Thursday, 21 March 2019

Last July, the Office of the Comptroller of the Currency (OCC) announced it would begin accepting applications for special purpose national bank charters by US fintech companies that don’t take customer deposits.

The idea is to foster innovation by fintech companies that provide lending, money transfer and other services to customers by establishing a framework of uniform standards and supervision. Right now, those companies may be subject to regulation, oversight and licensing requirements in every state in which they do business, a considerable burden for small companies.

As OCC comptroller Joseph Otting said in a press release about the new charter, offering fintech companies a path to become national banks “provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.”


The potential pitfalls

This sounds great on the face of it, but there are several potential problems. Fintech companies with the new charters will have capital and liquidity commitments, just like those with traditional bank licenses, but it’s unclear whether they will gain access to the Federal Reserve’s payments system, which would allow them to avoid bank routing fees.

Critics have also questioned whether fintech start ups, which often have only a few years to achieve scale and profitability, can afford the management time or money required to apply for a charter.  

The future of these charters is also uncertain. State regulators, including the New York State Department of Financial Services and The Conference of State Bank Supervisors (CSBS), are suing the OCC over its plans, believing the charter encroaches on each state’s regulatory oversight.  

All this has meant that no fintech firms have applied for a charter yet, according to a OCC court filing last month. The OCC also said that it “remains several steps removed” from issuing one.

States launch Vision 2020

Meanwhile, in February, The Conference of State Bank Supervisors (CSBS) approved 14 recommendations from its Fintech Advisory Panel for multistate licensing and supervision standards, including the development of a model state payment law, a single, uniform law for money services businesses in all 50 states.

If such a law is enacted, certain fintech companies may not need a national charter because their compliance burden would be significantly reduced. Instead of having to grapple with 50 different state licensing and regulatory regimes, fintech businesses could offer certain money services across multiple states’ markets by following one law.

For now, though, this is only a recommendation, and neither the OCC’s charter nor CSBS efforts will help fintech companies that do want to take customer deposits, which must still apply for traditional bank licenses.


The Banking-as-a-Service alternative

The alternative for fintech companies is to work with an existing banking franchise like BBVA Compass, which offers Banking-as-a-Service through Open Platform. In some cases, that means that fintech companies can offer their customers white label bank accounts and other banking services, using the secure infrastructure of a BBVA Compass, without having to spend the time, money or effort needed to become a bank themselves.  

This type of agreement is called a program agreement. If you would like to find out if your company is eligible to apply for a program agreement with BBVA Compass and what applying for a program agreement entails, contact us. We’d be happy to answer all your questions.  

–The Open Platform Team

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