The Office of the Comptroller of the Currency's decision to offer a special-purpose charter for fintech firms may entice more players than expected, including mortgage lenders and even some payday lending shops.
In the leadup to the charter's release last month, most had expected it to focus on marketplace lenders and others with a more technologically oriented business model. But the wording of the charter is broader, potentially allowing other nonbank players a way to enjoy the benefits of federal preemption and avoid state by state registration.
"The way they characterized the charter in the white paper has more people seeing greater possibilities," said Pete Mills, the senior vice president of residential policy and member engagement at the Mortgage Bankers Association. "What is the technology aspect of this that makes you eligible for the fintech charter?"
Observers said there is an argument that such firms, particularly given the use of new technologies to reach their customers, should qualify for the new charter.
"The fact that I take the application over the internet, does that make me a fintech?" said Jeffrey Taft, a partner at Mayer Brown. "Is the OCC going to look at that very broadly?"
Allowing mortgage lenders to apply for the charter would also address what some view as an unequal treatment by regulators of mortgage lenders and national banks.
The state-by-state licensing system "puts nonbank mortgage lenders at a very substantial disadvantage to national banks that do mortgage lending," said Gerard Comizio, the chair of the global banking practice at Paul Hastings.
Some attorneys are even hearing interest in the charter from payday lenders. Though it might be a long shot for them to obtain the OCC's blessing, observers say that the agency might at some point prefer to handle these companies through direct supervision.
"If the [Consumer Financial Protection Bureau's] payday lending proposal is ultimately implemented, it's going to steer a lot of those companies into a more regulated and — from the CFPB's perspective — consumer-protective space," said John ReVeal, a partner at Bryan Cave. This "could make the OCC more comfortable" in dealing with payday lenders.
In a statement to American Banker, OCC Chief Counsel Amy Friend cast doubt on the possibility of payday lenders ever obtaining a national charter, but seemed to leave a door open to other types of companies not explicitly cited in the agency's fintech charter paper in December.
"The national banking charter does not dictate business models," Friend said. "But, to be clear, the OCC took steps in the early 2000s to eliminate abusive practices common to payday lenders at the time. As a result, abusive payday lending was virtually eliminated in the federal banking system. The agency has no intention of allowing these abusive practices to return."
Whether the fintech charter will appeal to actual fintech firms, however, is still unclear. So far, smaller firms are keeping their distance, aware that some of the OCC's mandates for the charter — such as capital and liquidity requirements and the necessity of developing a plan for failure — could be extremely costly. The charter would also not in itself allow the companies to take deposits, a cheap source of funding.
"The fintech charter feels like a good opportunity for the largest, most sophisticated fintech firms with the most amount of capital," said Alex Acree, the managing director at the venture capital firm Fenway Summer. "It doesn't really solve the problems of the smaller fintech firms."
Even larger fintech firms are still waiting to hear more details about the plan before filing a formal application.
"Most are going to bide their time and think about what the return on investment might be, what the cost might be and what the saving opportunity might be," said Joseph S. Rubin, the senior counsel and co-chair of government affairs and public policy at Arnall Golden Gregory.
In the short term, the existence of a national charter for fintech companies will likely not change the frenemy dynamic of fintech-bank partnerships.
For one, fintech companies that partner with banks for funding will still need access to deposit-fueled cash. "I don't think that need will go away," said Pratin Vallabhaneni, an associate at Arnold & Porter.
Even companies that partner with banks for other reasons, like access to compliance resources or payments rails, will not go away anytime soon. The pool of small to midsize fintech companies interested in these types of relationships with banks will still be there, even if some do end up applying for the national charter.
"Traditional banks will continue to explore innovation activities with nonbank fintech companies," Acree said. "It's not likely that it's going to change the status quo in terms of bank-fintech relationships as much I think as people were hoping."
Indeed, one bank has already extended an olive branch to fintech companies interested in the OCC's charter.
"We identify with our partners that a change to the status quo is needed," Cross River Bank CEO Gilles Gade said in a statement a few days after the OCC's announcement. "Banks such as CRB are well equipped to advise and prepare the fintech applicants for a limited charter, if they so choose that route."
On the flip side, it is also not clear whether the OCC fintech charter will create significantly more competition for community banks in the form of newly fortified fintech companies. The rivals will remain the usual suspects.
"I don't think that means the virtual currency company will now go and compete with the community bank for services that have nothing to do with virtual currency," said Vallabhaneni.