How to regulate fintech products and services has proven to be something of a puzzle for most regulators around the world. Should they be held to the same set of rules and regulations as traditional financial services? With the notable exception of the UK, Australia, and Singapore, most countries have yet to clearly make a place for fintech within their regulatory regime. For the time being, fintech startups in the majority of countries are left to grapple with outdated rules that do not take into account the disruptive force that fintech has on the financial services sector.
In the U.S. – home to the world’s best known center for technology innovation, Silicon Valley – fintech may finally be getting some clear answers from regulators. The Office of the Comptroller of the Currency (OCC), which regulates and supervises all national banks in the country, is putting support behind what it is calling “responsible innovation”.
Comptroller of the Currency Thomas Curry said in a speech given in March 2016 that the OCC has heard from fintech startups that want to obtain a national charter for fintech. In June 2016, Curry reiterated this and added that the OCC is giving careful consideration to what the possible implications could be for establishing a limited purpose charter for fintech firms.
Why are U.S. fintechs pushing for a charter, and what would be the impact of having one?
What Having a Charter Means
Banks in the U.S. must be chartered either at the state or federal level, in accordance with banking laws. By being chartered, banks are allowed to operate in the jurisdiction under which the charter is held. For example, a bank chartered in the state of Nevada is allowed to do business in Nevada but not in New Mexico, unless it is chartered in New Mexico as well. If a bank is chartered federally by the OCC, then it is authorized to operate in any U.S. state without having to apply for a charter in each state.
It is also important to note that the level at which a bank is chartered also determines which set of laws and regulations it is subject to. A federally chartered bank is held accountable by federal regulators like the OCC, and federal banking rules take precedence over state rules. While larger banks may wish to seek a federal charter in order to simplify its compliance process, the OCC holds national banks to a very high standard.
“So if regulation adds value to the banks we supervise, we, as citizens, get plenty of value back—value that makes our country stronger,” Curry said in March 2016 speech. “The OCC is committed to ensuring that banks retain their relevance and fulfill their public purpose for many years to come.”
Charter Implications for Fintech
Since fintech firms typically do not wish to offer all of the services of a bank, they would be interested in applying for a limited purpose charter. Currently, limited purpose banks receive charters from the OCC so that they can offer a specific and narrow line of products and services, such as credit cards.
If the OCC was to approve the granting an equivalent to limited purpose national bank charters for fintech startups, it would not be without conditions. U.S. banking regulators are very strict and place high expectations for compliance upon those under their watch.
“I would be very concerned, for example, if we were to authorize a federal license that offers the benefits of the national bank charter, including preemption, without any of the safeguards or responsibilities that apply to banks and thrifts,” said Curry on the matter.
Should Other Countries Follow Suit?
This approach of adapting an existing process to help financial innovation become more widely available is a welcome idea. Although this concept may not be directly applicable to all countries, those with a similar system like the U.S. that have banking regulators at both the national and state level could certainly benefit.
Fintech startups have limited resources and may not be able to apply to every state regulator in order to offer their services nationally. As such, a national charter could put them in a better position to reach a wider market and become self-sufficient more quickly.
What do you think of a national fintech charter – or dare we suggest an international fintech charter?