The Conference of State Bank Supervisors (CSBS) issued a terse, three-sentence warning for the OCC to back off its plan to offer a payments charter. This reaction followed media reports that Acting Comptroller of Currency Brian Brooks is ready to start accepting applications in the next few days.
How did we get here?
As we've written about several times, over the past four years the OCC has been trying to position national banks and the national bank regulatory regime as the best avenue for financial innovation. One of its earliest moves was to begin accepting applications for a new fintech charter. The fintech charter would authorize fintech companies to make loans or facilitate payments, but not accept deposits, under a national bank charter.
The OCC would incorporate these fintech entities under its authority to charter special purpose national banks (SPNBs), which are banks that engage in a limited subset of the full suite of activities permissible for a national bank. Congress has explicitly defined SPNBs to include bankers' banks, credit card banks, and trust banks. The OCC has long maintained, however, that it has the regulatory authority to charter other SPNBs, such as community development banks.
Lending and payments platforms are two of the largest sectors of the fintech industry, and these companies have frequently raised concerns about the difficulty in obtaining the state licenses needed to operate on a nationwide basis. State regulators, meanwhile, see the state licensing regime as a bulwark against all manner of potential harm that would potentially flow from fintechs operating without regulation. Through the effect of federal preemption, an OCC-chartered fintech SPNB would no longer be subject to most state regulations. While the OCC would explicitly provide supervision and regulation of these entities, state regulators have argued that a national regulator is ill equipped to protect consumers.
The states sued the OCC to prevent the issuance of any fintech charters—and they won (New York won its suit against the OCC, while the CSBS lost). Although the decision has been appealed, the crux of the issue was whether the three pillars of the business of banking—taking deposits, lending, and making payments—were all required for the OCC to exercise its chartering authority. In other words, could the OCC charter an institution that would not be authorized to take deposits? The district court said no: taking deposits was a necessary part of the business of banking, and, therefore, the OCC did not have the authority to issue fintech charters to non-deposit-taking companies.
Taking deposits would implicate significant additional regulatory requirements, including FDIC insurance and the Bank Holding Company Act. If a fintech charter obligated a company to take deposits, few if any fintech companies would likely seek to obtain one (it would be indistinguishable from a full national bank charter). The district court, therefore, effectively killed the OCC's fintech charter (pending the outcome of the appeal, of course).
The OCC's new payments charter—if reports are accurate—would be another SPNB, this time limited to only one of the three essential banking activities: making payments. The OCC likely noticed that much of the state-level objection to the fintech charter was based on its potential to increase predatory lending. The payments charter, therefore, would avoid that controversial authority.
The CSBS's statement, however, shows that the OCC may have misread the states. Payments companies engaged in money transmission are subject to state licensing, examination, and supervision requirements, and clearly the state regulators feel just as strongly about protecting their jurisdictions over this space. As the CSBS explained, the "OCC's proposed payments charter is no different than the fintech charter already rejected in federal court . . . . State regulators are opposed to this unconstitutional expansion of power."
According to reports, Comptroller Brooks is intent on moving forward, and we will likely see a payments charter proposal in the next few days. The CSBS and certain states will almost assuredly file suit immediately thereafter. What is less clear is whether any company would be willing to apply for a payments charter until the uncertainty is settled. And so, in the meantime, payments and fintech companies will continue to navigate the legal and jurisdictional complexities of offering various financial services to consumers and businesses across the U.S.
Fintech companies that previously considered a fintech charter or payments companies that want to find out more about the OCC payments charter should contact the authors.