Last Friday was Brian Brooks’ final day as Acting Comptroller, leaving career staff to lead the agency until a successor is in place. Does this mean Friday was also the last day that the OCC was open to innovative charter applications? We think not.
The OCC’s efforts to bring more innovation into the banking system began well before Brooks arrived, and there are important policy reasons for those efforts to continue in the Biden administration. OCC staff also has become much more familiar with new technologies and processes and business models, and has a clearer idea of how they can fit within a bank regulatory framework. That understanding should enable more innovative companies to seek their own bank charters.
That said, the OCC is likely to take stock in the coming weeks of what it’s done to date and will almost certainly adopt a more deliberate pace going forward. As it does so, potential applicants should consider four key points:
If I’m already able to offer banking services, why should I bother to get a bank charter?
To quote bank robber Slick Willie Sutton, “Because that’s where the money is.” A bank charter provides direct access to the payments system, low-cost stable funding in the form of insured deposits, and, in certain instances, preemption of state laws. In addition, a bank charter liberates a fintech from relying on a bank partner, thus improving its economics and allowing it to control its own destiny to a much greater degree. Having one’s own charter also reduces the risks inherent in relying on a partner bank: a shift in its business strategy or regulatory problems could derail a fintech’s business through no fault of its own. These benefits no doubt enticed SoFi, Varo, and others to apply for a national bank charter.
But a bank charter, and the associated capital requirements and regulatory obligations, is not for everyone. Many fintechs lack the scale or the breadth of products to justify incurring the costs of becoming a full-fledged bank.
Should I seek a national bank charter in particular?
A national bank charter can reduce the complexity of a fintech’s business, increase its efficiency and enable it to reach more consumers. To operate nationwide without a national bank charter, a fintech company must rely on a complex patchwork of licenses, attempt to comply with conflicting state rules, and submit to dozens of examinations by state agencies each year. One of Klaros‘ clients, for example, currently maintains over 130 lending licenses, not to mention its loan servicing licenses and the money transmission licenses that will be necessary to operate its business prior to approval of its national bank charter application.
A national bank charter, by contrast, is a single charter administered by a single regulator pursuant to a comprehensive set of rules. Obtaining a national bank charter allows a fintech to offer a cohesive set of products and services nationwide, focus its compliance efforts on the requirements of a single regulator, reduce its legal and regulatory cost, complexity, and risk, and offer its customers the security and safety of dealing with a federally regulated and supervised national bank.
Are there other charters I should consider?
Absolutely. The other agencies and the states have increasingly encouraged fintechs and others pursuing innovative models to consider bringing that innovation into the banking system. Notably, FDIC Chair Jelena McWilliams approved FDIC insurance for Square and Nelnet, the first industrial banks in over a decade, and the Fed has more openly embraced “responsible innovation.” States have also granted a number of charters over the past few years, and New York, Wyoming, Georgia, and Colorado have all taken steps to establish and foster niche markets for regulated banks.
Is the OCC fintech charter an option?
The Figure and Anchorage applications may show that it is not necessary to create a new type of bank charter to bring innovative businesses within the federal banking system. If its application is approved (and survives a legal challenge brought by the states), Figure Bank will conduct lending, payments, and custody activities that are permissible for national banks throughout the United States, differentiating its offerings in the market by passing along to its customers the lower costs and better service enabled by blockchain technology. But Figure will not take ordinary deposits from individuals, thereby making FDIC insurance unnecessary and the Bank Holding Company Act inapplicable.
The OCC has conditionally approved the application of Anchorage Digital Bank to convert from a state trust bank to a national trust charter through which it will conduct its crypto custody business. Like Figure, Anchorage will not take deposits and, as a national trust company, will not be subject to the Bank Holding Company Act.
To pursue or not to pursue
Getting a bank charter is not for everybody. Companies should carefully consider why they want a charter, the advantages and authorities that come with the various charter types, and whether their business model and ownership structure are consistent with the requirements of the type(s) of charter they might seek.
Next, companies should consider their readiness to meet bank regulatory standards. In particular, they should consider whether they:
- Have the resources to pursue an application. This is an expensive undertaking, and U.S. Regulators expect to see minimum capital ratios for leverage, Tier 1 risk-based, and total capital of at least 10%, 12%, and 14%, respectively;
- Have or can recruit a seasoned bank management team;
- Have the patience to pursue a preparation, filing, and review process that will take at least a year;
- Are prepared to meet what are likely to be onerous conditions of approval. A quick glance at the Anchorage conditions will be instructive (and sobering).
Because fintechs are already providing banking services, charter or not, and in most cases are engaging directly with the banking system, we believe many will continue to seek bank charters—and we believe the OCC will continue to engage with them. Fintechs offer consumers a variety of banking products, including checking accounts, payments services, and loans. Notably, Chime has approximately 6.5 million accounts, PayPal has 277 million active accounts, SoFi has surpassed $50 billion in funded loans, and Quicken Loans is now the nation’s largest mortgage lender. Chime, like many other “neobanks,” offers checking accounts that are actually held at an FDIC-insured bank. PayPal is a licensed money transmitter, but relies on bank partners to access payment systems and credit card networks. SoFi and Quicken rely on a combination of state licenses and bank partnerships. There is almost always a bank involved, even if the company whose logo the customer recognizes is not a bank. The OCC should continue to actively engage with fintechs in order to maintain visibility into the vast amount of financial services innovation occurring outside the direct purview of banking regulators, and to enable fintechs who reach the scale and maturity to obtain their own charters.
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This column does not necessarily reflect the opinion of FinLedger’s editorial department and its owners.
To contact the authors of this story:
Michele Alt at [email protected] &
Jonah Crane at [email protected]
To contact the editor responsible for this story:
Mary Ann Azevedo at [email protected]