Pub. 11 2016-2017 Issue 5

www.nebankers.org Extraordinary Service for Extraordinary Members. ■ Counselor’s Corner — continued from page 12 “Granting national charters to the companies who desire and warrant one doesn’t weaken the competitive position of existing banks or the dual banking system. In some ways, it levels the playing field because statutes that by their terms apply to national banks would apply to all special purpose national banks, even uninsured ones.” more efficient than established brick-and-mortar institu- tions; a fintech charter will allow them to further streamline operations and cut costs. This could mean lower prices for consumers, higher margins for fintech companies, and heightened competition in a marketplace that is already very competitive for smaller and mid-sized banks. Financial Inclusiveness Important policies may be imposed through the OCC’s authority to enforce conditions on its approval of a charter. Through this process, the OCC plans to advance important policy objectives while ensuring that new fintech banks operate in a safe and sound manner, support their com- munities, promote financial inclusion, and protect cus- tomers. This regulatory process will be worth noting as it evolves since it also will likely serve as a Petri dish of sorts as regulators look to bring regulations into the digital age. Financial inclusiveness may be one of the more inter- esting policies the OCC will attempt to enforce. Part of the OCC’s mission is to ensure that all national banks treat customers fairly and provide access to financial services. Accordingly, financial inclusion will be a core aspect of the fintech chartering process. Financial inclusiveness typically is largely governed by the Community Reinvestment Act (CRA). However, CRA only applies to insured institutions. CRA can be particularly difficult to apply in the digital world given its geographical analysis. The OCC will expect all applicants that are engaged in lending to demonstrate and commit to financial inclusion in their charter applica- tion. While this potentially levels the playing field in terms of CRA compliance, many details remain unknown. The potential remains for fintech banks to have less regulatory burden compared to insured depository institutions when it comes to financial inclusiveness. The flexibility the OCC is asserting in its enforcement of financial inclusion is sparking discussion about the relevance of CRA given its geographic analysis in a digital age. It will be important to continue to monitor and engage in any debate surrounding this topic. The future direction of CRA may be informed and influenced by how the OCC approaches fintech charters and its financial inclusion policies. Prudential Standard Impact A very interesting question is how many current or fu- ture fintech firms will utilize the proposed fintech charter. As Comptroller of the Currency Thomas Curry stated in his speech announcing the fintech charter, the fintech charter is a choice not a requirement. Markets and the innovative process require failure. This is how healthy markets operate and determine which ideas and operators are the best stewards of scarce resources. This process is especially true for new innovations. The railroad is a good example. Hundreds of railroad companies existed in the late 1800s. The best run, most innovative railroads survived. Now only a handful are in business after several periods of consolidation and bankruptcies. The banking system, understandably given its systemic importance, cultural significance, and operational dynam- ics, is regulated so that banks are not likely to fail. This is implemented through prudential regulations. One of the consequences of prudential regulation is an aversion to risk, both by the regulator and the regulated institution. Fintech companies are arguably not accustomed to or structured for prudential regulation. For fintech compa- nies, business plans, products, and strategy can change in a matter of days, while typically change takes much longer to implement at banks. That is not to say fintech companies or the OCC won’t adapt to one another to find a middle ground, but it will be one thing fintech companies consider as they determine the risks and rewards of the proposed fintech charter.