In July, the Office of the Comptroller of the Currency (OCC) announced its decision to begin issuing special purpose national bank charters to fintech companies. Recently, though, Maria Vullo, superintendent of New York’s Department of Financial Services, filed a lawsuit against the OCC in an attempt to counteract the decision.
In the lawsuit, Vullo aims to argue that the OCC’s decision to issue national charters to fintech companies is unconstitutional, as an overreach of the OCC’s power, and that issuing national banking charters to fintech companies would pose a risk to consumers. Like other recent changes in regulation, the outcome of this lawsuit will likely influence how fintech companies conduct business in the years to come.
A Long-Awaited Decision
The OCC’s recent decision has been in the works since December 2016, when the OCC first began entertaining the idea of issuing special purpose charters specifically for fintech companies. The decision came about after issues were raised regarding the difficulty fintech companies face when trying to operate across state lines.
Before the OCC’s decision, fintech companies were required to apply for charters in every state they operated in. This often made it impossible for smaller startup companies to operate in all 50 states because complying with regulations and maintaining licencing in every state was too time-consuming and expensive.
The OCC’s decision would allow non-deposit fintech companies to apply for national charters as if they were banks — which, according to the OCC’s definitions, they practically are — allowing fintech companies to exchange state licencing processes for federal ones.
National charters would streamline business for many fintech companies, allowing them to serve more customers across the country, which only makes sense for companies that operate in primarily online spaces. Even better, it would allow those companies to provide consistent service to people from state to state, which is difficult under the current charter system.
Objections to Special Purpose National Charters
Though national charters would provide new opportunities for fintech companies, some individuals and organizations are still against them. Some in the fintech industry believe that national oversight would be too harsh on startups, while others outside the industry believe that issuing bank charters to fintech companies should not be in the federal government’s domain in the first place.
If you’ve been paying attention to this debate for a while now, Vullo’s lawsuit probably sounds familiar. This is because two similar lawsuits have already been brought against the OCC for considering this decision: one filed by the Conference of State Bank Supervisors (CSBS) and one by the New York Department of Financial Services. Both cases were dismissed because the OCC had not yet reached a decision.
Vullo has suggested that the OCC decision to issue national charters would allow fintech companies to skirt more rigorous state regulations, such as those in New York. However, the OCC’s decision does not simply exempt fintech companies from state laws.
Clarifying the OCC Decision
In response to the new lawsuit, Joseph Otting, the current Comptroller of the Currency, published an explanation detailing the OCC’s process and clarifying misconceptions about the decision. In particular, Otting clarifies that many state and consumer protection laws would continue to apply to fintech companies after the decision and those that are not covered would be thoroughly regulated by the OCC, which has more funding to allocate to oversight than many states with smaller budgets.
Otting goes on to suggest that the lawsuits filed by the CSBS and Vullo in New York are more about “defending turf and licensing revenue” than about protecting consumers or allowing competitive state markets. If Otting is correct, then national charters for fintech companies could benefit not only the companies themselves but commerce in smaller states.
The Impact on Fintech Companies
Though fintech companies have long awaited national licensing as opposed to state regulation, the success or failure of New York’s lawsuit will not completely remake the fintech industry.
If the lawsuit succeeds and the OCC’s decision is overturned, fintech companies will simply carry on as they have been, operating on a state-by-state basis. If the lawsuit fails and the OCC’s decision is upheld, some companies will apply for national charters while others will choose not to.
The national licensing process comes with many benefits and drawbacks, all of which will influence the decisions of different companies. Some companies will seize the opportunity to more easily expand into other states, while others will prefer to avoid heavy national scrutiny and continue to operate on a smaller scale.
Though the fintech industry would not change overnight, the OCC’s decision could substantially change the landscape of the industry over time. National charters could give small startups a boost and allow them to compete with larger, more established companies. Indeed, Otting suggests that the decision will facilitate increased competition and innovation.
Because of the impacts this decision could have on the nature of competition in the industry, it’s certain that many fintech professionals will be following this issue closely as it develops.