The standards and processes discussed in the OCC’s recently issued FinTech Charter materials are generally consistent with the OCC’s prior statements and positions regarding the FinTech Charter. As the OCC suggested previously, 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 carefully consider the regulatory requirements to operate as an SPNB, including those concerning capital and liquidity, financial inclusion and risk management. Also, 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.
FinTech Charters Generally
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 of receiving deposits, paying checks or lending money.1
The OCC has determined to 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 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 SPNBs 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 preemption with respect to the regulation of national bank activities, avoiding the need to obtain multiple state licenses, and the potential for simplifying commercial relationships, all without subjecting any company that controls the SPNB to the Bank Holding Company Act and Federal Reserve regulation. However, it is unclear whether SPNBs 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.
Also, it is unclear whether the FinTech Charter will be available to fintech companies if they also engage in commercial activities. The OCC’s draft Licensing Manual Supplement indicated 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 SPNBs. In the charter application process, the OCC will consider whether a proposed SPNB “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 SPNB has and will have adequate capital and liquidity to support its business activities over time; has organizers 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 the OCC will vet potential applicants by requiring potential SPNB applicants to begin the process of exploring an SPNB charter by engaging initially with the OCC’s Office of Innovation. The Office of Innovation seemingly will serve as an informal gatekeeper — possibly discouraging the filing of applications by fintech companies that are not likely to meet the OCC’s standards.
A substantial element of an SPNB charter application will be the applicant’s detailed business plan. The business plan must, among other matters, discuss the applicant’s proposed activities, define its 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 related 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 applicants may be required to maintain a minimum level of capital in excess of what the OCC’s regulatory capital rules would otherwise require, if an applicant has “limited on-balance-sheet assets or nontraditional strategies.” Liquidity also will be a key focus because of the absence of deposit funding. In the Licensing Manual Supplement, the OCC indicates that it may require SPNBs to enter into liquidity maintenance agreements.
Two other important aspects of the FinTech Charter are the requirement for a demonstrated commitment to financial inclusion and the requirement for a contingency plan. Applicants should expect that the former will require a plan for meeting financial services needs in underserved communities in its anticipated markets and for 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 SPNB will restore its financial strength, including options for selling, merging and liquidating the SPNB.
When considering a FinTech Charter, fintech companies should be aware that certain portions of an SPNB 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. 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,” but also indicates that the OCC’s review of an SPNB charter application “may require additional time and scrutiny.” Moreover, it is important to be aware that it may require many months of interaction with the OCC before a fintech company’s application is deemed by the OCC to be “complete and accurate.” Additionally, it will be important to consider that newly chartered national banks, including SPNBs, are subject to an initial period of heightened supervision as 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 FinTech Charter. The suits asserted that the OCC exceeded its statutory authority in proposing the FinTech Charter. Both suits were dismissed for lack of ripeness (i.e., on the basis that the OCC had not yet issued an SPNB 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 an SPNB charter to a fintech company. Thus, a fintech company considering filing an SPNB 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 SPNB until the legal challenges are resolved. The threat of legal challenges from the CSBS and NYDFS also might cause the OCC to be particularly cautious regarding which fintech company is the first to receive an SPNB charter, to ensure that the OCC is in the best possible position in the event of a legal challenge. It does appear that the OCC 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 SPNB charters. This may have been done at least in part in anticipation of possible litigation or other challenges.
Alternatives to a FinTech Charter
The FinTech Charter may offer a meaningful option for some fintech companies and financial services firms. However, the FinTech Charter will not be the most effective licensing model for all fintech companies, particularly those that are not concerned about Bank Holding Company Act compliance and that otherwise could 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 have difficulty with those challenges), partnering with a bank, seeking an industrial bank charter, seeking a limited purpose trust charter or obtaining any necessary state licenses might be better options than a FinTech Charter. We regularly counsel our clients on the advantages, disadvantages, complexities and risks associated with the different options. Before proceeding down the path of a FinTech Charter, we encourage clients to reach out to their Sidley contact for advice on whether it is the best option for the client.
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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