In December 2016, the Office of the Comptroller of the Currency (OCC) released its white paper on a special purpose national bank charter for fintech companies that provide banking products and services. The comment period on the white paper closed in mid-January, and it remains to be seen whether fintech companies decide to opt for the new charter or look for other ways to increase access to customers, such as partnering with banks. In either case, fintech companies will continue to expand access to financial services for consumers and small businesses that are unserved or underserved.
One area of focus by the OCC white paper is on whether the special purpose charter will expand access to banking services to the underserved, noting that the problem of the underserved in the financial sector is a global issue. Recent studies by other bank regulatory agencies have highlighted this issue, with a 2015 report by the Federal Deposit Insurance Corp. finding that almost 30 percent of U.S. households were unbanked or underbanked. The OCC white paper specifically asked for comment on the types of activities and expectations the agency should require for entities seeking a special purpose bank charter that demonstrate their commitment to support fair access to financial services and fair treatment of customers.
In the white paper, the OCC notes that a special purpose bank engaged in lending would have to explain its commitment to financial inclusion in its business plan when applying for the charter. An applicant for the charter would also have to provide detailed information on how its policies, procedures and practices will ensure that products and services are offered on a non-discriminatory and fair basis. Under current law, a special purpose bank that is not an insured depository institution is not subject to the Community Reinvestment Act, which requires insured banking institutions to meet the credit needs of their communities.
The OCC expanded on the issue of financial inclusion in its recently issued draft guidance on evaluating charter applications from financial technology companies. Under the guidance, an applicant for the charter would be required to specify in its business plan how it intends to foster financial inclusion, whether defined by income, geography or other factors such as unserved or underserved populations, and would have to include measurable goals for accomplishing its financial inclusion objectives. In reviewing an applicant’s plans for financial inclusion, the OCC will review the applicant’s policies to ensure that any products or services are offered and provided on a fair and non-discriminatory basis. Approval of an application for a fintech charter would include an enforceable condition that would require the applicant to implement its financial inclusion plan.
A review of comments received on the OCC white paper provides some insights on the market reaction to the charter, as well as on the potential for expansion of financial services to a broader group of consumers and small businesses. A general theme that emerged from the comments is that the innovation that has occurred and is occurring in the financial services marketplace is moving the market toward affordability and ease of access in a manner that is much more tailored to the needs of individual consumers and small businesses, leading to inclusion of many more consumers and small business owners.
Mobile technology has been touted as a key means of reaching the underserved in the U.S., as well as globally. However, with mobile technology and other more innovative ways of reaching a broader range of consumers comes the risks to privacy, data security and cybersecurity. There are also risks in lending that the use of algorithms as a decision-making tool, rather than the traditional underwriting process, could lead to unintentional bias that has the potential to have a disparate impact on certain classes of individuals. Lastly, state regulators and other commenters have raised concerns that the national charter would enable fintech companies to avoid state consumer protection laws, including those that are designed to protect consumers from falling into continuous cycles of debt and predatory collection practices.
Concerns about protecting consumers are important, particularly when targeting the underserved. Some of those concerns can be mitigated by a more regulated environment, such as an OCC charter would provide, and ongoing financial education can also help such consumers navigate and better understand the products and services they are receiving through mobile technology or online services. However, if one of the goals of a special purpose charter or bank-fintech partnerships is to provide greater access to financial services to a broader group of consumers and businesses, the bank regulators should work to ensure that any regulatory requirements imposed on such charters or relationships do not unintentionally impede the innovation and development that is key to ensuring that there are new entrants to the marketplace, and to the continued expansion of financial services to the underserved.