Proposed Fintech Charter Could Sprout Waves of U.S. Digital Banks

I’ve been critical of the U.S. regulators for some time, as the complex mixture of different state, national and federal licensing boards makes it difficult for fintech innovations to break through. This is pretty obvious when you think that there is not a single new digital bank launched in the U.S., when there are dozens across Europe. There, you have N26, Solaris and Fidor in Germany; Knab and Bunq in the Netherlands; and a whole range of new startups in the U.K. including Atom, Starling, Monzo, Loot and Tide. Can you name a new U.S. digital bank?

Well, you may well be naming a few quite soon. Recognizing the innovation in the EU and U.K., the Office of the Comptroller of the Currency (OCC) has announced that it will support fintech innovations from neobanks to special banks, and creating breakthrough possibilities for firms in digital currencies like bitcoin. This is pretty radical, and overrides a lot of the barriers to breaking into U.S. banking today if approved, as the idea is currently under consultation.

The idea is that fintech startups could get licensed by the OCC under the National Bank Act and given a special purpose national bank charter. This is a license used by several firms already, including some trust and credit card banks, and would allow fintech firms to operate nationally without all the overhead of dealing with state regulations. That is a serious breakthrough for American markets and fintech companies if implemented, as one of the reason that you don’t have national neobanks startups in the U.S. is the complex spaghetti of regulations and authorities you have to deal with to get started.

Financial Innovation Now (FIN)—a public policy coalition of Amazon, Apple, Google, Intuit and PayPal—has been one of the key groups applying pressure to the OCC for these reforms. Back in the summer, the consortia produced a fascinating report on the complexity of U.S. financial regulations. As cited by these internet giants, compliance requirements constitute a significant market barrier, particularly for new entrants, and can serve to protect incumbent providers from new competition. Obviously, companies like Amazon and their brethren are listened to and the OCC has responded. Equally, FIN has been calling on the new administration to focus on fintech. At the end of November, the group called on President-elect Trump to embrace technology’s potential to make financial services better for American consumers and small businesses in a letter.

A key paragraph in that letter stated:

Technology and the internet are changing the way consumers and small businesses manage money, access capital, and grow commerce. Financial regulators around the world are paying close attention to this transformation and actively working to adopt policies that attract investment and create jobs in these new services, ultimately benefiting their own consumers and businesses. While America’s financial regulators and Congress have recognized this potential on a bipartisan basis, more leadership and federal coordination is necessary.

What FIN is getting at in this letter is that some markets—Germany, Britain and Singapore in particular—are a hotbed of financial innovation through technology. Does the U.S. want to fall behind? I don’t think so, and Amazon, Apple, Google, Intuit and PayPal are on the campaign trail to make sure it doesn’t. With the OCC and, hopefully, an open ear from a new president, it will be fascinating to see just how radical 2017 will be.