WASHINGTON — The Office of the Comptroller of the Currency appears willing to consider the creation of a federal fintech charter, but one group is raising a red flag: state regulators.
Bank supervisors in several states, which already oversee many examples of tech firms that provide financial services, say a federal charter could provide regulatory favor to still-unproven firms. They also worry that a national charter could weaken states' own established authority to enforce consumer protection and licensing laws for tech companies in the financial sphere.
"We believe a federal one-size-fits-all framework for fintech is neither possible nor appropriate," said Maria Vullo, New York State's superintendent of financial services.
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In 1999, the OCC issued a charter to the internet bank AeroBank, but the startup's efforts to raise capital were thwarted when dot-com-boom money went chasing shinier options. Nonetheless, the banks experiences resonate with fintech banks trying to obtain a national charter today.
July 13 -
While fintech companies are urging federal regulators to create a federal charter that would allow them to follow a single national standard instead of a myriad of state rules, such a benefit will almost certainly come with strings attached, including possible compliance with the Community Reinvestment Act.
July 5 -
Fed up with the hassles of applying for a multitude of state licenses and relying on bank partners, fintech firms are increasingly interested in applying for a national bank charter and federal regulators are considering ways to accommodate them.
May 9
Fintech firms have pressed the OCC to develop a limited-purpose charter so they can be governed by a single regulatory framework rather than have to comply with all the different sets of rules that exist in the states they operate. In several pronouncements, OCC officials have indicated the agency is exploring the idea.
But state regulators say a federal charter could be seen as validating business models on a national basis before they have proven they can withstand a crisis. They also raise concerns reminiscent of the federal preemption battles before the 2008 financial crisis, saying that a federal fintech charter could undermine state authority.
"A federal charter is likely to preempt state laws on interest rates, impairing states' ability to tailor their laws to their consumers," said Ray Grace, the North Carolina banking commissioner.
Massachusetts Commissioner of Banks David Cotney also said a federal charter could trump state consumer protection and licensing rules, which would be "the beginning of a race to the bottom."
He said state regulators have observed the evolution of fintech companies long before debates over regulating financial technology came to Washington, and noted that it is too soon to say if they are sustainable or similar to past innovations that ultimately failed.
"While the federal government is talking about what to do about fintech, the states are already acting in this space," Cotney said. "We see things early, and our legislatures and state regulators have the flexibility to act quickly."
"We have not been through a complete cycle with some of these fintech companies," he said, adding, "We saw some examples of innovation that led us down a dangerous path in the past."
Yet advocates for a nationwide fintech chartering system say a state-by-state licensing system is not a good solution either, and that it could be holding back the innovation and sustainability of new firms.
"The cost of inefficiency [in] having to comply with 50 different sets of rules makes it really hard to roll out any kind of national new financial services model," said Alex Acree, a managing director at the venture company Fenway Summer who regularly advises fintech companies.
Many also disagree that a federal fintech charter would result in softer regulation for firms than what they face at the state level.
"If there is a national charter, it won't be easy to get it," said Jo Ann Barefoot, a consultant who has worked on this issue with both fintech companies and regulators. And, she added, "It's going to be a select group of fintechs that will apply for it."
OCC officials have suggested that the high frequency of bank charters granted to banks in the years leading up to the financial crisis looms large in their ongoing analysis of what a fintech charter might look like.
"The sanctity of the charter was something that in large-bank supervision we needed to reflect on after the financial crisis," Maryann Kennedy, the OCC's deputy comptroller for large-bank supervision, said during a forum on responsible innovation held by the agency in June.
But state regulators say they are also worried about the viability of their own authority to charter companies and set rules of the road.
"A federal fintech charter is likely to eliminate that local responsiveness and imbalance the allocation of power between the federal and state government," Grace said.
New financial technologies, he added, "can and should continue to develop within the existing regulatory framework before regulators attempt to create a 'charter' to specifically ease the licensing process."
The concerns raised by state regulators recall tensions that had brewed between states and the OCC over the federal preemption powers of national banks.
Yet much has changed since those battles, including provisions passed in the 2010 Dodd-Frank Act that sought to limit preemption. Also different is that the current comptroller, Thomas Curry, is a former state banking regulator from Massachusetts.
"It's a fairly complex calculus to determine the degree to which a federal charter preempts consumer protection law," said Cliff Stanford, a partner and chair of Alston & Bird's Bank Regulatory Group. But, he added, "I don't think the OCC would have wiggle room to expand preemption for fintech companies."
Stanford added that Curry's background as a state regulator "quite possibly would temper" the type of authority the OCC would seek in a fintech charter. "The comptroller will have due respect, deference and appreciation for the dual banking system," Stanford said.
Yet state regulators argue they are better positioned to deal with the issues that come up with regulating fintech firms, including a broad purview and responsibility to oversee both safety and soundness and consumer protection laws.
"We have the market, the consumer and the institutional perspective all rolled together as regulators," said Margaret Liu, the senior vice president and deputy general counsel at the Conference of State Bank Supervisors. "We bring a really different perspective to regulation."
One of the common complaints from fintech firms is how different states all have different sets of rules. But state officials say they have worked to standardize certain facets of fintech oversight.
Through the CSBS, they have implemented a unified portal for money transmitter licensing, which is commonly required of online lenders for each state in which they seek to operate.
Originally created for mortgage companies, the Nationwide Multistate Licensing System is now a money transmitter licensing application portal in 35 states.
States are also working on creating greater consistency in their laws. The Uniform Law Commission, a Chicago-based nonprofit that develops model state laws, is in the process of drafting a virtual currency bill.
"We've been working together and try to identify how we can work together better so that we don't need to recreate the wheel in each state," said Cotney, whose state passed a virtual currency bill just last month.
Cotney added that taking away states' authority to regulate fintech would not solve the problem of the limited resources some of his counterparts face in dealing with new types of businesses.
"If you ask any state or federal regulator, they'll always tell you we could use more resources," he said.
