Earlier this summer the Office of the Comptroller of the Currency issued the anticipated announcement that fintech companies engaged in the business of banking may apply for special purpose national bank charters. In conjunction with its announcement, the Comptroller of the Currency, Joseph Otting, adopted a Policy Statement describing how the agency will consider applications by financial technology companies — the "new entrants to the national banking system" — under the agency's existing chartering authority. The OCC also issued a Supplement to the Comptroller's Licensing Manual, entitled, "Considering Charter Applications from Financial Technology Companies" (Supplement). The OCC's actions this summer are the most concrete steps in a 19-month-plus process to promote "responsible innovation" in banking, particularly through the special purpose national bank charter tailored for fintech companies.
Key takeaways from the Policy Statement and the Supplement includes:
- Deposit-Taking Activity Is Off the Table
As we previously discussed here, the OCC’s existing regulatory framework provides that a special purpose national bank charter may be granted if the bank were to conduct at least one of three “core” banking activities: receiving deposits, paying checks, or lending money. Even though the Policy Statement reiterates the existing OCC standard, the OCC now interprets its authority to restrict the special purpose national bank charter for a fintech-company applicant that engages in paying checks or lending money. The Supplement states that a fintech company “that seek[s] a national bank charter and plan[s] to take insured deposits would be required to obtain FDIC insurance and should apply for a full-service national bank charter.”
In the Supplement, the OCC states that the provisions of the National Bank Act are “sufficiently adaptable” to allow a national bank to exercise its traditional powers in the business of banking in “new ways,” but does not describe whether certain activities would cross the threshold into the core function of taking deposits. Stored value products, among others, could have characteristics of either taking deposits or paying checks, and the OCC now notes that “facilitating payments electronically may be considered the modern equivalent of paying checks.” However, that example stops short of the OCC’s previous statement (offered in the white paper entitled “Exploring Special Purpose National Bank Charters for Fintech Companies” (December 2016)) that “issuing debit cards” also is a “modern equivalent of paying checks.”
- “Comprehensive” Business Plan Is “Critical” to the OCC’s Consideration
The OCC previously indicated that an applicant seeking a special purpose national bank charter would be required to submit a business plan, which is also a requirement for applicants seeking a full-service charter. In addition to detailed information about its lines of business and relevant markets, a fintech company’s comprehensive business plan must describe the applicant’s proposed risk management framework and its proposed internal system of controls to monitor and mitigate risks. Plus, the business plan must include a risk assessment: “The risk assessment should demonstrate a realistic understanding of risk and describe management’s assessment of all risks inherent in the proposed business model and products and services, including risks relating to third-party service providers, cybersecurity,” and a lineup of other potential risks in other areas. The OCC’s emphasis on a fintech company’s business plan generally is in line with the OCC’s policies relating to “responsible innovation” and its intention to evaluate each fintech-company applicant’s “unique facts and circumstances.”
- Contingency Plan Required for Final Approval
While the OCC’s prior draft of the Supplement indicated that applicants should discuss “realistic contingency plans based on critical assumptions,” the draft did not discuss further details of the types of plans that would be required to be submitted. The Supplement makes clear that, prior to receiving final approval for a charter, a fintech-company applicant must “develop a contingency plan to address significant financial stress that could threaten the viability of the bank.” Although the format and content of the plan are “flexible,” the plan should outline strategies for restoring the bank’s financial strength and options for selling, merging, or liquidating the bank in the event the recovery strategies are not effective.
Once approved to operate as a special purpose national bank, the contingency plan would serve as a key element of the OCC’s supervision of the bank’s financial strength, as well as its adherence to safe and sound banking practices. The Supplement explains, for example, that the bank will be required to review the contingency plan on an annual basis and update the plan, as necessary, however any “significant changes” may be made only if the OCC’s supervisory office expresses no objection.
By requiring a fintech-company applicant to submit a contingency plan, the OCC seems to indicate a belief by the OCC that a fintech company operating as a special purpose national bank could present risks to the banking system, but that such potential risks can be mitigated—and that, on balance, the potential benefits such banks would offer outweigh such risks.
- Financial Inclusion
From the earliest stages of its initiative, the OCC has placed an emphasis on the opportunities for financial inclusion as a core feature of responsible innovation in banking. In November 2016, for example, former Comptroller Thomas J. Curry explained that, as the OCC was “working through” the policy of whether, and under what conditions, to grant national bank charters to fintech companies, one attraction is that “[f]intechs may also help expand financial inclusion.” For an insured depository institution operating through a full-service bank charter, satisfying the requirements of the Community Reinvestment Act of 1977 (CRA) operates, de facto, as a standard for “financial inclusion,” chiefly because the supervisory framework explicitly evaluates the institution’s record of meeting the credit needs of the communities that it serves, including low- to moderate-income neighborhoods. But there is not a clear crosswalk from a full-service national bank’s performance under the CRA to a fintech- company bank’s activities for financial inclusion, in part because the fintech’s offering of credit products may be limited, if offered at all.
In the Supplement, the OCC underscores that “any entity”—not solely fintech companies engaged in lending money—seeking a special purpose national bank charter must demonstrate a commitment to financial inclusion. The standards for financial inclusion, derived from the OCC’s regulations governing the chartering process, require, at a minimum: (i) “fair access to financial services” and (ii) “fair treatment of customers.” To demonstrate its commitment, the fintech-company applicant must submit a financial inclusion plan, tailored to the nature, scope and scale of its particular business lines.
The financial inclusion plan should be designed with milestones and metrics that could be applied to determine whether the special purpose national bank is satisfying the OCC’s principles. Correspondingly, the special purpose national bank’s compliance with its own financial inclusion plan would be one of the areas for the OCC’s examination of the bank’s operations. Relatedly, the OCC has issued an Advance Notice of Proposed Rulemaking to solicit comments on “building a new framework to transform or modernize the regulations that implement the [CRA].” The OCC has invited comment on ways that regulation under the CRA should or could be modified, including approaches for updating “assessment area definitions to accommodate digital lending channels, while retaining a focus on the communities in which bank branches are located.” However, the OCC’s action for considering modifications to the regulations or examination standards for the CRA appear to not address the principles of “financial inclusion,” particularly as those principles would apply to a special purpose national bank.
- Issues Still In Flux
Even though the Supplement offers definitive guidance on several key parts of the application process, many aspects of the OCC’s policies and regulations for fintech companies continue to be fluid. For example, neither the Policy Statement nor the Supplement clearly articulate how the policy of the separation of banking and commerce would be applied to fintech companies. Moreover, key regulatory requirements for capital and liquidity would depend on the particular size, complexity, and risk factors for the fintech-company applicant. In these two areas, the OCC outlines the standards as follows:
- “Minimum and ongoing capital levels should be commensurate with the risk and complexity of the proposed activities.”
- Capital must account for off-balance sheet exposures.
- As the special purpose national bank scales its banking business, capital would increase, commensurate with the size, complexity, and risks to the bank.
- A special purpose national bank must maintain cash and other forms of liquid assets to meet funding needs, particularly in volatile conditions.
- The liquidity requirements are imposed in addition to the capital requirements.
We and our colleagues at DWT will continue to be closely engaged with this area.