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. This announcement coincides with the release of a Treasury Department report supporting financial innovation and the regulation of nonbank financial entities. 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." 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), 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. 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. 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. 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. 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.
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;
- 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;
- 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; and
- developing and committing to adhere to a contingency plan that includes various scenarios that could threaten the viability of the Fintech company.
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). 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.
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.
 OCC Press Release NR 2018-74 (July 31, 2018).
 U.S. Department of the Treasury, Press Release: "Treasury Releases Report on Nonbank Financials, Fintech, and Innovation" (July 31, 2018).
 OCC Licensing Manual Suppl., Considering Charter Applications from Financial Technology Companies, p. 2 (July 2018).
 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).
 Id. at 2 n.4 (internal citations omitted).
 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.
 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).
 OCC Licensing Manual Suppl. at 5.
 Id. at 6-8. See also 12 C.F.R. § 5.20(h) (detailing specific items to be addressed in business plans).
 Id. at 8-10. This may include an OCC-specified minimum capital level – and, if applicable, a commitment from the applicant's parent company.
 Id. at 10. See also OCC Policy Statement on Financial Technology Companies' Eligibility to Apply for National Bank Charters, p. 3 (July 31, 2018).
 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.
 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.