A Fintech Charter by Another Name

Picture your life without a bank account. Where would you store your money? How would you pay your bills? Who would give you a loan? The COVID-19 pandemic has highlighted the struggle that one in four American households face every day when they cannot access basic banking services, such as checking accounts, payment services, and affordable loans. Financial technology firms, or “fintechs,” help some of these consumers access vital services at lower cost and in remote areas where traditional banks do not operate. Banking regulation, however, has not kept up with these technological innovations in the industry. Federal banking law does not currently provide a cohesive regulatory framework for fintechs. This has forced fintechs to seek licenses from a complex network of state banking regulators, increasing their costs and limiting their opportunities to provide consumers with better banking services. In 2018, the Office of the Comptroller of the Currency (OCC)—the federal agency responsible for issuing charters to national banks and regulating their activities—took the first stab at addressing this problem when it created a “fintech charter.” Unlike traditional banks, which provide one-stop shops for all banking services, fintechs typically offer only payments or lending services, not both. The fintech charter gives fintechs that provide such narrow banking services an option to receive a national bank charter that is tailored to their needs, rather than requiring fintechs to navigate the complex and burdensome web of state regulations. Although the fintech charter technically covers both payments and lending firms, the OCC primarily designed the charter for fintech lenders. Since its creation, the OCC’s fintech charter has encountered significant legal roadblocks, discouraging fintechs from applying for one. In October 2019, a federal judge in New York struck down the charter for exceeding the OCC’s authority because it applies to firms that do not take deposits. The judge noted that the National Bank Act “unambiguously requires that … only depository institutions are eligible to receive national bank charters from the OCC.” The OCC’s appeal of the ruling is still pending. Despite this litigation challenging the lawfulness of the fintech charter, Comptroller Brian Brooks—the head of the OCC—announced in June 2020 that the OCC intends to create a new payments charter designed exclusively for fintech payments firms, such as Venmo or MoneyGram, which hold users’ funds and transfer funds between accounts. One important question is whether chartering payments firms is legally different from chartering lending firms. State banking regulators—who led the charge against the fintech charter—have criticized the payments charter as “no different than the fintech charter” because both apply to non-depository firms. The OCC does not dispute this point. Instead, Comptroller Brooks claims that both charters are valid under the National Bank Act. He argues that existing regulation gives the OCC authority to issue charters to non-depository institutions involved in payments and lending. If the OCC ultimately loses its appeal over the fintech charter, the payments charter—as proposed—will likely fail as well because it also applies to non-depository firms. If that happens, the OCC will need another way to charter fintech payments firms. One option for the OCC is to offer payments firms traditional national bank charters, known as “full-service” charters, which allow firms to accept deposits, issue loans, and facilitate payments. The OCC recently granted Varo Money just such a full-service charter—the first national charter ever given to a fintech. Full-service charters, however, take significant time to acquire and involve extensive regulation that is often not suitable to payments firms with narrow business models. In those cases, the OCC may still be able to offer its narrow payments charter by accepting applications from fintechs that take deposits. The OCC designed the fintech charter for non-depository institutions because fintech lenders—the firms the OCC had in mind when designing the fintech charter—have no reason to take deposits. Fintech lenders use technology to facilitate loans but push the default risk onto the consumers and financial institutions providing the money. If a fintech lender were to take deposits and offer loans, it would become a traditional bank and require a full-service charter. Payments firms are different. Some experts argue that cutting-edge payments companies, such as cryptocurrency firms, already take deposits. And those that do not take deposits could cut costs if they did, rather than paying third-party banks to hold their users’ funds. If fintech payments firms take deposits, they may not require the same degree of oversight as fintech lenders or traditional banks. For decades, some scholars have argued that banks narrowly focused on payments should face less regulation because they merely transfer funds or invest deposits in low-risk assets. Comptroller Brooks echoed this argument when proposing the OCC’s payments charter, advocating that the OCC should tailor regulations to the narrow services offered by fintech payments firms. Most payments firms do not hold deposits because they cannot obtain deposit insurance from the Federal Deposit Insurance Corporation and they want to avoid designation as a bank holding company. The OCC can address both of these issues. The OCC has stated—in an unrelated context—that it has the authority to grant a specialized charter to depository institutions that do not have deposit insurance if they “can operate in a safe and sound manner.” Fintech lenders are unlikely to meet these qualifications because fintech lending involves significant risk to depositors, systemic risk to the economy, and potential predatory consumer practices. Payments firms are less likely to incur financial risk because they merely transfer users’ funds between accounts or invest those funds in low-risk assets, such as U.S. Treasuries. They do not lend the money to borrowers who could default on a loan. Given this low degree of risk, the OCC could grant payments firms that take deposits a specialized charter, claiming they can operate in a safe and sound manner without deposit insurance. In addition, many fintechs fear dealing with enhanced regulation as bank holding companies. Any institution that either has deposit insurance or accepts deposits and makes commercial loans could be deemed a bank holding company under the statute. If fintech lenders accept deposits, they will automatically qualify because they make commercial loans. Payments firms, however, can accept deposits without being bank holding companies because they do not offer loans or require deposit insurance. This difference means that, under federal banking law, the OCC could offer its payments charter to firms that exclusively accept deposits and facilitate payments. The OCC has not yet explored the idea of offering a specialized charter to fintechs that accept deposits. It may ultimately decide that payments firms expose consumers to too much risk to accept deposits without insurance. In addition, even if payments firms take on less financial risk than traditional banks or fintech lenders, some commenters worry that payments firms are vulnerable to significant cyber-risk, fraud, and other operational risks that pose a systemic risk to the financial system. This is an important issue the agency must consider. If the OCC loses its legal fight to charter non-depository institutions, it will need to rethink how it charters fintechs. In doing so, the OCC may have more options to charter fintech payments firms than fintech lenders