Departing Administration Leaves Gift of Fintech Principles


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It may strike some as odd that President Barack Obama’s White House’s National Economic Council just published a “Framework for FinTech paper on administration policy just before departing, but having been a part of several conversations that helped to shape this policy perspective, I see it from a much different angle.Given that traditional financial institutions are increasingly investing resources in innovationalong with the challenges facing many regulatory bodies to keep pace with the fast-moving fintech sector, I see this as a pragmatic attempt to provide the incoming administration with ideas upon which to build while making note of current issues.Indeed, we all must appreciate that technology isn’t just changing the financial services industry, it’s changing the way consumers and business owners relate to their finances—and the way institutions function in our financial system.

The Special Assistant to the President for Economic Policy Adrienne Harris and Alex Zerden, a presidential management fellow, wrote a blog that describes the outline of the paper.

I agree with their assertion thatfintech has tremendous potential to revolutionize access to financial services, improve the functioning of the financial system, and promote economic growth. Accordingly, as the fabric of the financial industry continues to evolve, three points from this white paper strike me as especially important:

  • In order for the U.S. financial system to remain competitive in the global economy, the United States must continue to prioritize consumer protection, safety and soundness, while also continuing to lead in innovation. Such leadership requires fostering innovation in financial services, whether from incumbent institutions or fintech start-ups, while also protecting consumers and being mindful of other potential risks.
  • Fintech companies, financial institutions, and government authorities should consistently engage with one another… [indeed] close collaboration potentially could accelerate innovation and commercialization by surfacing issues sooner or highlighting problems awaiting technological solutions. Such engagement has the potential to add value for consumers, industry and the broader economy.
  • As the financial sector changes, policymakers and regulators must seek to understand the different benefits of and risks posed by fintech innovations.While new and untested innovations may increase efficiency and have economic benefits, they potentially could pose risks to the existing financial infrastructure and be detrimental to financial stability if their risks are not understood and proactively managed.

A product of ongoing public-private cooperation, I see this just-released whitepaper as a potential roadmap for future collaboration.In fact, as the fintech ecosystem continues to evolve, this statement of principles could serve as a resource to guide the development of smart, pragmatic and innovative cross-sector engagement much like then-outgoing president Bill Clinton’s “Framework for Global Electronic Commerce” did for internet technology companies some 16 years ago.

Want to Go Fast, Go Alone. Want to Go Far, Go Together.


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There was a plaque in my father’s office that is attributed to the late David Ogilvy, often called “The Father of Advertising. It read, “Search the parks in all your cities, you’ll find no statues of committees,” which I always interpreted to mean, “YOU need to make something happen; don’t wait on others to get going.”

But going it alone in the banking industry is extremely difficult because of the complexities around regulation, underwriting, competition and the thousands of vendors that serve it. Combine that with record breaking investment in financial technology and the next few years may very well serve as our “big bang” and usher in a new era of banking.

I’ve observed how companies seeking to make a real impact within the industry rarely do it alone. While we need committees in business, maybe what we need more is a “virtual committee,” or community of fintech players, to better understand the nuances within the landscape. The value of this fintech community is to provide industry intelligence, serve as a sounding-board for new ideas and foster relationships to move you faster in achieving your organizational goals.

The fintech community should also include thought leaders, published research and reports—and most importantly, peers from outside your organization. Even competitors can be valuable resources for your company and contribute to your personal development.

The banking segment will likely see more action than the rest of the economy. In the future we will probably witness the following:

  • The adoption of a new fintech charter
  • A relaxation of the regulatory burden
  • Improved bank earnings, helped in part by rising interest rates
  • Increased customer expectations

Individuals and organizations that embrace the industry as a community and foster relationships will have a competitive advantage.

Why Dramatic Change in Banking is Hard
Many of the products and services that banks offer are mature, even bordering on commodity status. Technology advances we see in our industry tend to fall into a few categories:

  • How banks deliver products (channel)
  • Customer insights and recommendations (managing their money better)
  • Ease of doing business (speed, simplicity and service)
  • Tweaks to traditional business models (sources of funding, hyper-focused segmentation)
  • Operational improvements (automated processes, enhanced security and improved regulatory compliance processes, to name three)

Many of the platforms we used today are in the process of being either rewritten or replaced. According to one vendor, the life cycle of fintech moving forward will be five years or less on average.

The technology that the vast majority of financial institutions use today is a result of decisions spanning over many years and engagements with a lot of vendors—typically from dozens to hundreds of relationships.

Media, fintech executives and investors have a tendency to focus on new and shiny technology without an appreciation of how hard it is to run a technology company in the financial industry, much less what it takes to achieve long-term success.

Agents For Change
Vendors looking to grow their businesses seek focused education and networking opportunities. Organizations such as the Association for Financial Technology, or AFT, enable vendors to learn about technologies, which organizations are doing well, and gain industry insights that help provide a perspective for decision-making. This particular fintech community includes companies of all sizes that have implementations in virtually every U.S. financial institution.

Ultimately, people do business with people, and fintech advances won’t happen until two people or two companies agree on a shared vision. Finding your community, and being a good citizen within it, will enable you to grow professionally and help your company succeed and make a positive impact.

Additional resource: “What You Need to Know About AFT Fall Summit 2016” by Kelly Williams.

Four Tips for Choosing a Fintech Partner


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Over the last three years we’ve implemented five strategic partnerships with fintech companies in industries such as mobile payments, investments and marketplace lending. In doing so, we’ve developed a reputation of being a nimble company for fintechs to partner with, yet we remain very selective in who we decide to work with.

We are very often asked–in places like the board room, at conferences and at networking events, how we choose what fintech companies to work with. It is a great question and one that needs to be looked at from a few angles. If you’re a financial institution looking to potentially begin partnering with fintech companies, below are some criteria to consider when vetting an opportunity.

A Strategic Fit: How does this relationship fit into your strategic plan? Finding a fintech that helps advance your goals may sound obvious, but it can be easy to get caught up in the fintech excitement, so don’t allow the latest fad to influence your choice of a partner. Don’t lose sight of your vision and make sure your potential partners buy into it. It’s better to have a few, meaningful partnerships than a host of relationships that may inadvertently distract you from your goals and spread your resources too thin.

Cultural Alignment: Make sure to do some research on the fintech’s management team, board of directors and advisory board. How do they–and their company’s mission-fit with your organization’s mission? Do you trust their team? Our CEO, Mike Butler, likes to say that we have a culture of trying to do things, not trying to NOT doing things. That’s important to us, and we want to work with teams that think similarly. Spending time together in the early stages of the relationship will help set the stage for a solid partnership in the future.

A Strong Business Plan: Is the company financially sound? Is their vision viable? Back to earlier commentary on not getting too caught up in the latest technology trend, consider testing the business idea on someone who isn’t a banker, like a friend or family member. While you might think it’s a great idea, does it appeal to a consumer that is not in our industry? If the business plan passes muster, another issue to consider is the fintech’s long-term plan and possible exit strategy, and the impact it would have on your business if the relationship went away. It’s important to understand both the fintech’s short- and long-term business plans and how those will impact your bank’s balance sheet and income statement today and in the future.

Compliance Buy-In: Does the fintech team appreciate the importance of security? Do they appreciate the role of regulation in banking and finance? Do they understand they may need to modify their solution in light of certain regulations? We know fintechs can sometimes look at banks with impatience, feeling that we’re slow to move. And while some might move at a slower pace than other, we banks know that there are good reasons to proceed cautiously and that compliance isn’t a “nice to have” when it comes to dealing with other people’s money. We are never willing to compromise security and are sure to emphasize that early in the conversation. It’s critical to find a partner with a similar commitment.

We’re in an exciting time; the conversations on both the bank and fintech sides are increasing about collaboration rather than competition. Considering criteria like the above will help banks take advantage of new possibilities in a meaningful way.

Fintech Lenders Under Fair Lending Scrutiny


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One of the many concerns surrounding fintech lenders is that they are not as tightly regulated as traditional banks and are not bound as firmly by the provisions of the Fair Lending Act. The Federal Trade Commission has expressed concerns about many of the lending practices of fintech companies, saying in a recent statement that “the use of big data analytics to make predictions may exclude certain populations from the benefits society and markets have to offer.” Using big data to cherry pick loan candidates may be seen as discriminatory and could end up increasing regulatory scrutiny of fintech lenders as some see their underwriting practices as not being much different than redlining.

Gerron S. Levi, the director of policy and government affairs for the National Community Reinvestment Coalition, also expressed concerns about the practices of the fintech lenders in recent testimony before the House Subcommittee on Financial Institutions and Consumer Credit, telling legislators “We see echoes of the early days of the subprime mortgage boom, in which rapidly growing nonbank mortgage lenders innovated in the worst possible way by loosening credit standards, layering significant and multiple forms of risk, and causing financial harm to borrowers who could ill afford to repay the loans. If lightly regulated nonbank small business lenders, including fintech firms, are left unchecked, our fear is the impact may be the same: millions of small businesses stuck with exploding loans they can’t afford, and the American taxpayer left on the hook to clean up the mess.”

While the ability of fintech lenders to quickly process and fund loans may be seen as an improvement over the much slower process used by most banks, and is also seen by many as an opportunity to expand credit offerings to a wider percentage of the public, there are drawbacks. The algorithms that are used to find the very best borrowers would stand a good chance of being found to be discriminatory under the requirements of the Fair Lending Act. And some fintech lenders are targeting consumers with low or no FICO scores and charging extremely high-interest rates—which some regulators consider to be a form of predatory lending.

We already see the various regulatory agencies take a deeper look at the fintech lending industry. The Consumer Financial Protection Bureau in July entered into a consent order with Flourish, a fintech lender that the agency said had violated several regulations including the Consumer Financial Protection Act and the Fair Credit Reporting Act. The order required Flourish to deposit $1.93 million in an escrow account to repay customers, and the company was fined an additional $1.8 million.

The biggest problem facing fintech lenders is that most of them have not yet been all the way through a credit cycle, so we have no idea how they will react when an economic event causes liquidity to dry up. They do not have access to depository funding and rely on credit facilities, whole loan sales and securitizations to fund originations. These sources of financing have a tendency to evaporate when markets become volatile, and many fintech lenders could be forced to seek partnerships with other lenders or the banks themselves.

In many ways, that would be the perfect solution for this potential liquidity problem. Community and regional banks are very interested in adding new technology that will allow them to offer more online products and services as well as cut costs and speed up loan processing. Banks are actively looking to accomplish this by partnering with, or in some cases acquiring, fintech lenders. According to a recent survey conducted by the law firm Manatt, Phelps & Phillips, 88 percent of those surveyed think that in a decade the banking world will be one where traditional banks are partnering with fintech companies in a mostly collaborative environment

Fintech lenders choosing to partner with banks will come under closer regulatory scrutiny as their lending practices will have to be in line with the regulations under which banks operate. Regulators have also expressed growing concern about data security, and that will be a large issue that both the banks and fintech companies will have to address.

Regulatory challenges are going to continue to increase for fintech lenders. For many of them, the most practical course of action will be to partner with community and regional banks. For that to happen, however, their strategies and operations will have to be modified so the marketing programs and loan approval algorithms have no hint of discriminatory or predatory lending practices.

Fundbox: Friend or Foe


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For small businesses and freelancers, successfully performing work for customers and clients is only half the battle. Oftentimes, businesses wait up to 90 days to receive payment for their outstanding invoices. This delayed cash flow can create a variety of problems, especially when it comes to covering overhead expenses like rent and payroll.

That’s why Eyal Shinar developed the Fundbox software service, to help small businesses fix their cash flow problems as it relates to outstanding invoices. Fundbox is the leading cash flow optimization platform for small businesses, and who better to start a fintech company focused on this problem than someone who learned it at his mother’s knee? Shinar’s mother was a small business owner, so growing up he saw the pain and frustration that delayed payment of invoices can cause. According to a recent report, 82 percent of small businesses fail due to poor cash management. Where some see problems, others see solutions, and that’s where Fundbox comes in.

The process is straightforward. Business owners simply connect their existing accounting software to Fundbox and submit their outstanding invoices for immediate reimbursement. The business owner incurs a small fee for this service and they are given up to 24 weeks to pay Fundbox back.

For banks looking to offer new or better services to small business clients and freelancers, though, is Fundbox a good partner? Let’s look a little closer.

THE GOOD
Small business accounts are a much coveted group for banks, so providing new tools to improve service and/or relationships with this group should be of interest area to most any financial institution. The fact that Fundbox already has some traction in the small business space should be a good indicator for banks that the service they provide—instant cash flow—is a needed service for this group.

Once a small business owner submits an invoice to the Fundbox platform, they are typically paid within one to two days. Fundbox connects easily with most existing accounting platforms that small businesses are already using, such as QuickBooks, Freshbooks, Xero, Wave and Sage One, so there is very little to do in terms of importing data. Fundbox connects with a few simple clicks and pulls any outstanding invoices that business owners might want to turn into cash. Also, when the user signs up for their account, Fundbox uses big data and algorithms to quickly determine the consumer’s financial health rather than putting them through a lengthy application and approval processes.

The pricing model is simple and transparent. For an invoice of $1,000, the fee is $48 per week over 24 weeks, or $89 per week over 12 weeks. Fees are reduced if the business pays back what it owes prior to the deadline, which is a good incentive to keep Fundbox’s own cash flow looking good, although they have no shortage of funding—another point that might give banks some comfort in partnering with the company.

THE BAD
While the Fundbox fee structure is quite straightforward and transparent, it’s also relatively expensive and can really add up over time, especially for businesses that regularly choose the 24-month financing option. After you do the math, the annual percentage rate for Fundbox repayments can range anywhere from 13 percent to 68 percent. Fundbox also places a $100,000 limit on invoices that it will fund, so it isn’t an option for companies seeking to turn accounts receivable for amounts larger than that into cash.

While Fundbox is compatible with most of the common accounting software mentioned earlier, small businesses that use less common accounting packages or Excel spreadsheets can’t utilize its service. Other drawbacks are that Fundbox doesn’t provide cash for past-due invoices, and the approval process for credit limit increases can take some time. So while the service is helpful in many use cases, it certainly doesn’t match every situation. Finally, Fundbox is rolling out additional credit products as well, which could increase its presence as a possible competitor in the banking space.

OUR VERDICT: FOE
Fundbox offers an important service to small businesses and entrepreneurs, and does so more conveniently than most banks do today. At a time when so much emphasis is being placed on the customer experience, banks should be taking notice of this heavily-funded bank alternative. If an entrepreneur has outstanding invoices and needs cash to keep the lights on, their only option with traditional banks is to apply for a small business loan, or to go to their credit card company, which charges even higher rates than Fundbox. Furthermore, between the application process, credit checks and agreeing upon collateral, it can be weeks or months before businesses see a penny of the cash they need. For this reason, I applaud what Fundbox is doing, and I think it is certainly a —friend’ to many entrepreneurs in their times of need.

As Fundbox encourages more and more small business owners to come to them for cash, though, this obviously chips away from the bank’s importance and its relationship with their small business clients—a relationship they certainly don’t want to lose. And to date, Fundbox cannot boast of any existing bank partnerships or list banks as an area of interest. Of course, if this was to change, we might reconsider our foe designation.

In the meantime, banks would be wise to understand why entrepreneurs are using services like Fundbox, and how they might better address this particular need, whether it’s partnering with fintech companies, investing in new solutions or building them internally. In short, business owners have enough things to worry about, and getting paid on time doesn’t have to be one of them. Who can blame small business owners for looking outside their banking relationship for help?

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


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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.

Fintech Action Cools in U.S., Soars Elsewhere


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Looking back over the last year, it is apparent that the fintech industry has become mainstream just as fintech investing cools. What I mean by this is that fintech has matured in the last five years, going from something that was embryonic and disruptive to something that is now mainstream and real. You only have to look at firms like Venmo and Stripe to see the change. Or you only have to consider the fact that regulators are now fully awake to the change and have deployed sandboxes and innovation programs. Or that banks are actively discussing their fintech innovation and investment programs. Or that institutions are being created around fintech like Innovate Finance or the Singapore Fintech Festival. Fintech and innovation is here to stay.

For me, the biggest impact has been how busy 2016 has been. Each year is busy, but this year has been amazing. A great example is that I travelled to four continents in six days recently. That’s unprecedented and, a century ago, wouldn’t have been possible. Today, it’s easy. We just jump on and off aircraft and go. What is particularly intriguing for me—and telling—is where I go. After all, as someone at the center of fintech, where I go shows where the action is. In 2016, I’ve been to Singapore, New York and, most recently, London, which are the three fintech hubs for Asia, America and Europe, respectively. But I’ve also been to Nairobi, Hong Kong, Washington and Berlin, all key fintech focal points. Nascent centers in Abu Dhabi, Dubai, Bangkok, Kuala Lumpur also are on the radar. So, too, are are Mexico City, Sao Paolo and Mumbai.

In fact, what intrigues me the most is the fact that fintech has bubbled over in 2016. The latest figures show that U.S. investing in fintech slowed in 2016, while Chinese investments went up. And that is probably the most sobering thought as we head towards the holiday season. Fintech reached its zenith in the U.S. in 2016. Prosper and Lending Club started to have to answer some hefty questions about their operations, and there is no major new digital bank in the U.S. Meanwhile, Chinese fintech investments soared in 2016, and Ant Financial, which operates the Alipay payment platform for the Chinese Alipay Group, has become one of the most talked about IPOs of the year.

In other words, China, India and Africa are where we are beginning to see the most amazing transformations through technology with finance. China has more fintech buzz than anywhere at the moment thanks in large part because of Ant Financials’ innovations. India is doing amazing things with technology, and Africa has seen the rise of mobile financial inclusion that is changing the game for everyone.

The key here is to keep your eyes and ears open to change. Too often, I encounter people—senior banking people—who believe that developments in economies they see as historically poor being irrelevant. They don’t recognize that those historically poor economies are becoming presently wealthy and future rich. They are missing a trick.

In fact, I would go as far as to propose that the economies that were historically poor are the ones that are reinventing banking and finance through technology. They have no legacy and have no constraints, so they are rethinking everything. Eventually, their ideas will become things we all use so ignore them at your peril.

Happy New Year!

Is Trump Good for Fintech, or Bad?


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There has been an enormous sense of anticipation flooding through the community and regional banks since the election. President-elect Donald Trump’s opposition to the Dodd-Frank Act, which has created a stifling regulatory environment, is well known and bankers feel that relief is on the way. By contrast, the election results have produced a sense of consternation and concern among the financial technology companies that are trying to partner and compete with community and regional banks. The regulatory picture is much more confusing under a Trump Administration for these enterprises.

One reason for this is that fintech regulation was far from a settled issue before the election. The regulatory framework for fintech is not in place to any significant degree. In many cases, it will take new regulations to allow many of the fintech lenders and payment companies to expand their operations, and that’s a problem. Trump is opposed to new financial regulations of any sort, and it may be difficult to get the new framework in place during his term in office. Rather than pass new federal legislation, he is likely to leave the matter in the hands of the state legislatures and that will not benefit fintech companies.

The creation of a limited purpose national fintech charter as proposed by the Office of the Comptroller of the Currency is an attempt to make it easier for these companies to operate and not have to deal with regulatory agencies on a state-by-state basis. But in my opinion, there won’t be that many fintech companies that are willing and able to handle the responsibilities of a national charter, so this will provide limited relief to the industry. I also will not be shocked to see the concept of a limited purpose charter unwound early in a Trump Administration as bankers have been huge supporters of the incoming president and in my experience, the average bank is not shy about asking for favors.

Fintech firms are also big supporters of net neutrality since it gives them open and even access to bandwidth to offer services to users. Trump is not a supporter, and neither are the ranking members of the GOP in the Senate and the House of Representatives. Republican lawmakers have already put forth a bill to end net neutrality that I think will pass early in the next session of Congress and I expect Trump to sign it when it reaches his desk.

Immigration policies will also be a potential negative for fintech companies. Immigrants make up a significant percentage of the skilled workforce within the financial technology industry, and anything that makes to harder for them to get here and stay here is going to create a talent challenge for the companies in that space. Fintech companies that focus on payments could be hurt as well since many of the people that Trump wants to deport use these systems to send money to family back home, and that volume could drop substantially.

The biggest threat to fintech firms from the new administration will likely come from the repeal or reduction of Dodd-Frank. A lot of the opportunities that fintech companies are pursuing were created by the handcuffs placed on banks by that legislation. If the handcuffs come off under the Trump Administration, then fintech lenders and payment companies will find that they now have to go head to head with the likes of JP Morgan Chase & Co., Citigroup and Bank of America Corp., and that will be no easy task.

The regulatory environment for financial technology was murky before the election, and it is even more so today. While we can expect the combination of a Trump Presidency and GOP-controlled Congress to be pro-business, we can also expect them to be very pro-traditional banking. That will be a big negative for fintech companies that had hoped to compete with the banks in the future.

While many expect fintech to be a major disruptor of the banking industry and some even think it will replace banking, I don’t expect that to happen—especially if banks end up with a more favorable regulatory environment. The fintech firms that prosper under a Trump Administration will be those that can partner with a bank to offer financial products and services to bank customers in a more efficient and profitable manner.

What to Know About the New Fintech Charter


fintech-12-13-16.pngDon’t expect an onslaught of fintech companies rushing to become banks. The recent announcement that the Office of the Comptroller of the Currency would begin accepting applications for special purpose national bank charters from fintech companies was met with gloom from some in the banking industry, and optimistic rejoicing from others.

For now, the impact on banking and innovation seems unclear, but the hurdles to obtaining a national banking charter will be significant, and include compliance with many of the same regulations that apply to other national banks, possibly dissuading many startup fintech companies from even wanting one. On the other hand, larger or more established players may find it worth the added regulatory costs to boost their marketing and attractiveness to investors, says Cliff Stanford, an attorney at Alston & Bird. Plus, fintech firms can avoid the mélange of state-by-state banking rules and regulations by opting for a national banking charter instead. So don’t be surprised if a Wal-Mart, Apple or Google decides to get a banking license, along with some other, less well known names. The online marketplace lender OnDeck has already said it was open to the possibility of a national bank charter.

The OCC is offering fintech companies the same charter many credit card companies and trust companies have. Basically, the institution has to become a member of the Federal Reserve, and is regulated as a national bank with the same capital standards and liquidity requirements as others. The company has to provide a detailed plan of what products and services it intends to offer, a potential hurdle for a nimble start-up culture more accustomed to experimentation than regulation. “They will have a high bar to meet and they might not be able to meet those requirements,” Stanford says.

However, if the special purpose bank doesn’t accept deposits, it won’t need to comply with the same regulations as banks insured by the Federal Deposit Insurance Corp., which means it is exempt from the Community Reinvestment Act (CRA). Although nondepository institutions would not have to comply with the CRA, the OCC described requirements to make sure the fintech companies follow a plan of inclusion, basically making sure they don’t discriminate, and promote their products to the underserved or small businesses. This has caused some consternation among community banks.

“Why should a tiny bank have to comply with CRA and a big national bank across America does not have to comply?’’ says C.R. “Rusty” Cloutier, the CEO of MidSouth Bancorp, a $1.9 billion asset bank holding company in Lafayette, Louisiana. “If they want a bank charter, that’s fine. Let’s just make sure they play by the same rules.”

The Independent Community Bankers of America, a trade group, put out a press release saying it had “grave” concerns about what it called a “limited” bank charter. “We don’t want a charter that disadvantages one set of financial institutions,’’ says Paul Merski, an executive vice president at the ICBA. “We aren’t against innovation. But we want to make sure some institutions aren’t put at a disadvantage.”

Richard Fischer, an attorney in Washington, D.C., who represents banks, says he doesn’t think a fintech charter is a threat to banks. The Wal-Marts and Apples of the world will do what they want to do, whether or not they have a bank charter. Wal-Mart, which abandoned attempts to get a special purpose banking charter in 2007, already has a sizeable set of financial services, although it partners with banks that do have a charter, such as Green Dot Corp. in Pasadena, California.

Could a new fintech charter lead to fewer bank partnerships with fintech companies, as the fintech companies can cut out the need for a bank? Possibly. But it could also lead to more bank partnerships, as some banks, especially small or midsized banks, become more comfortable with the risk involved in doing business with a fintech company that has a national banking charter.

Jimmy Lenz, the director of technology risk at Wells Fargo Wealth and Investment Management, a division of Wells Fargo & Co., says he’s optimistic that a charter could create more products and services.

“I don’t see this cutting the pie into smaller slices,’’ he says. “I think they will be cutting a bigger pie. I don’t see the banks coming out on the short end of this.” Others said that the competition to banks coming from fintech companies already exists, and won’t go away if you don’t offer a federal charter for fintech companies. “The competition is already there,’’ Stanford says.

What To Know About the New Fintech Charter


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Don’t expect an onslaught of fintech companies rushing to become banks. The recent announcement that the Office of the Comptroller of the Currency would begin accepting applications for special purpose national bank charters from fintech companies was met with gloom from some in the banking industry, and optimistic rejoicing from others.

For now, the impact on banking and innovation seems unclear, but the hurdles to obtaining a national banking charter will be significant, and include compliance with many of the same regulations that apply to other national banks, possibly dissuading many startup fintech companies from even wanting one. On the other hand, larger or more established players may find it worth the added regulatory costs to boost their marketing and attractiveness to investors, says Cliff Stanford, an attorney at Alston & Bird. Plus, fintech firms can avoid the m?©lange of state-by-state banking rules and regulations by opting for a national banking charter instead. So don’t be surprised if a Wal-Mart, Apple or Google decides to get a banking license, along with some other, less well known names. The online marketplace lender OnDeck has already said it was open to the possibility of a national bank charter.

The OCC is offering fintech companies the same charter many credit card companies and trust companies have. Basically, the institution has to become a member of the Federal Reserve, and is regulated as a national bank with the same capital standards and liquidity requirements as others. The company has to provide a detailed plan of what products and services it intends to offer, a potential hurdle for a nimble start-up culture more accustomed to experimentation than regulation. “They will have a high bar to meet and they might not be able to meet those requirements,” Stanford says.

However, if the special purpose bank doesn’t accept deposits, it won’t need to comply with the same regulations as banks insured by the Federal Deposit Insurance Corp., which means it is exempt from the Community Reinvestment Act (CRA). Although nondepository institutions would not have to comply with the CRA, the OCC described requirements to make sure the fintech companies follow a plan of inclusion, basically making sure they don’t discriminate, and promote their products to the underserved or small businesses. This has caused some consternation among community banks.

“Why should a tiny bank have to comply with CRA and a big national bank across America does not have to comply?’’ says C.R. “Rusty” Cloutier, the CEO of MidSouth Bancorp, a $1.9 billion asset bank holding company in Lafayette, Louisiana. “If they want a bank charter, that’s fine. Let’s just make sure they play by the same rules.”

The Independent Community Bankers of America, a trade group, put out a press release saying it had “grave” concerns about what it called a “limited” bank charter. “We don’t want a charter that disadvantages one set of financial institutions,’’ says Paul Merski, an executive vice president at the ICBA. “We aren’t against innovation. But we want to make sure some institutions aren’t put at a disadvantage.”

Richard Fischer, an attorney in Washington, D.C., who represents banks, says he doesn’t think a fintech charter is a threat to banks. The Wal-Marts and Apples of the world will do what they want to do, whether or not they have a bank charter. Wal-Mart, which abandoned attempts to get a special purpose banking charter in 2007, already has a sizeable set of financial services, although it partners with banks that do have a charter, such as Green Dot Corp. in Pasadena, California.

Could a new fintech charter lead to fewer bank partnerships with fintech companies, as the fintech companies can cut out the need for a bank? Possibly. But it could also lead to more bank partnerships, as some banks, especially small or midsized banks, become more comfortable with the risk involved in doing business with a fintech company that has a national banking charter.

Jimmy Lenz, the director of technology risk at Wells Fargo Wealth and Investment Management, a division of Wells Fargo & Co., says he’s optimistic that a charter could create more products and services.

“I don’t see this cutting the pie into smaller slices,’’ he says. “I think they will be cutting a bigger pie. I don’t see the banks coming out on the short end of this.” Others said that the competition to banks coming from fintech companies already exists, and won’t go away if you don’t offer a federal charter for fintech companies. “The competition is already there,’’ Stanford says.