In a surprising move, U.S. regulators have approved a new charter allowing fintechs to become full fledged banking providers. The Treasury Department and the Office of the Comptroller of the Currency (OCC) have approved a controversial national fintech charter proposal. Non-depository fintech companies will be able to obtain special-purpose national bank charters.
The new fintech charter — now final — gives non-banks an avenue that could potentially threaten traditional banking providers.
Lawsuits from interests looking to protect legacy banks and credit unions had attempted to kill the fintech charter proposal while it was still in the incubator, but federal judges dismissed such cases as “premature” because no charters had been granted. Of course, these lawsuits are very likely to resurface as fintechs begin applying for — and getting — the new special charters.
Reaction to the OCC’s announcement and related recommendations from Treasury — such as protected “regulatory sandboxes” for fintechs and other players to experiment in — ranged from fearful to downright vitriolic. Others were carefully crafted and more philosophical.
While many executives representing the legacy banking’s industry are freaking out about the potential fallout, some experts say the announcement isn’t all doom and gloom. In their view, the future looks more nuanced, and see these developments as holding promise for all players.
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Here’s a sampling with some of the more immediate reactions:
• Train Wreck. “An OCC fintech charter is a regulatory train wreck in the making,” declared the Conference of State Bank Supervisors. This trade association, comprised of state regulators, had been one of the litigants suing over the fintech charter issue. They continue to claim that this idea goes beyond what Congress empowered OCC to do.
• Kid Stuff. From New York came a heated attack regarding the idea of sandboxes: “Toddlers play in sandboxes,” said N.Y. Department of Financial Services Superintendent Maria Vullo. “Adults play by the rules.” Vullo added that “The idea that innovation will flourish only by allowing companies to evade laws that protect consumers, and also safeguard markets and mitigate risk for the financial services industry, is preposterous.” Vullo’s department had also sued OCC over the fintech charter, and she said that responsible companies should appreciate the importance of developing products under a protective state regulatory framework.
• Compete on Our Terms. The American Bankers Association struck a more diplomatic tone, generally approving of the thrust of regulators’ plans. Regarding the fintech charter itself, the ABA stated that it was pleased to see the OCC moving forward with a model that “maintains the strict safety and soundness requirements all banks face today.”
• Unfair Competitive Advantage. The Independent Community Bankers of America (ICBA) had praise for multiple aspects of the broader Treasury report, but said that it is “concerned that instituting a special-purpose national bank charter for fintech firms would create an unlevel regulatory playing field.” The ICBA is calling on the OCC to “procure explicit statutory authority from Congress before it issues fintech charters.”
Are Regulators Opening ‘The Floodgates’?
Jim Marous, co-publisher of The Financial Brand and one of the world’s most respected fintech authorities, is frustrated by some of the comments and reactions within the industry. He wonders if some in the industry aren’t blowing the subject out of proportion.
“Honestly, I am really tired of industry interests screaming foul every time anyone tries to change how banking would work,” Marous says. “Some banks and credit unions may whine about everything just to keep it business as usual, but it’s not a good position.”
“The biggest challenge facing fintech firms would be if they wanted to collect deposits,” Marous continues. “Why would they want to do that when there is already that ability by simply partnering with a traditional bank?”
Indeed, how much direct activity the OCC’s move will produce remains to be seen. Marous thinks the market will move forward no matter what regulators and other bureaucrats do — because that’s what free markets do.
Brett King, commentator and founder of payments and budgeting app Moven, believes the OCC’s move was long overdue. But he calls the Treasury’s assertion in its press summary that “the United States is the global leader in financial services and innovation” bogus.
“When it comes to innovation in this space, the U.S. is a laggard,” bemoans King.
“There are more than 50 challenger banks in the U.K. alone,” King continues. “The U.S. is very late to this party.”
He says that in order for the OCC’s efforts to succeed, the key will be a “rapid approval of new license applications, and real operational capability for the new challengers, not a limited sandbox with no real teeth.”
Nothing to Fear?
Many doubt that fintech companies will seek the new charters in significant numbers. Some experts think both the number and speed with which applications will come in won’t pose much of a threat to legacy banking providers.
“Most fintechs will not take this route,” says Jo Ann Barefoot, CEO at Barefoot Innovation Group and Cofounder at Hummingbird Regtech. She says the new policy “simplifies licensing and state-based supervision, but it adds a whole lot of rules, capital requirements, and close scrutiny.”
“Only strong, ambitious fintechs will try for it,” adds Barefoot, a former OCC regulator. “If others try, they won’t be approved. The applicants will be leading companies seeking national markets. I think the early applicants will likely include a lot of executives with banking backgrounds.” The profile of the typical applicant will likely be a firm that wants its own direct access to the payments system, for example, according to Barefoot.
Indeed, The Financial Brand’s Jim Marous thinks much of the debate that’s taken place has been over a misplaced sense of the significance of a national fintech charter. Marous argues that many concerns are purely theoretical, with little resemblance to how things will actually play out.
“The fintech charter assumes a broader range of services than most fintech firms will want to offer,” says Marous. “Why would a fintech firm want to do business like a traditional bank? Fintechs have no reason to become banks. They haven’t in the UK — where a similar bank charter has already been approved — and they won’t here.”
Bankers who worry about fintech charters have the wrong end of the matter, Marous believes. They are bringing legacy thinking to a fintech fight.
“In reality, the benefit of a fintech firm is the ability to serve a rather narrow range of segments in a way that current banks and credit unions don’t,” Marous explains. “We are no longer talking about a format of accounts that includes a checking, savings, investment, loan, and payment service — the traditional one-institution arrangement. Instead, we should be talking about a ‘financial account’ that integrates the best of all of these components into an account that has no barriers and can be formatted the way a consumer wishes.”
Marous says it is time to look at things from the consumer perspective.
“Consumers don’t want ‘bank accounts’ as they have been traditionally defined,” says Marous. “They want an ecosystem of financial services that can leverage insights to solve their problems and address their needs.”
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Jim McAlpin, a veteran banking attorney who also heads the financial services practice at Bryan Cave Leighton Paisner LLP, says he’s had lots of talks with fintech players, but that their appetite for charters is small. The issue had gone so quiet for so long, he says, that the Treasury and OCC announcements came as a surprise. He says he doesn’t expect any significant developments for a while, and that the timing may have been deliberate — coming in the dog days of summer. But he thinks some firms may go for the charters, in time.
McAlpin says they may adopt a two-step approach: (1) Get the fintech charter without going after deposits, and then (2) graduate sometime later to a full-blown charter that would include taking deposits.
“It will be interesting to see how they evolve,” says McAlpin, “to see what kind of entities they become.”
Banks and credit unions have historically counted on one perennial axiom: the pace of change in banking typically moves at a glacial pace. But does this still hold true in the digital age?
Barefoot doesn’t feel this new charter threatens traditional banking providers that are embracing digital transformation. “To the contrary, this step will help the OCC and other federal regulators better understand the fintech world, which will bring more holistic and level regulation to the system as a whole.”
According to Barefoot, fintechs that go for a charter “will have to be highly motivated and confident that they have a great story to tell, and they’ll have to understand that being a bank means clearing a high bar.”
“It won’t be ‘regulation lite’,” Barefoot insists.
The Fintech Loophole: Just Buy a Traditional Bank
The fintech charter may turn out to be not much of a threat to banks and credit unions after all, but actually a boon for some of them, say some experts. One element of the argument is that now that the concept is real, and finalized, everyone knows what the rules are going to be and can move ahead.
Even before the charter was codified, bank attorney and consultant Jeffrey Gerrish says fintech firms had been exploring the acquisition of what he calls “microbanks” — really tiny community banks, typically in rural markets, that no one would ever want to acquire under ordinary circumstances.
Gerrish, who’s been involved in some of these deals, says they offer the buyer several things: an existing charter that’s capitalized, federal deposit insurance, and the ability to branch nearly anywhere. In cases the original bank remains in its community, often maintaining the original business, and the buyer establishes offices in metro markets from which to build its main business.
Gerrish says “it’s a lot cheaper and quicker” to do this kind of deal than to try for a fintech charter. Gerrish, a community banking specialist, is Chairman of Gerrish Smith Tuck Consultants, and a member of Memphis-based Gerrish Smith Tuck, Attorneys.
A living example of such an innovative approach is CBW Bank. CBW was — and remains — a small, local agricultural lender. However, in 2009 Suresh Ramamurthi and his wife, Suchitra Padmanabhan, acquired the then-troubled bank. While retaining its roots, it became the platform for Yantra Financial Technologies, the couple’s bank tech and payments business. (CBW issues cards for Brett King’s Moven.)
Gerrish says in spite of this tool already being available, there will be those who will try to go with OCC’s new route. “Some of the fintech guys will not know what they are wishing for,” says Gerrish, “and they will try it.”