On December 2, 2016, Comptroller of the Currency Thomas J. Curry announced that the OCC will move forward with considering granting federal charters—under the OCC's existing authorities—to financial technology companies. Comptroller Curry's action is the latest, clearly most substantial, step forward in administering the "responsible innovation framework" for the banking industry. As we have discussed previously, the OCC's responsible innovation initiative has included the release of a white paper, Supporting Responsible Innovation in the Federal Banking System, an innovation forum, and the issuance of the OCC's Recommendations and Decisions for Implementing a Responsible Innovation Framework. In this most recent paper, Exploring Special Purpose National Bank Charters for Fintech Companies, the OCC indicates it will exercise its existing authority to "consid[er] charter applications from fintech companies[,] . . . while continuing to provide the robust oversight that [the OCC's] mandate requires."
Any fintech company or banking organization, startup or seasoned, should be prepared to explore its options through the OCC's chartering process because obtaining a bespoke, "special purpose" federal charter could enable the company to:
- Conduct its business on a nationwide basis without obtaining state licenses;
- Enjoy the benefits of supervision (yes, the benefits of supervision) through the OCC's exclusive visitorial authorities;
- Demonstrate to its customers (consumers and businesses alike), as well as to its investors, the company's fitness and financial wherewithal by meeting the OCC's expectations for operating in a safe and sound manner; and yet
- Not necessarily become entangled with all of the bank regulatory laws, notably the potential limits of the Bank Holding Company Act (BHC Act).
Why Should a Fintech Company Seek a Special Purpose National Bank Charter?
Comptroller Curry's chartering announcement represents a major breakthrough in the OCC's ongoing efforts to develop its responsible innovation framework because the OCC now explicitly "acknowledges" that its existing authorities may be adapted "to approve a fintech charter." The OCC's paper flows, first, through the powers to grant a federal charter and, second, through the range of permissible banking activities and arrives at a newly formed harbor: a special purpose national bank charter. The OCC has signaled its readiness to be flexible in achieving its goals by noting that "the agency may need to account for differences in business models and the applicability of certain laws."
With a special purpose national bank charter, a fintech company would be a bank authorized "to conduct business on a nationwide basis," subject to "uniform standards and rigorous federal oversight." The OCC's perspective vis-à-vis state law is clearly stated: "State law applies to a special purpose national bank in the same way and to the same extent as it applies to a full-service national bank." Operating on a nationwide basis under the shield of federal law could enable the fintech company to explore a broad range of permissible banking activities, particularly the OCC's long list of approved electronic banking activities, with a streamlined method to comply with applicable state laws. Perhaps most notably, such an entity would enjoy the same level of preemption from state licensing laws that national banks enjoy.
The special purpose national bank charter potentially opens a great range of opportunities for engagement in financial services by both new and existing players. But if the fintech company becomes a bank, would not the company that controls the bank become a bank holding company subject to the restrictions under the BHC Act? How might the fintech company need to reevaluate its options for a value-realization event?
The OCC provides a path forward: consideration for issuance of a special purpose national bank charter to establish an uninsured bank that restricts its activities so as not to qualify as a "bank" under the BHC Act. The OCC's paper offers a clear example of the flexibility contemplated for a federally chartered bank: "a fintech company with a special purpose national charter that does not take deposits, and therefore is not insured by the Federal Deposit Insurance Corporation (FDIC), would not be subject to laws that apply only to insured depository institutions." That goes for the BHC Act, too, so long as the special purpose national bank is not a "bank" under 12 U.S.C. § 1841(c).
The OCC's stated willingness to grant a special purpose national bank charter to an uninsured bank could be attractive to a new entrant or even a well-established banking organization prepared to develop a laser-focused business plan for its banking activities (though still with ambition to go nationwide). For example, an existing national bank could consider whether to migrate a fintech business line to an affiliate with a bespoke, special purpose uninsured national bank charter in order to facilitate supervision of its ongoing operations (i.e., bringing the fintech affiliate, alongside the bank, under the OCC's supervisory tent) without necessarily dampening the sale of the fintech by pressing the would-be acquirer to become a bank holding company. If the fintech special-purpose uninsured national bank is put up for sale, the acquirer would not need to concern itself with divesting its commercial activities to comply with the BHC Act.
What's the Special Purpose Bank Charter Going to Cost?
- Capital. But possibly calculated differently.
Even a special purpose (uninsured) national bank will need to develop a capital structure to meet the OCC's demands for the fintech company to be a bank that has safety-and-soundness in its roots. Clearly one of the core components of responsibly promoting innovation in the federal banking system is the OCC's statement that each fintech "[applicant is] expected to propose a minimum level of capital that the proposed bank would meet or exceed at all times." There's going to have to be real financing to support the new bank. But that does not necessarily mean that a company offering the best technology, say, for remittance transfers abroad, must master the jargon of the Basel framework. Rather the OCC "would consider adapting capital requirements applicable to a fintech applicant for a special purpose national bank charter as necessary to adequately reflect its risks and to the extent consistent with applicable law."
- Liquidity. But possibly not full-blown bank liquidity.
Here again, even a special purpose (uninsured) national bank will need to develop a structure for liquidity to meet the OCC's demands for the fintech company to be a bank that can safely and soundly sail when cash-flow winds periodically subside. Responsible innovation in the federal banking system means that all banks must be expected to pay their counterparties, including by planning for hiccups in short-term funding. The fintech-company applicant will need to demonstrate to the OCC that its liquid asset positions, taking into account its cost of funding, will suffice to make payments for its customers and to other counterparties. Nonetheless, the OCC expresses its willingness to grant a special purpose (uninsured) national bank charter to a fintech company that establishes arrangements for liquidity "commensurate with risk and complexity of the proposed activities." Thus, a platform lender with ambitions to operate nationwide must consider the potential contingent obligations attendant to its activities, whereas a payments processor must focus on its operating cash to consistently make payouts—but neither would appear to be placed in the position of establishing a full range of liquidity sources in the manner demanded of a full-service bank.
What Else Will Be Expected?
- Robust, well-developed business plan for the special purpose (uninsured) national bank's line(s) of banking business;
- Governance structure that allows the special purpose (uninsured) national bank to maintain its "expertise, financial acumen, and risk management framework" as its business grow and evolves;
- Compliance management system, enabling the special purpose (uninsured) national bank to "identify, assess, manage, and monitor"—on an ongoing basis—the process for complying with, among other potentially applicable regulatory requirements, anti-money laundering laws and federal consumer financial laws;
- Plan for financial inclusion, gearing the special purpose (uninsured) national bank to fairly treat its customers, as well as to provide fair access to its banking products and services, as the bank "responds to the needs of the community, consistent with the safe and sound operation of the bank;" and
- Resolution plan, which consists of the special purpose (uninsured) national bank's articulation of the "specific financial or other risk triggers that would prompt the Board and management's determination to unwind the operation in an organized manner."
The expectations listed above are specifically called out in the OCC's paper. For more background on the OCC's general expectations for charter applications, refer to the Comptroller's Licensing Manual. All of these components are important, but the OCC's paper explains that each will be shaped by the particular contours of the fintech-company applicant's line of banking business. For example, the OCC will expect a fintech-company applicant seeking to engage in lending to consumers to "explain its commitment to financial inclusion," specifically by considering (i) method(s) for defining the relevant market, customer base, or community in which to sell its loan products; (ii) the nature of the loan products and the marketing methods or outreach plans to connect with prospective borrowers; (iii) how the loan products and marketing plans would "promote financial inclusion (e.g., provide access to underserved consumers or small business)," and (iv) how its operations are designed so that its loan products are offered and delivered on a fair and non-discriminatory basis. By contrast, a fintech-company applicant that does not engage in lending activities, such as a company specializing in authentication services that is not engaged in marketing for or brokering of loan products, likely will be expected to show the OCC, in the course of the chartering process, a different type of plan for fairly treating customers, such as small business customers.
In its paper, the OCC reserves plenty of discretion to adapt its chartering process to meet the evolving demands of fintech companies so as to promote responsible innovation in the banking industry. For example, even though an uninsured special purpose national bank may not be subject to various banking laws applicable to an insured bank, the OCC explains that "the OCC may impose requirements by way of conditions similar to those that apply by statute to an insured bank, to the extent appropriate given the business model and risk profile of a particular applicant." The OCC's paper mentions the Community Reinvestment Act as one example of such a law that does not apply to uninsured banks.
Comptroller Curry shot a flare to fintech companies that the OCC should not stand still and wait for the new Congress and the next President to specify if and, if so, how a fintech company could be permitted to extend its reach into our banking system, nationwide. But Comptroller Curry's chartering announcement is only the first (substantial!) word, not the last.
We and our colleagues at DWT will continue to be closely engaged with this area.