WASHINGTON — Fintech companies now have the federal option they have long sought after the Office of the Comptroller of the Currency green-lighted firms to apply for a special-purpose bank charter. But winning OCC approval on charter bids will not be a walk in the park.

One day after the OCC announcement, some fintech firms signaled clear interest in the charter. But the agency's decision also prompted a slew of additional questions, including whether firms would be able to meet the regulator's tough criteria, and whether state regulators would continue to fight the charter concept in court.

“There are no short cuts here for prospective fintech charter applicants,” said Julie Williams, managing director and the director of domestic advisory practice at Promontory Financial Group LLC. “The OCC very much reaffirmed they will be looking at applying all of the safety and soundness expectations they would apply to a traditional bank.”

Joseph Otting, comptroller of the U.S. currency
Speaking to reporters in May, Comptroller Joseph Otting said some companies are less interested in exploring a charter after discussing the process with the OCC and learning what is involved. Bloomberg News

Still, fintech firms reacted to the news positively, and indicated some may test the waters.

David Klein, CEO and co-founder of CommonBond, said companies would be seeking additional "clarity" from the agency, but he added that the more financially sound fintech firms will likely consider applying despite having remaining questions.

“For many capital-intensive fintech firms, it’s probably less a question of whether to get a charter and more about when to apply for one,” he said. “This is a conversation I’m sure many capital-intensive fintech companies are having right now.”

The OCC's statement, along with an accompanying supplement to the agency's licensing manual for fintech applicants, did address some questions the industry had about what would be required to get a charter.

For example, the OCC said applicants would have to meet similar capital, liquidity, stress testing and financial inclusion requirements as traditional banks.

However, the OCC also left some wiggle room by not explicitly defining the needed capital ratios or what “financial inclusion” requirements with which charter recipients must comply.

“The expectations for promoting financial inclusion will depend on the company’s business model and the types of planned products, services, and activities,” the OCC said in its press release. The OCC also appeared to provide some flexibility in how an applicant would craft its "contingency plan," which is akin to the stress tests conducted by large banks.

The OCC “left the financial inclusion part pretty open,” Klein said.

But Williams pointed out that both requirements go beyond what regulators typically expect from a de novo bank applicant.

The contingency plan and financial inclusion “are additional to the requirements that we see in the standards and application processes for a traditional bank charter,” said Williams, who was a former senior deputy comptroller and chief counsel at the OCC.

The overall level of interest in an OCC charter among the fintech industry is somewhat of an open question amid signs that firms' enthusiasm about the idea may have dwindled since the agency first proposed it under former Comptroller Thomas Curry.

Speaking to reporters in May, the current comptroller, Joseph Otting, said some companies are less interested after discussing the process with the OCC and learning what is involved.

“They began to learn about national banking versus state banking and operating across state lines and then they come talk to us, and we explained the issue … of capital, liquidity and serving your community,” Otting said. “A lot of them, I kiddingly say, leave skid marks leaving the building."

The extra requirements for the fintech charter could be a deterrent to some fintech firms, particularly when there are other long-standing charter options more clearly defined, such as an industrial loan company charter or state nonbank licensing process, sources said.

But fintech firms said the flexibility provided in the OCC manual could be a draw.

Sam Taussig, head of global policy at Kabbage, said the OCC appeared to communicate that it will tailor the charter to how each firm operates.

“The charter is certainly on the table as one of many options and we’re certainly excited about it,” he said.

But he added that questions remain, particularly about the Federal Reserve’s involvement as the gatekeeper to the payments system, and since it oversees holding companies and some affiliates of banks.

“We need clarification ... from the Federal Reserve on access to payments and federal stock subscription piece,” he said.

A Treasury Department report, also released Tuesday, that endorsed the OCC’s fintech charter, noted the Fed will need to make a decision on whether these firms get access to the payments system.

Another area of uncertainty is whether state regulators will refile litigation in an attempt to block the OCC’s new fintech charter. The Conference of State Bank Supervisors and the New York State Department of Financial Services filed separate cases against the OCC in 2017, arguing that the charter proposal was an unlawful expansion of the OCC’s chartering authority.

But judges dismissed both cases, since the OCC had not yet made a decision on whether to grant the charter.

In his group's initial response to the Comptroller's Office's announcement Tuesday, John Ryan, the CEO of the Conference of State Bank Supervisors, called the charter a “regulatory train wreck in the making.”

But the CSBS has yet to make a decision on whether state regulators will attempt to block it again.

“We’re studying it, we are considering all of our different options and we’ll figure something out,” said Margaret Liu, senior vice president and deputy general counsel at the bank supervisor group. “All options are on table.”

Taussig at Kabbage said that “the litigation risk is huge” but that “we think the OCC is on very good legal standing.” He and others said fintech firms were already expecting the charter to trigger potential litigation, so that likely won’t be a deterrent.

“Anyone who enters this chartering process would go in with eyes wide open,” Christin Spradley, head of government and regulatory affairs at OnDeck. “A lot of companies are now in a ‘look and learn’ position and I would expect ... the most viable options would come from the more mature players in this space.”

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