Fintech Firms Press OCC for Specialized Charter

WASHINGTON — Fintech companies are asking a federal regulator to create a specialized charter that would allow them to comply with federal rules instead of facing a state-by-state licensing framework.

In comment letters to the Office of the Comptroller of the Currency, the Chamber of Digital Commerce is seeking a "fintech or 'bank-light' charter," while the Innovative Lending Platform Association envisioned a licensing system to "prevent [the] application of an inefficient and duplicative patchwork of state and federal laws."

ILPA members Kabbage, OnDeck and CAN Capital were seconded by the Center for Financial Services Innovation, the Milken Institute and Coin Center, which all called for a nonbank charter or variations of one.

Fintech companies are often hampered by their money-services-business status, which can make it difficult to obtain and keep a bank account due to compliance issues, and have long clamored for a unified licensing system akin to a bank charter.

But an OCC white paper released in March and several recent statements from the agency that it is considering creating a charter have sparked renewed discussion.

"It stimulated the thinkers out there," Cliff Stanford, a financial lawyer who has worked with fintech startups, said in an interview. "The ideas are going to bubble up."

But even if the OCC were willing to create a limited-purpose charter — like those used by credit card banks, for instance — the agency would have its own obstacles to face.

The OCC can charter institutions, but it doesn't have the power to grant deposit insurance, which is the purview of the Federal Deposit Insurance Corp.

That's why Coin Center and other advocates are seeking a limited-purpose charter that would pre-empt state transmission rules but ensure that fintech firms are differentiated from banks.

"Given the risks associated with deposit-taking and lending, fintech firms could be limited in their charters to performing the check payment function," Peter Van Valkenburgh, Coin Center's director of research, and Jerry Brito, its executive director, said in their comment letter.

Still, if the OCC decides to create a federal charter, it raises the question of how other federal regulators fit into the picture.

"The question of who regulates is incredibly important," the Milken Institute's Jackson Mueller and Staci Warden said in a comment letter. The agency, they said in their letter to the OCC, should find ways to "work with [other federal and state regulators] in order to provide consistent and transparent communication and guidance."

Industry observers said regulators will need a balanced approach, making sure that new entrants are appropriately regulated on the one hand while encouraging innovation on the other.

An OCC-backed charter is "a high bar," Jo Ann Barefoot, a longtime consultant on fintech regulation, said in an interview. But "regulators are recognizing that if they don't bring innovation fintechs into the banking system ... that could lead to instability overall, and it could also lead [banks] to have difficulty competing."

Following is an abbreviated list of the other items fintech firms are hoping to see.

Better coordination among regulators

Ripple envisioned a formal body akin to the Federal Financial Institutions Examination Council through which regulators could make innovation-related decisions. "Such an effort would create alignment for regulators overseeing similar financial activity," Ryan Zagone, the payment network's director of regulatory relations, said in a comment letter. "Technology companies and financial institutions would benefit from clarity and consistency."

Similarly, the data analytics company Plaid proposed an "advisory committee" bringing together representatives from traditional financial services companies, as well as fintechs and consumer groups.

Clarifying standards for partnerships between banks and fintechs

"Many [banks] have the perception, accurate or inaccurate, that regulators have not been clear in their expectations of banks who are considering such platform arrangements," Lending Club said.

The online lending platform proposed a "regulatory bulletin" clarifying the OCC's expectations of bank partners, and FFIEC exam modules focused on their relationships with marketplace lenders.

A principles-based approach rather than a rules-based approach

"Outdated regulations restrict innovation that could expand high quality services and improve consumer financial health," Jennifer Tescher and Jeanne Hogarth of the  Center for Financial Services Innovation said in a comment letter. "A broader guideline might allow for this innovation to take place and more quickly allow banks to serve a broader range of customers and provide them with a more convenient means of depositing cash."

A regulatory "sandbox"

Inspired by the U.K.'s Financial Conduct Authority, some called for a sandbox approach where regulators could test out certain products outside of previously established rules. Innovators "need opportunities to test out minimally viable products, to try out a proof of concept, to field beta-test pilots, to 'test and learn,' and to iterate product changes without necessarily being in full compliance with every nuance of every regulation," the CFSI said.

Distributed-Ledger Technology

The Bankers Association for Finance and Trade, an arm of the American Bankers Association, urged the OCC to "recognize the unique qualities" and not stand in the way of distributed-ledger technology, a type of blockchain that has sparked banks' interest.

R3 CEV's managing director, Charley Cooper, wrote that the Comptroller's Office should get its hands dirty, too. "By developing a sophisticated in-house understanding of how various technologies work, and their strengths and limitations, the OCC will be better positioned to regulate those technologies," Cooper wrote. Asked how the OCC plans to handle the technology, an agency spokesman noted that banks did not currently need a license to use distributed-ledger technology, but that it was on the agency's radar.

"As a technology matures, the agency may consider updating risk management guidance to assist banks and examiners in ensuring new technologies are deployed responsibly," the spokesman said.