The Office of the Comptroller of the Currency (OCC) recently announced it would consider applications by fintech companies to organize a national bank to conduct their activities. This should be a wake-up call for many institutions, but particularly credit unions. The action by the OCC was inevitable in light of the developments in the financial services industry and makes good economic sense since electronic banking is cost effective and can reach consumers any time day or night. The OCC clearly has emerged as an enthusiast of wedding technology to the bank charter. The OCC noted that such banks will be subject to the same safety and soundness standards, albeit with any modification due to the nature of their business.
The credit union industry has already suffered a well-known adverse effect of technology due to the impact of Uber on the taxi industry and medallion lenders. Like many competitive threats the impact was not recognized until it was too late. The Uber effect has taken some time to take hold and now it is in full force. In fact, “Uber” has been turned into a verb: as a credit union client of mine recently told me that he did not want to be Uberized!
Nationally chartered Fintech banks would have the ability to provide lending, deposit or payment system services individually or a combination thereof. Most likely they will focus on payment systems and therefore will not need to be federally insured. These banks will also carry the power of federal preemption. Many questions remain, and the OCC is seeking public comment. State-chartered Fintech banks are also a possibility depending upon state law.
Credit unions, unlike banks, do not carry many of the tools to compete with the potential competitive threat. Alternative capital may be coming but isn’t currently an option, credit unions are limited in the scope of people they can serve, their commercial lending authority is limited and their corporate structure is more constrained. Further exacerbating the situation is the recent bankers’ challenge to the new field of membership and member business lending rules.
Unlike the days of old when credit union members were more easily recruited through their employer, credit unions now must do battle in the community with other financial service providers, many of which are larger with more resources. The competitors probably have greater ability to buy a fintech company or invest in technology. Many younger people do not have the same affinity for the credit union message or even that of a traditional bank since there are so many alternatives in the marketplace. Pricing differential is not necessarily going to drive the consumer’s choice and electronic delivery is very attractive particularly when it is mobile and at the consumer’s finger tips.
The electronic competitor is a growing disruptive force to the traditional banking delivery channels. It is unburdened by the many costs that a typical institution must carry, such as brick and mortar, credit risk, a multitude of compliance costs and CRA in the case of banks. It remains to be seen, however, what financial inclusion standards the OCC may impose on fintech banks in the form of a CRA-light obligation, for example.
There are lessons that should be learned quickly from the taxi medallion episode. The next technological development may be upon us without much advance warning and all institutions need to be prepared for the coming events. Conducting a SWOT analysis at the next strategic planning session is probably a good idea. Take heed, the future is here. Survive or be Uberized.
Richard Garabedian is an attorney with Womble Carlyle Sandridge & Rice, LLP.