A banking charter for fintechs proposed by the Office of the Comptroller of the Currency in December 2016 unleashed a vigorous debate. Advocates say the bill could promote innovation and financial inclusion for underbanked citizens. Opponents believe the measure could threaten consumer safety and impede small business growth.
"The OCC should not use technological advances as an excuse to attempt to usurp state laws that already regulate fintech activities where they intersect with banking and lending, whether depository or [non-depository]," said New York State Department of Financial Services Superintendent Maria T. Vullo. "New York is the leader of innovation and will continue to promote small businesses and leaders in this field. However, a one-size-fits-all federal charter will not work to create a level playing field among all financial services companies, or to alleviate risks."
David True, payments industry consultant and President of NYPAY, voiced a different view. "It's a natural tendency for government and business entities to protect their turf, and in fact our nation was founded on the principle of balancing state and government rights," he said. "But navigating state-by-state requirements can be costly and time-consuming for startup companies. A national charter would enable a money transfer company to apply once and be covered throughout the United States."
The OCC's Exploring Special Purpose National Bank Charters for Fintech Companies contains a far-reaching proposal that examines the agency's role as chartering authority, both historically and organically, as the office evolves in response to emerging financial technologies. The 150-year-old OCC strives to remain relevant in the digital age, publishing guidance designed to balance innovation with protecting established, financial infrastructure.
The agency feels it has established rigorous standards for entities applying for special purpose banking charters. Applicants must submit "a detailed business plan, governance, capital, liquidity, compliance risk management, financial inclusion, and recovery and resolution planning," the OCC stated. The OCC has offered to meet with prospective applicants to discuss requirements.
"The OCC expects any applicant seeking a special purpose national bank charter to provide a sufficient description of the proposed bank's activities for the OCC to fully understand the BSA/AML and compliance risks the proposed bank faces, how it intends to assess, manage, and monitor these risks, and how it would comply with relevant laws, regulations, and requirements," the proposal's authors wrote.
The OCC's interest in financial inclusion, defined by The World Bank as conditions in which "individuals and businesses have access to useful and affordable financial products and services that meet their needs ‒ transactions, payments, savings, credit and insurance ‒ delivered in a responsible and sustainable way," aligns with goals on the part of many payments industry and financial services leaders to expand financial inclusion.
The Electronic Transactions Association stated that fintech is naturally focused on financial inclusion and has made financial services widely available through mobile apps, online applications and a range of free and low-cost digital services. "These products and services have also expanded, and are continuing to expand, financial opportunities for underserved consumers," wrote Scott Talbott, ETA Senior Vice President of Government Affairs in a Jan. 17, 2017 letter to the OCC.
Talbott further noted the role of nontraditional finance companies in providing lines of credit to small business owners, creating new opportunities for borrowers and lenders. "It's clear that online small business lending is reaching a broad market, and that providing quicker access to capital allows small businesses to invest in their employees, purchase more inventory, expand their services, and ultimately grow their businesses," he wrote.
In a separate letter, also dated Jan. 17, 2017, the New York State Department of Financial Services (DFS) urged the OCC to respect New York State laws for money transmitters, online lenders and virtual currency exchanges, which have been in place for decades. The department also called on state regulators, legislators and policymakers to oppose the OCC proposal in favor of retaining a state-based regulatory system.
"The National Bank Act does not provide the OCC with authority to create this new proposed charter," Vullo wrote. "The proposal threatens to create an entirely new federal regulatory program, creating serious regulatory uncertainty that threatens to invade state sovereignty and embolden those who may seek to evade strong state consumer protection laws."
Vullo feels that a national charter might even stifle innovation by enabling large firms to dominate the financial services sector, to the detriment of existing banks and small business startups. "A national charter would encourage large 'too big to fail' institutions, permitting a small number of technology-savvy firms to dominate different types of financial services simply because they are able to get a national charter," she wrote.
Vullo went on to note that the proposal could create "regulatory arbitrage" by enabling companies to sidestep state consumer protection laws. "State regulators like DFS are experienced and therefore better equipped to regulate cash-intensive nonbank financial service companies, which requires strict oversight and enforcement of anti-money laundering, consumer identification and transaction monitoring statutes and regulations," Vullo stated.
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