|Financial Technology Start-Ups to Get a License to Bank|
By NATHANIEL POPPER
New York Times
DEC. 2, 2016
Regulators are planning to create a new type of banking license that will allow upstart financial technology companies to expand more quickly across the country.
The plans for the new type of bank license were announced Friday morning by the comptroller of the currency, Thomas J. Curry, after months of public discussion on the possibility.
The licenses from the Office of the Comptroller of the Currency, which oversees many national banks, will be available to companies like Square and Lending Club that accept deposits, facilitate electronic payments or lend money.
Many technology firms have been pushing for some sort of new regulatory system that would allow them to cut through the patchwork of state and federal laws that govern financial activities and make it hard to expand nationally.
The introduction of the licenses, called special purpose national bank charters, underscores how quickly so-called fintech firms are growing and how significant they are considered to the future of the financial industry.
“Providing a national charter to those responsible innovators who seek one and meet our high standards can help promote economic growth across the country and recognizes that technology-based products and services are the future of banking and the economy,” Mr. Curry said in a speech at Georgetown University.
But consumer advocates and state banking regulators have already been expressing concern that a new national charter could allow start-ups to get around state laws intended to protect consumers in areas like payday lending.
“There is enormous opportunity for consumers from a more competitive financial marketplace,” said Joe Valenti, the director of consumer finance at the Center for American Progress, a left-leaning research firm. “But I’m not sure that outweighs the risk of upending various state laws and consumers’ protections.”
Mr. Valenti said that any weakening of state laws could be a particular problem at a time when the incoming president, Donald J. Trump, has promised to broadly cut back federal financial regulations.
Mr. Curry acknowledged some of these concerns in his speech on Friday, but he argued that competition in the financial industry was driving down the prices of financial products and opening access to the financial system for lower-income people who used to be shut out.
“What excites me most about the changes occurring in financial services is the great potential to expand financial inclusion, reach unbanked and underserved populations, make products and services safer and more efficient, and accelerate their delivery,” Mr. Curry said.
Companies applying for the new charter would need to demonstrate their commitment to “financial inclusion,” the agency said on Friday.
The financial industry has been shaken up in recent years by tech start-ups that have taken on business services that were traditionally restricted to banks, like lending and electronic payments.
Mr. Curry noted that the amount of investment going into these so-called fintech companies had risen to $24 billion from $1.8 billion five years ago.
Companies like Lending Club, an online loan marketplace, and Square, which allows small businesses to accept electronic payments, have been changing the ways Americans expect to receive financial services. These companies have also operated outside of some of the regulatory constraints on traditional banks.
Regulators around the world have scrambled to keep up with the new developments and ensure that customers of the new companies are receiving the same protections they have had in the traditional financial system. Entrepreneurs have complained that existing regulations are stifling new innovation.
Some countries, like Britain and Singapore, have tried to create a friendlier regulatory environment to encourage the new players and attract new companies.
Of the many financial regulators in the United States, the Office of the Comptroller of the Currency has been the most active in trying to keep up with the changes in the industry. Earlier this year, the agency created an Office of Innovation to serve as a central point of contact for new companies that are trying to figure out their regulatory responsibilities.
Banks and state bank supervisors have strongly objected to the agency’s moves on this front, seeing them as a way to allow in new competitors without forcing them to follow all the existing rules.
“A fintech charter poses risks to taxpayers and the financial system by endowing these nonbank companies with a federal bank charter,” Camden R. Fine, the chief executive of the Independent Community Bankers of America, said on Friday.
For their part, many fintech start-ups have complained that under existing rules they have to partner with traditional banks, which often do not want to work with them, to provide basic financial services.
“It’s great to have this new charter as an option,” said John Beccia, the general counsel at Circle, a start-up based in Boston that allows customers to send instant payments as well as to buy and hold virtual currencies. “There are a lot of benefits to this.”
Under the current rules, Circle has to hold all of its customers’ deposits in a partner bank and has to use the bank’s systems any time it wants to move money to another customer or issue a credit card. With a license, Circle and other companies might be able to offer many of these services on their own.
Mr. Curry said on Friday that fintech companies could continue to work under the existing rules, partnering with banks, but would have the option of applying for the new charter.
There are still many questions on the specific requirements that companies will need to fulfill to get approval for one of the new licenses. In Mr. Curry’s speech, and in an agency white paper released at the same time, the currency comptroller’s office said that companies receiving the charter would most likely be held to higher standards than existing banks in certain ways. They will, for instance, have to maintain higher levels of capital, the loss-absorbing cushion required of financial firms.
It is unclear if companies chartered by the Office of the Comptroller of the Currency would be able to get the deposit insurance offered by the Federal Deposit Insurance Corporation.
Banks and consumer advocates have expressed the most concern over the possibility that a national charter for fintech companies could allow new online lenders to evade state caps on interest rates and other local rules designed to cut down on predatory lending.
“Fundamentally, the primary reason for a lender to seek a federal charter is to avoid state licensing regimes and their accompanying laws and oversight,” a coalition of consumer advocacy groups, led by the group Americans for Financial Reform, wrote to the currency comptroller before the announcement on Friday. “We are deeply skeptical of assurances that it will be possible to maintain the same range of consumer protections as exist in state law under a Federal charter regime.”
Mr. Curry’s agency will not begin offering the charters until after a public comment period that ends in January.