United States: Federal Charters For Fintech: Empowering Disruptors, Increasing Banking Competition

On July 31, 2018, the Office of the Comptroller of the Currency ("OCC") announced its intent to accept applications for special purpose national bank charters from eligible non-depository financial technology ("Fintech") companies.[1] This announcement coincides with the release of a Treasury Department report supporting financial innovation and the regulation of nonbank financial entities.[2] These announcements signal a significant shift in the current banking marketplace. On the one hand, the announcements are good news for Fintech disrupters, as it opens an avenue to reaching a nationwide market despite sometimes hostile state laws. On the other, for traditional banks, the announcements are a further harbinger, if any is needed, of the emerging new competition from Fintech.

The OCC's Response to Technological Innovation in Banking

Over the past several years, Fintech has caused meaningful disruption in the financial services industry. Working with banks and non-bank businesses, Fintech companies have introduced new approaches to traditional banking products and services, and entirely new products and services, by leveraging technology, data, and connectivity. Typically, Fintech avoids the expense of extensive brick-and-mortar physical presence, while reaching broad markets, by using the internet to provide products and services.

The OCC has expanded special-purpose national bank charters ("SPNBCs") to eligible Fintech companies to bring these companies within the U.S. bank regulatory system, which in turn will increase consumer protection, foster healthy competition, and encourage technological innovation in the banking industry. Also, by granting SPNBCs to Fintech companies, the OCC will expand its oversight of technology-based products and services that are reshaping the banking industry. In exchange, OCC-chartered Fintech companies will be able to conduct business throughout the U.S. under a uniform set of regulations and supervisory standards without the need to seek multi-state licensing or partner with insured depository institutions, while enjoying the significant benefits of federal preemption of many state laws under the National Bank Act.

Only Certain Fintech Companies May Qualify for the OCC's Special Purpose National Bank Charter

Historically, a special-purpose national bank has been an entity "that engages in a limited range of banking or fiduciary activities, targets a limited customer base, incorporates nontraditional elements, or has a narrowly targeted business plan."[3] The OCC has for many years issued SPNBCs for trust institutions and credit card banks with little to no fanfare.

In the current context, the OCC will make SPNBCs available to those Fintech companies engaged in one of the two core banking functions of paying checks or lending money (including activities interpreted by the OCC as the equivalent thereto[4]), subject to the OCC's approval of a charter application (discussed below). However, the OCC will not consider applications from Fintech companies involving proposals to engage in deposit-taking activities.[5] Those Fintech companies must apply to the Federal Deposit Insurance Corporation ("FDIC") for deposit insurance and seek a full-service bank charter.

The Benefits of the SPNBC

As with a national bank, a Fintech company that obtains a SPNBC will be subject to the corporate licensing, organization and structure provisions of the National Bank Act. In addition, the same statutes, regulations, examination and reporting metrics, and ongoing supervisory requirements applicable to national banks, such as legal lending limits, will apply to SPNBC Fintech companies.[6] Fintech companies that operate as special purpose national banks will also be subject to other federal statutory schemes such as the Bank Secrecy Act and federal anti-money laundering regulations, as well as prohibitions against unfair, deceptive or abusive acts or practices.[7] A Fintech company that obtains a SPNBC that engages in consumer lending will also continue to be subject to federal consumer lending laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act.

For a Fintech company that obtains a SPNBC, burdensome state-by-state licensing, regulatory and supervisory requirements – including state usury laws – will be preempted by the National Bank Act.[8] These companies will not need to be licensed under state law to engage in any activity permissible pursuant to the National Bank Act. However, a Fintech company that obtains a SPNBC should expect that some consumer protection and other state laws will continue to apply. Examples of state laws generally applicable to national banks include laws on anti-discrimination, fair lending, debt collection, and foreclosure.

The SPNBC Application Process

To obtain a SPNBC, a Fintech company must submit to the same de novo application review process as national banks, including an assessment of whether the Fintech company has a reasonable chance of success and will (i) be operated in a safe and sound manner, (ii) provide fair access to financial services, (iii) promote the fair treatment of customers, (iv) ensure compliance with applicable laws and regulations, and (v) foster healthy competition in the marketplace.[9]

The OCC's approval of a Fintech company's application to obtain a SPNBC will depend on the applicant:

  • presenting a comprehensive business plan that articulates why a SPNBC is being sought with significant detail about proposed activities;[10]
  • demonstrating the ability to meet minimum and ongoing capital and liquidity levels proportionate to the risk and complexity of the activities proposed in the business plan;[11]
  • committing to provide fair access to financial services and fair treatment of customers commensurate with the high standards imposed on traditional banks by the Community Reinvestment Act;[12] and
  • developing and committing to adhere to a contingency plan that includes various scenarios that could threaten the viability of the Fintech company.[13]

If approved for a SPNBC, the OCC will subject the recently chartered Fintech company to a scheduled supervisory cycle, including on-site examination and periodic off-site monitoring (as it would any de novo bank).[14] This means rigorous ongoing supervisory oversight to ensure that management and the board of directors are properly executing their business strategy and the Fintech company is meeting its performance and compliance goals.

Cost-Benefit Approach to the SPNBC

Whether a Fintech company should pursue a SPNBC from the OCC requires a tailored cost-benefit analysis. If the OCC processes Fintech applications for SPNBCs as rigorously as traditional de novo national bank charter applications, the SPNBC process could take several months from prefiling to approval. The OCC has stated that proposals from Fintech companies without an established business record will be subject to more scrutiny to evaluate the likelihood of long-term success.

Challenges from State Banking Regulators

In response to the OCC's preliminary proposal regarding SPNBCs and Fintech issued in 2016, the New York Department of Financial Services and the Conference of State Bank Supervisors filed separate lawsuits challenging the OCC's authority to issue SPNBCs to Fintech companies. Those suits were both dismissed on the basis that OCC had yet to issue any special purpose national bank charters. The OCC's announcement of its intent to accept Fintech SPNBC applications paves the way for those parties to renew their opposition as soon as the first SPNBC is issued to a Fintech company, if not before.

Conclusion

The OCC's decision to accept SPNBC applications from Fintech companies presents an opportunity for Fintech participants and the financial industry. Whether you are an established Fintech company or contemplating a new business, Troutman Sanders is ready to help you navigate the SPNBC process.

Footnotes

[1] OCC Press Release NR 2018-74 (July 31, 2018).

[2] U.S. Department of the Treasury, Press Release: "Treasury Releases Report on Nonbank Financials, Fintech, and Innovation" (July 31, 2018).

[3] OCC Licensing Manual Suppl., Considering Charter Applications from Financial Technology Companies, p. 2 (July 2018).

[4] The OCC has indicated that it views "facilitating payments electronically" as the "modern equivalent of paying checks" and that the scope of qualifying activities would be determined on a case-by-case basis. See OCC White Paper, Exploring Special Purpose National Bank Charters, p. 4 (Dec. 2016).

[5] Id.

[6] Id. at 2 n.4 (internal citations omitted).

[7] Such prohibitions will continue to apply as required either by Section 5 of the Federal Trade Commission Act or Section 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

[8] See generally Barnett Bank of Marion County v. Fla. Ins. Comm'r, et al., 517 U.S. 25 (1996) (federal law preempts state financial laws that prevent or significantly interfere with exercise of powers by national bank).

[9] OCC Licensing Manual Suppl. at 5.

[10] Id. at 6-8. See also 12 C.F.R. § 5.20(h) (detailing specific items to be addressed in business plans).

[11] Id. at 8-10. This may include an OCC-specified minimum capital level – and, if applicable, a commitment from the applicant's parent company.

[12] Id. at 10. See also OCC Policy Statement on Financial Technology Companies' Eligibility to Apply for National Bank Charters, p. 3 (July 31, 2018).

[13] The contingency plan must outline strategies for restoring the Fintech company's financial strength and options for selling, merging, or liquidating the entity if the recovery strategies are ineffective. See OCC Licensing Manual Suppl. at 10.

[14] Id. at 13.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Alan D. Wingfield
Similar Articles
Relevancy Powered by MondaqAI
Arnold & Porter
Womble Bond Dickinson
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Arnold & Porter
Womble Bond Dickinson
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions