Google, PayPal and dozens of other technology and fintech companies have visited with officials at the Office of the Comptroller of the Currency during the past year to explore whether to obtain the agency's new special-purpose national bank charter, according to sources familiar with the matter.
But both Google and PayPal, as well as several others, have since backed off over fears that they could harm existing relationships with state regulators and concerns about whether the OCC will prevail in a legal challenge to its authority to create the fintech charter.
Many technology and fintech companies “operate under a national network of state licenses, so they don’t want to jeopardize that relationship as they shift to a national bank charter, especially if it’s unclear where the litigation will end up,” said Thomas Curry, a partner at Nutter McClennen & Fish LLP and the former comptroller who initially called for the creation of the limited-purpose charter.
Yet in almost a year since the charter has been available, no fintech or technology firm has filed an application. That’s partly because state regulators, under the Conference of State Bank Supervisors and the New York State Department of Financial Services, have filed separate lawsuits attempting to stop the charter by arguing it goes beyond the OCC’s statutory authority. Firms fear that their name could be added to the lawsuits if they apply for a charter, which poses a reputational risk and added expense to enter the federal banking system.
Moreover, applying for a fintech charter risks alienating state regulators with whom they have to work as part of their existing relationships. State regulators have been vocal on their antipathy to the charter — and few firms want to potentially draw their ire. State agencies have a range of existing legal authorities they could deploy to scrutinize any applicant.
“At this moment, there’s just a lack of clarity as to what will the process be and will it be litigated,” said Brian Peters, executive director at Financial Innovation Now, which represents big tech companies like Google, PayPal and Amazon. “Whoever is first to apply, will it become the sacrificial lamb that the states go after? And that is a process concern where the marketplace needs a lot more certainty.”
For Google in particular, an application might prove politically dicey. The OCC's limited-purpose charter is theoretically designed to help fintechs that do not seek to take deposits but want to operate under a single national regulator.
That has proven controversial enough, but a move by a large tech company like Google would significantly raise the stakes. Community banks have successfully rallied in the past to push back against large firms — namely Walmart — seeking to enter the banking business. If Google sought to charter a bank, even a limited-purpose one that did not take deposits, it would almost certainly set off a political firestorm and prompt regulatory concerns of creating a monopoly.
"There is an underlying fear for regulators as to whether there will be concentration of economic power in chartering a larger player and that is much more elevated with the big tech firms as opposed to smaller players,” Curry said. “With the big tech players, down the road a banking charter might be something they would be increasingly interested in but given the uncertainty relative to the regulatory and legislative environment, it may not be something they want to do at this time.”
Although the creation of a fintech charter was first suggested under Curry, an Obama appointee, the Trump administration and Comptroller Joseph Otting have taken up the idea. The Treasury Department issued a report last year calling for such a charter, and under Otting's direction, the OCC finalized it in July 2018.
Otting repeatedly denied the state lawsuits posed an impediment to applicants until recently, when a federal judge ruled in May that the New York State Department of Financial Services could proceed with its case.
“I previously said in the second quarter” that the OCC would have an applicant, but “clearly with this ruling, that is going to chill that a little bit,” Otting said in an interview in May.
Now, some say it could be at least a year before a fintech is approved for an OCC specialty charter. And the first applicant is not likely to be a major player that already has a national presence.
As to the concerns from large fintechs about disrupting their relationship with state regulators by pursuing the OCC’s charter, Otting said, “That's not what we've heard.”
“When people come to us they say the complexity of dealing with state licensing and state regulators is enormous and ever changing,” he said. “What I have generally heard from most people is we are looking for a solution as we get bigger and bigger that allows us to have more consistency in our regulatory infrastructure. And everybody recognizes that the OCC for hundreds of years has provided that discipline.”
Many state regulators would disagree, arguing they have been working to streamline multistate regulations for nonbanks largely through the Conference of State Bank Supervisors, which launched a big effort in 2017 to get states to harmonize the licensing process by next year, called “Vision 2020.” Nearly half the states in the country have now agreed to form a joint licensing process.
"State regulators don’t put themselves in an ivory tower and particularly in the fintech space, we’re seeing a lot of state regulators interested in learning about these companies in a constructive way for both parties," said Margaret Liu, senior vice president and deputy general counsel at the bank supervisor group. "Any number of companies would say they find state regulators approachable. It’s part of their job."
Tom Dresslar, a former deputy commissioner at California’s Department of Business Oversight, which licensed many of the fintechs that now have a national presence, said the state has long worked with fintechs to help address the multistate regulatory regime.
“My guess is the folks who have bank relationships are satisfied with their current posture, vis-a-vis state regulators, and other folks have apparently decided the OCC charter is just not the best way to go for them," he said.
Another impediment for fintechs flirting with the OCC’s new charter is that it is “limited” and lacks two critical elements in both the lending and the payments space. First, it does not require an applicant to collect deposits, which many fintechs would like to do to access a cheap source of funding. If a company wanted to directly accept federally guaranteed deposits, it would also have to get a regular bank charter and face separate approval by the Federal Deposit Insurance Corp.
Second, the Federal Reserve has not yet indicated whether it would allow an applicant into its payments system or access to the discount window, which are critical components to companies seeking a charter.
“The OCC special-purpose charter is not a walk in the park,” said Sam Taussig, head of global policy at Kabbage, an online small-business lending platform “The Fed has done little in issuing policy statements clarifying whether an OCC special-purpose national bank would be given access to the payment systems. ... While we have publicly supported the concept, there are still a number of variables that are unclear to the industry.”
Still, Taussig said, it’s likely a fintech applicant will test the waters on the OCC’s new charter as soon as this summer.
Many observers said that the first applicant is likely to be a smaller fintech that doesn’t have as many state licenses and doesn’t face the political headwinds that Google or PayPal would encounter.
Otting said most of the companies that continue to talk with the OCC about the charter “have regional presence and view having a national presence as a critical component of their business model.”
He cautioned that OCC standards are also high, making it difficult for fintechs that are startups to apply.
“This isn't a free ride. I mean, people that have come in and talked to us realize we expect real capital, real liquidity, solid risk management programs” and profitability, he said. “That's not an easy bar to get over.”