A Guide to the OCC's Fintech Charter Licensing Manual

6 min

The Office of the Comptroller of the Currency (OCC) announced it will begin accepting applications for a special-purpose national bank charter from nondepository fintech companies ("Fintech Charter"). The OCC's July 31, 2018 announcement was accompanied by the release of a policy statement reaffirming the agency's commitment to offering a Fintech Charter and describing the standards and expectations for a successful applicant ("Fintech Policy Statement"), and a licensing manual supplement that provides the framework for how the agency will evaluate Fintech Charter applications ("Fintech Manual").

For some nonbank financial technology companies a federal bank charter could provide many benefits, including preemption of state licensing requirements for various financial activities. OCC Comptroller Joseph Otting said, "The OCC is open and receptive to [Fintech Charter] applications," but he cautions that the agency "will not approve proposals that are contrary to applicable law, regulation, policy, or safety."

Based on the Fintech Policy Statement, a company that receives a Fintech Charter ("Fintech Bank") will be:

  • subject to the same high standards of safety and soundness and fairness as all federally chartered banks;
  • supervised like similarly situated national banks, including with respect to capital, liquidity, and risk management;
  • required to demonstrate a commitment to financial inclusion with high standards similar to those under the Community Reinvestment Act (CRA); and
  • required to develop a contingency plan to address significant financial stress, including exit strategies if unable to recover.

Below is an overview of a process for deciding whether a Fintech Charter fits the company's business model and provides an overview of the considerations for preparing an application. After such a review, a company would then be ready to seek out a full analysis of how and when to move forward.

Overview of the Fintech Manual

The Fintech Manual describes the required components of a Fintech Charter application and explains the framework the OCC will use to evaluate each application. The OCC recognizes that potential applicants may vary widely in form and business model, and the evaluation process will take into account the specific attributes of each applicant.

The central evaluation framework for Fintech Charter applications remains largely unchanged compared to the 2017 draft of the licensing manual supplement. There are, however, a few noteworthy differences:

  • The Fintech Manual states that a Fintech Bank cannot accept deposits. If a fintech company wants to accept deposits, it must apply for a full-service national bank charter.
  • The Fintech Manual places greater emphasis on an applicant's business plan and, in particular, the contingency plan piece of the business plan.
  • Fintech Charter approvals will be conditioned on the applicant committing to a CRA-like financial inclusion plan. Appendix B of the Fintech Manual provides guidance for how applicants can demonstrate that commitment.
What can a Fintech Bank do? A Fintech Bank…
  • Must engage in paying checks or lending money (or both), but cannot take deposits.
  • May engage in traditional activities in new ways (e.g., facilitating electronic payments as a modern form of paying checks).
  • May engage in any activity permissible for a national bank, which includes offering electronic stored value.
How does a Fintech Bank fit in the bank regulatory system?
  • A Fintech Bank is a national bank under the National Bank Act for all relevant purposes.
  • State laws, including licensing requirements, would be preempted from applying to a Fintech Bank to the same degree as for other national banks.
  • A Fintech Bank would be a member bank of the Federal Reserve System, and would be eligible to be a member of a Federal Home Loan Bank.
  • Any parent company of a Fintech Bank could be subject to the Bank Holding Company Act.
What is the overall application process for a Fintech Charter?
  • It is based on the already established procedures for national bank charter applications.
  • There are four phases: (1) prefiling, (2) filing, (3) review, and (4) decision.
  • The procedures in the Fintech Manual are in addition to the Charters and Background Investigations booklets of the Comptroller's Licensing Manual for full-service national banks.
What information and documents are required for a Fintech Charter application?
  • Completed OCC version of the Interagency Charter and Federal Deposit Insurance Application.
  • Articles of association or incorporation, bylaws, offering materials, and stock certificates.
  • Background checks and financial disclosures for company organizers, senior officers, directors, and controlling shareholders.
  • Company financial data, including capital structure.
  • Details of the company's premises, information systems, security procedures, and insurance.
  • Copies of applicable policies, including risk management, BSA/AML compliance, credit risk, funds management, interest risk, and liquidity management.
  • Business plan, including contingency and financial inclusion plans.
What are the requirements for a Fintech Bank business plan? A business plan should…
  • Describe and address the permissibility of the Fintech Bank's proposed activities.
  • Clearly define the market to be served and the products and services that will be offered.
  • Contain realistic forecasts for demand, competition, financial projections, and capital adequacy in both normal and stressed conditions, and the basis for those forecasts.
  • Provide a proposed risk management framework, including how the Fintech Bank's board will monitor adherence to the business plan.
  • Describe the proposed internal system of controls, including management information systems, for ensuring data and transaction integrity, security, auditability, and resiliency.
  • Provide for testing of compliance and risk management systems and address any services that will be outsourced to third parties.
  • Demonstrate a realistic understanding of all risks inherent in the business, including applicable service provider, cybersecurity, BSA/AML, OFAC, consumer protection, and fair lending risks.
What are the capital and liquidity requirements for a Fintech Bank?
  • A Fintech Bank is subject to the same regulatory minimum leverage and risk-based capital requirements as all national banks.
  • The regulatory minimum capital levels are a floor and may be insufficient to be commensurate with the risk and complexity of a Fintech Bank's proposed activities.
  • The applicant will propose a minimum capital level for the Fintech Bank based on an assessment that considers both quantitative and qualitative factors associated with the business plan.
  • The capital proposal should discuss how the Fintech Bank would address adverse market conditions that could deplete capital.
  • The applicant should describe the potential volatility of its funding sources and how the Fintech Bank will maintain sufficient liquidity under stressed conditions.
  • The OCC will impose capital and liquidity requirements tailored to the Fintech Bank's funding model, structure, and risks.
What is the contingency planning requirement?
  • A Fintech Bank must develop a contingency plan that outlines strategies for restoring financial strength — including options for selling, merging, or liquidating — in the event of significant financial stress.
  • Format and content are flexible and should be tailored to the Fintech Bank's specific business.
  • A Fintech Bank will be expected to review and update the contingency plan annually.
How does a Fintech Bank demonstrate a commitment to financial inclusion?
  • A Fintech Charter applicant should describe the proposed commitment in its application.
  • The description should include the goals, approaches, activities, milestones, commitment measures, and metrics for serving the anticipated market and community.
  • The commitment should identify the needs of underserved markets that could be met by the Fintech Bank's products, services, and activities.
  • The commitment to financial inclusion is ongoing through the life of the charter, and the Fintech Bank will develop policies and procedures to implement its financial inclusion commitment.

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The finalized Fintech Manual and Comptroller's enthusiasm for the Fintech Charter present an opportunity for fintech companies to seek a tailored, nationwide charter. The OCC says, however, that the Fintech Charter is not for everyone; it "is only one option among many for companies engaged in the business of banking." The OCC thinks fintech companies also should consider "state banking charters, appropriate business licenses, and partnerships with other federal or state financial institutions." Determining whether a company should apply for a Fintech Charter will take thoughtful evaluation and analysis of the full spectrum of licensing and regulatory costs and opportunities.