A brouhaha between federal and state financial regulators is playing out, and fintech is the battleground. The Office of the Comptroller of the Currency (OCC)’s proposed fintech charter is stuck in the courts after a lawsuit from the New York State Department of Financial Services (NYDFS).
But Brian Brooks, acting director of the OCC, is undeterred and pushing a watered-down version of the charter for payments companies. That initiative is likely to draw legal opposition on the same grounds as the first one: neither require deposit insurance, which would free fintechs from the Federal Deposit Insurance Corporation’s (FDIC) oversight.
Several banking trade associations have voiced their concern. For example, the Conference of State Bank Supervisors (CSBS) has filed two lawsuits, alleging that the OCC is undermining the federal-state dual banking system.
But some fintechs and industry experts see the situation in a different light.
Richard Arundel is head of North America for London-based Currencycloud, an eight-year-old payments fintech company that is familiar with navigating the U.S. regulatory system.
He believes that “in principle, one regulator rather than 50 regulators makes a lot of sense.”
Currencycloud currently operates under an agency agreement with a sponsor bank, a common arrangement for fintechs that allow them to operate as a money transmitter between states. The venture-backed company is also in the process of obtaining payment transmitter licenses from all 50 states, and expects to be done by 2021.
“We’ve invested in the process quite heavily,” Arundel told FinLedger. “It’s just really tough. Each state has different requirements.”
That process is also costly, according to the CEO of another fintech that is entering the U.S. market.
“We will obtain whatever licenses we need, but it’ll cost a lot of money, it’ll take a lot of time,” said the executive, who asked to remain anonymous for confidentiality reasons. “Large entities can handle it, but it makes it difficult for fintechs and newer types of ideas to make it to the market.”
The CEO also said his company “would embrace” a national OCC fintech charter.
Opposing viewpoints
John DelPonti, a financial services leader at consultancy BRG, agrees that some fintechs should be nationally chartered and regulated. He points to the fact that fintechs are “part of the overall payments and banking system” and “operate with customers on a national basis.”
Others are far more skeptical of Brooks’ plans.
Vinay Prabhakar, a VP at payments and financial messaging provider Volante Technologies, has his doubts.
“In the pantheon of ideas, some are bad and some are dangerous. This is both,” he said. “Requiring fintechs to be federally chartered will essentially force them to operate as banks. They will be subject to the same onerous compliance, liquidity, and capital requirements as banks, even though most fintechs do not aim to provide depository services.”
(Last month, Volante raised its first outside investment of $35 million in growth funding to expand its cloud-based payments and financial messaging tool globally – after nearly two decades of organic profitability.)
Meanwhile, Neocova CEO Sultan Meghji doesn’t believe that the OCC is “necessarily the best organization to drive such an agenda, especially in the wake of the legal collapse of their previous fintech charter program.”
For context, Neocova is a Missouri-based fintech that works with community banks and credit unions – many of which are arrayed against the OCC’s charter program, according to this letter from industry groups.
According to Meghji, the OCC needs to first get buy-in from a range of stakeholders, including other federal agencies, state regulators, industry partners, trade associations, and even Congress.
“Given the hybrid nature of regulations in the financial sector, any initiative that does not include significant participation from these groups is, in my opinion, doomed to fail,” he told FinLedger.
There is also the question of which fintechs would qualify for a charter.
“The devil is in the details of what the requirements are,” said Mark Flamme, who leads the North American fintech practice at New York-based consultancy AlixPartners. “What will be the capital requirements, restrictions on lines of business and investments, [and] reporting requirements?”
Then there are ‘grass-is-always-greener’ risks. State regulators “generally tend to accommodate different business models and have more flexibility in how they provide oversight,” said Manish Vrishaketu, COO of accounting fintech Tipalti. Vrishaketu, who is supportive of a federal charter, echoes Prabhakar in noting that fintechs could get “treated like a national bank, which will create very onerous regulatory requirements.”
Another unanswered question is whether federal regulators are keeping pace with innovation. Arundel mentioned that Brooks wrote of “the great unbundling of banking,” and how that perspective doesn’t necessarily reflect the state of the industry.
“I think we’re in a new era of rebundling,” said Arundel. “Suddenly you find yourself in a world where we have 8 or 9 financial applications on our phone. People want a more centralized experience.”
But fintechs shouldn’t get their hopes up about any federal charter coming into effect, according to Meghji.
“The likelihood of this happening, in my opinion, is quite low,” he told FinLedger. “Even if it does happen, there aren’t enough resources for the OCC to take on any significant portion of this market. Fintechs will adjust to avoid it and nothing will actually change.”
Recommended Reading: In addition to determining the future of fintech regulation, the OCC has also been busy enforcing regulation for depository institutions. HousingWire covered news that the OCC has settled with three former Wells Fargo executives for their roles in the bank’s fake-account scandal. More on HousingWire.