OCC can't claim victory despite dismissal of fintech charter suit

The Office of the Comptroller of the Currency’s recent escape from litigation challenging its new, untested fintech charter was treated by the agency as a big win. Not so.

Sometimes winning the battle means losing the war. By further delaying the day of legal reckoning on its power to issue the charter, the OCC has put its entire fintech strategy at risk.

Judge Dabney Friedrich of the U.S. District Court for the District of Columbia ruled for a second time that litigation by the Conference of State Bank Supervisors challenging the agency’s power to issue a special-purpose national bank charter to fintechs is “unripe” until such a charter is actually issued.

The OCC’s “win” comes a few months after a contrary ruling in the Southern District of New York, where a judge adopted the view of the New York State Department of Financial Services that the OCC lacked authority to issue the fintech charter; and forcefully rejected the OCC’s motion to dismiss the case on similar ripeness grounds.

One must ask: Why is the OCC trying so hard to avoid the core question of the fintech charter’s legality? It’s a confounding question, because there’s a really big problem with the agency’s litigation approach that undermines its entire fintech charter strategy.

By avoiding a ruling on its power to issue a fintech charter until one is actually issued, the OCC is paradoxically ensuring that no fintech will want to seek such a charter; and that the OCC will never issue one. How can that outcome be a win for the agency or the fintech community?

The value the OCC’s special-purpose charter for fintechs is already questionable. The charter exempts fintech banks from bank holding company limits under the Federal Reserve and the Federal Deposit Insurance Corp.’s oversight, while also permitting preemption of many state consumer laws. However, fintech banks would remain subject to most of the regulatory oversight and capital, liquidity and compliance burdens of a full-service bank.

Moreover, one of the most important benefits of national bank status — direct access to the Federal Reserve’s payments system — isn’t guaranteed. The Fed hasn’t decided if it’s a good idea to let nondepository banks into the direct access “club.” And the early smoke signals have not been positive.

Even if we assume that a brave (or foolhardy) fintech decides today to take the gamble on payment-system access and goes through the arduous, multi-year process of building a banking team, applying for and receiving a fintech charter (and then raising capital), will only start the legal clock ticking.

It will take several years after the first decision “on the merits,” and at least one trip to the Supreme Court, to resolve the novel and difficult questions raised in the litigation. In a world where deference to administrative agencies is out of fashion, there’s a good chance that the OCC may lose in the end.

Even if it wins, that would only trigger political jockeying with legislative proposals introduced to reverse the outcome once Congress realizes that tech companies like Amazon, Google, Facebook and Microsoft could also be granted fintech charters.

That means that any fintech startup which decides today to take the fintech charter plunge would just be exposing itself to the risk of discovering some years from now that the OCC didn’t actually have the authority to charter nondepository banks — or that Congress took that power away — and that their fintech charter, and the business they built around it, is worthless.

Why would any venture-capital-backed fintech divert critical management time and energy — along with millions of dollars in salaries and legal fees — to gamble on a legally suspect and politically charged OCC fintech charter that might turn out worthless in the end? Even cash-rich publicly traded tech companies are likely to balk at those odds.

That’s what makes the OCC’s continued attempts to delay court consideration of the key legal issues such a head-scratcher.

Instead of attempting to use the court system to get quickly to the heart of the matter, the OCC inexplicably insists that nothing should be decided until a charter is issued. But that means one will never be issued, ensuring that the fintech charter fails as a policy tool.