry acknowledged the government’s interest in a field that is expanding to be a significant part of consumers’ lives. He said that the U.S. and U.K. combined now have more than 4,000 fintech companies, and that investment in fintech had skyrocketed, growing from $1.8 billion to $24 billion worldwide in only five years.

Curry outlined several reasons that the agency had decided to proceed with a special charter for these companies.

“First and foremost, we believe doing so is in the public interest,” he said. “Fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters. Fintechs, while not without some risks, also can potentially deliver these products and services in a safer and more efficient manner.”

Advantages and disadvantages for fintech companies

While the OCC intends to provide some protection for consumers through this special purpose charter, it is not requiring fintech companies to seek it. So, should they? As is often the case, it depends. Companies will need to balance the benefits with both the initial and ongoing demands of working with a government regulator.

“There are a number of distinct advantages to obtaining a charter,” Targan said. “One is that chartered entities will answer primarily to a single regulator. Another is that companies that obtain a charter are more likely to attract investment capital.  But these will come at the price of a rigorous application and vetting process.”

Cliff Stanford, an attorney with law firm Alston & Bird who is advising clients regarding the charter, agrees.

“Not every fintech company will want to pursue this, given the upfront and ongoing costs (like holding capital), and the availability of alternatives that may be better suited, depending upon the business model,” he said.

The fact that the charter is a national one may prove appealing for some companies seeking to avoid a patchwork of state laws.

“It is true that national charters have the benefit of preemption of various state laws, but this preemption is not absolute, and some state laws (such as UDAP laws) may still apply,” Stanford said. “This is a complicated analysis. However, in particular, payments firms will seek to benefit as a ‘bank’ from the preemption of most state money transmitter laws, which are disparate and for which compliance is complicated and expensive.”

Abby Chaffat, deputy chief compliance officer at PF WePay, told, “WePay is certainly interested in and will be keeping a close eye on how this proposal progresses. I can identify very tangible and immediate benefits for fin techs in the lending space who face state-by-state oversight, but we do not face these challenges.”

“WePay will be weighing the cost of getting ‘safety and soundness’ ready, which are really high costs, against the expected benefits of being a federally chartered bank. I imagine the OCC will adjust the current exam expectations to accommodate for the vastly different risk profile of a company like WePay versus that of a traditional banking institution. Those concessions will be a determining factor regarding whether we take advantage of this proposed charter,” she continued.

Targan encouraged companies interested in the charter to provide their input to the OCC during the comment period, calling it a “unique opportunity to influence the chartering process.”

A paper explaining the charter is available on the agency’s website. The OCC is accepting comments through January 15.