Recently, the Office of the Comptroller of the Currency announced that it has begun accepting applications for a new special purpose national bank charter directed at fintech firms. The new charter recognizes technological innovation and development in banking, but it’s nevertheless a controversial move.
The Conference of State Bank Supervisors says the OCC is acting in an area traditionally left to state regulators. Others interpret it as the opening of another competitive front against banks. However, a closer examination of the issue reveals that the best fintech opportunities may still reside in working side-by-side with traditional banks.
The fintech charter
One reason the new fintech charter isn’t likely to usher in the end of banking as we know it is because the list of permissible activities allowed under it is limited.
It allows an entity to engage in the business of banking—except, that is, for the taking of federally insured deposits. To access those, a fintech firm must apply for and obtain federal deposit insurance, in which case it would be subject to the normal laws and regulations associated with an ordinary national banking charter. Consequently, because deposit-taking tends to be the principal benefit of a full bank charter, given the access it provides to a cheap and stable source of funds, companies operating under a fintech charter are likely to remain on the periphery of the industry.
While some fintechs will nevertheless apply for the new charter, its limitations and restrictions could minimize its appeal. It doesn’t allow a company to escape federal consumer banking laws and regulations, for instance, and it may complicate a fintech firm’s desire to intermingle certain commercial and banking activities. Companies that are awarded a charter will also need to be well capitalized, demonstrate financial inclusion (somewhat similar to Community Reinvestment Act requirements) and submit to examination by federal regulators. Finally, since all of this is still new, it’s hard to say whether the new charter will interfere with the prototypical fintech firm’s accelerated timetable for product development.
In any case, the fintech charter is a work in progress, and many prospective applicants may take a wait-and-see approach before committing to the process. Accordingly, fintechs would be excused for concluding that partnering with banks to innovate and develop financial technology is a superior approach offering fewer uncertainties.
Opportunities for banks with fintechs
Notwithstanding the OCC’s enthusiasm for the new charter, the fintech revolution is creating opportunities for banks. These opportunities promise to expand a bank’s product offerings and services in ways that could yield new sources of non-interest income.
Some of these opportunities include:
- Licensing innovative online lending platforms
- Acquiring loans originated by fintech firms
- Licensing online customer-interface platforms, such as mobile apps
- Acting as an insured depository source for pure fintechs
- Developing secure custody mechanisms for cryptocurrencies
- Developing systems that efficiently and intelligently utilize customer data
The bottom line is that partnering with a traditional bank may still be necessary for fintech companies, despite the new charter. We’ve seen this firsthand by helping banks forge relationships with fintechs, and we don’t believe this will change, even if the new charter is widely adopted.
We say all of this based on experience, as we have helped regional and community banks enter into strategic partnerships and ventures with well-known fintech firms. We have also helped regional and community banks collaborate in joint incubators and innovation labs to foster the development of financial technology and reap the rewards of the next great product.
Regardless of the process, banks and fintechs working together still seems to offer the greatest opportunities for all involved.
The new fintech charter is an innovative move by the OCC that represents the change that technology is bringing to the banking industry. Nonetheless, because the charter’s utility may be limited, banks are still in the best position to introduce new innovations into financial services. Banks of all sizes, in turn, through various methods, remain primed to take advantage of new technologies and opportunities offered by the fintech revolution.