On 31 July 2018 the Office of the Comptroller of the Currency (OCC) announced – to much anticipation – that it will begin accepting applications from fintech companies for special-purpose national bank charters (commonly referred to as 'fintech charters'). The announcement included two documents supporting the fintech charter:
- a policy statement on the OCC's intent and authority to offer a fintech charter – "Policy Statement on Financial Technology Companies' Eligibility to Apply for National Bank charters" (the policy statement); and
- a final version of a supplement to the Comptroller's Licensing Manual entitled "Considering Charter Applications from Financial Technology Companies" (the licensing manual supplement).
The OCC's announcement appears to have been coordinated with the Department of the Treasury, which issued a wide-ranging report on the same day that expressed support for the fintech charter.
The standards and processes discussed in the OCC's recently issued fintech charter materials are generally consistent with its previous statements and positions regarding the fintech charter. As the OCC has previously suggested, the fintech charter will not be an easy road to obtaining the benefits of a national bank charter. Any company considering applying for a fintech charter should take into account the regulatory requirements to operate as a special-purpose national bank, including those concerning capital and liquidity, financial inclusion and risk management.
Further, state banking regulators are likely to once again challenge the OCC's authority to grant fintech charters, which could create some uncertainty for early applicants. However, for some fintech companies, the fintech charter may present a meaningful licensing option.
In the policy statement, the OCC asserts its authority under the National Bank Act and its existing regulations and procedures to grant national bank charters to companies that engage in the business of banking. The OCC defines the 'business of banking' as any of the three core banking functions:
- receiving deposits;
- paying checks; or
- lending money.(1)
The OCC will accept fintech charter applications from fintech companies that wish to engage in the core banking functions of lending money or paying checks (including facilitating payments electronically). The OCC has indicated that it will not grant a fintech charter to a fintech company that wishes to accept deposits or engage in fiduciary activities (for business plans that involve purely fiduciary activities, a limited purpose trust charter may provide an alternative vehicle). Because special-purpose national banks will not be allowed to accept deposits, fintech company applicants will not require deposit insurance from the Federal Deposit Insurance Corporation (FDIC) and therefore will not apply to the FDIC as part of the chartering process.
For fintech companies engaged in lending money or facilitating payments electronically, the fintech charter may be attractive because of:
- the benefits of federal pre-emption with respect to the regulation of national bank activities;
- avoiding the need to obtain multiple state licences; and
- the potential for simplifying commercial relationships, all without subjecting any company that controls the special-purpose national bank to the Bank Holding Company Act and Federal Reserve regulation.
However, it is unclear whether special-purpose national banks will have access to Federal Reserve payment services, which could be an important issue for some fintech companies that are considering the fintech charter option.
Further, it is unclear whether the fintech charter will be available to fintech companies which also engage in commercial activities. The OCC's draft licensing manual supplement indicates that:
Proposals that inappropriately commingle banking and commerce could introduce into the banking system risks associated with non-banking related commercial activities, interfere with the efficient allocation of credit throughout the U.S. economy and foster anti-competitive effects and undesirable concentrations of economic power, and would thus be inconsistent with the OCC's chartering standards. Proposals from companies that implicate such concerns will not be approved.
The OCC has not included this discussion in the final version of the licensing manual supplement. However, the policy statement mirrors this view in a description of how the OCC will exercise its chartering authority: "Exercising the OCC's existing authority to grant special purpose charters does not alter existing barriers separating banking and commerce."
In the policy statement and the licensing manual supplement, the OCC explains that it will apply the same high standards that apply to all national banks to the charter application review process and ongoing supervision of special-purpose national banks. In the charter application process, the OCC will consider whether a proposed special-purpose national bank:
has a reasonable chance of success, will be operated in a safe and sound manner, will provide fair access to financial services, will treat customers fairly, and will comply with applicable laws and regulations. The OCC will also consider whether the proposed bank can reasonably be expected to achieve and maintain profitability and whether approving the charter will foster healthy competition.
Other OCC considerations include whether a proposed special-purpose national bank:
- has and will have adequate capital and liquidity to support its business activities over time;
- has organisers and management with appropriate skills and experience (including experience in financial services, highly regulated environments and technology);
- has and will maintain effective corporate governance;
- has appropriate processes or plans for sophisticated risk management that will effectively identify, measure, monitor and control risk;
- is committed to financial inclusion; and
- has an adequate contingency plan in the event of financial stress.
Even before the OCC evaluates an applicant under these considerations, it appears that it will require prospective applicants to begin the process of exploring a special-purpose national bank charter by engaging with the OCC's Office of Innovation. It seems that the Office of Innovation will serve as an informal gatekeeper – possibly discouraging applications from fintech companies that are unlikely to meet the OCC's standards.
A substantial element of a special-purpose national bank charter application will be the applicant's detailed business plan. The business plan must (among other things):
- discuss the applicant's proposed activities;
- define the applicant's market;
- provide realistic business and volume forecasts;
- discuss how the applicant will maintain effective capital and liquidity and engage in effective funds management;
- describe the company's risk management controls; and
- identify key vendors.
On the issue of capital, the applicant will need to consider qualitative and quantitative factors relating to:
- on and off-balance-sheet assets;
- operational risk;
- anticipated activities and volume;
- prospects for growth; and
- stability in its sources of capital.
The OCC indicates that if an applicant has "limited on-balance-sheet assets or non-traditional strategies", it may have to maintain a higher minimum level of capital than the OCC's regulatory capital rules would otherwise require. Liquidity will also be a key focus because of the absence of deposit funding. In the licensing manual supplement, the OCC indicates that it may require special-purpose national banks to enter into liquidity maintenance agreements.
Two other important aspects of the fintech charter are the requirements for:
- a demonstrated commitment to financial inclusion; and
- a contingency plan.
Applicants should expect the former to require plans for meeting financial services needs in underserved communities in its anticipated markets and investment in such communities. The latter will necessitate the development of a detailed written plan describing how, in the event of significant financial stress, the special-purpose national bank will restore its financial strength – including options for selling, merging and liquidating the special-purpose national bank.
When considering a fintech charter, fintech companies should be aware that certain portions of a special-purpose national bank application will be made public and the public will be given a chance to comment. Fintech companies should also be prepared for a lengthy charter application process. While the licensing manual supplement indicates that the OCC "seeks to make a decision on a complete and accurate application within 120 days after receipt or as soon as possible thereafter", it warns that the OCC's review of a special-purpose national bank charter application "may require additional time and scrutiny". Further, there may be many months of interaction with the OCC before it deems a fintech company's application "complete and accurate". In addition, newly chartered national banks – including special-purpose national banks – are subject to an initial period of heightened supervision compared to other national banks.
State opposition and likely legal challenges
State regulators generally – and the New York Department of Financial Services (NYDFS) in particular – oppose the fintech charter. Both the Conference of State Bank Supervisors (CSBS) – the national association for state banking regulators – and the NYDFS have previously sued the OCC to prevent the charter. The suits asserted that the OCC had exceeded its statutory authority in proposing the fintech charter. Both suits were dismissed for lack of ripeness (ie, on the basis that the OCC had not yet issued a special-purpose national bank charter to a fintech company) without addressing the merits of the CSBS and NYDFS arguments.
After the OCC's recent announcement that it would begin accepting applications for fintech charters, both the CSBS and the NYDFS issued statements of opposition. It seems likely that these entities will renew their legal challenges either on the basis of the OCC's recent announcement or the first time that the OCC grants a special-purpose national bank charter to a fintech company. Thus, a fintech company considering filing a special-purpose national bank charter application in the near future should be aware of the potential for legal challenges by state regulators, which could delay the licensing process and make uncertain the status of any special-purpose national bank until the legal challenges are resolved.
The threat of legal challenges from the CSBS and NYDFS might also prompt the OCC to be particularly cautious regarding which fintech company is the first to receive a special-purpose national bank charter, to ensure that the OCC is in the best possible position in the event of a legal challenge. The OCC appears to have made efforts in the final licensing manual supplement and the policy statement to provide detailed legal support (including footnotes and citations) for its authority to issue special-purpose national bank charters. This may have been done – at least in part – in anticipation of possible litigation or other challenges.
The fintech charter may offer a meaningful option for some fintech companies and financial services firms. However, it will not be the most effective licensing model for all fintech companies – particularly those unconcerned about Bank Holding Company Act compliance and that could otherwise meet full-service national bank standards, including FDIC approval for deposit insurance. For such companies, a full-service national bank charter may be appropriate. For others (including some fintech companies that would struggle with those challenges), better options than a fintech charter might include:
- partnering with a bank;
- seeking an industrial bank charter;
- seeking a limited purpose trust charter; or
- obtaining any necessary state licences.
For further information on this topic please contact David E Teitelbaum, Joel D Feinberg or Michael D Lewis at Sidley Austin LLP's Washington DC office by telephone (+1 202 736 8000) or email ([email protected], [email protected] or [email protected]). Alternatively, contact Connie M Friesen at Sidley Austin's New York office by telephone (+1 212 839 5300) or email ([email protected]). The Sidley Austin website can be accessed at www.sidley.com.
Endnotes
(1) The OCC also has authority to establish limited-purpose national banks that engage in fiduciary activities without engaging in one of the three core banking functions.
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