Pub. 11 2016-2017 Issue 5

www.nebankers.org Extraordinary Service for Extraordinary Members. COUNSELOR’S CORNER ■ Counselor’s Corner — continued on page 14 OCC’s Fintech Charter What Is It & Why Does It Matter? Kevin Griffith, Kutak Rock LLP O N DEC. 2, 2016, THE OFFICE OF the Comptroller of the Cur- rency announced 1 it would move forward with con- sidering applications from financial technology, or fintech, companies to become special purpose national banks. 2 Among the primary benefits of the national charter will be the preemption of state licensing require- ments granted to national banks and the ability to export interest rates of the state of domicile. Online lenders and digital wallets may greatly ben- efit from the new regulatory schema if adopted. Arguably, the OCC’s actions give further credibility to fintech compa- nies and the latest wave of financial innovation. A number of unsettled consequences remain for the financial marketplace, including the impact of prudential standards on innovation, implications for the dual-banking system, future regulation, competitive dynamics, and financial inclusion. Fintech Charter Explained The National Bank Act gives the Office of the Comptroller of the Cur- rency (OCC) the authority to grant bank charters, including charters for special purpose national banks. Typi- cally, a special purpose national bank conducts fiduciary activities such as custodial or trustee services, or is a credit card bank. The chartering powers are broader, however, and include any activities within the “business of bank- ing.” The business of banking includes one of the following core banking func- tions: receiving deposits, paying checks, or lendingmoney. Currently, it is rare for a fintech company to receive deposits. Many fintech companies lend money such as Sofi, Prosper, and OnDeck, or “pay checks.” The OCC broadly interprets lending money and paying checks, allowing regulators to keep up with the pace of innovation. For example, purchas- ing bank-permissible debt securities, discounting notes, and engaging in lease-financing transactions are all considered making loans. Likewise, any means of facilitating payments electronically can be considered the modern equivalent of paying checks. Fintech examples of this are PayPal, Venmo, and Square. The OCC will consider on a case-by-case basis the permissibility of a new activity that a company seeking a charter wishes to conduct, but indications are that regulators will be as inclusive as they can since one of the main motives for a fintech charter is to create an avenue to regulate the shadow banking system. A fintech charter will be subject to the same laws, regulations, examina- tion and reporting requirements, and ongoing supervision that apply to na- tional banks generally. This includes lending limits, real estate holdings, anti-money laundering laws, and others. A fintech charter will have the same charter as a full-service na- tional bank, but its activities will be limited through the bank’s articles of association or through OCC-imposed conditions for approving the char- ter. Accordingly, existing precedent around national banks should apply to fintech charters, giving them the same competitive advantages as a “regular” national bank. Preemption is the most significant of these competitive advantages. Typi- cally, online lenders are operationally