Over the past decade, there has been an explosion of Silicon Valley start-ups and technology companies that act like banks. Now, a key U.S. regulator is inviting them to be regulated more like traditional lenders.
The Office of the Comptroller of the Currency on Friday said it plans to start accepting applications from financial technology companies for a special charter that would formally subject them to federal banking rules. Companies that become chartered will get the benefits of being an established company in the eyes of the government. But they will also face anti-money laundering controls and consumer protections that apply to other lenders, the OCC said.
“Preferences and needs of consumers, communities and business are changing,” Comptroller of the Currency Thomas Curry said in remarks at Georgetown University Law Center. “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.”
A special charter marks one of the most significant steps by U.S. banking regulators to try to bring technology firms more under the government’s watch. With the development of systems such as blockchain, mobile payments systems and the new approaches to lending taken by companies including LendingClub and On Deck Capital — regulators have scrambled to keep pace. Many of the innovations have popped up without the government restrictions that established financial firms are subjected to. While the charter won’t be required for firms to keep lending, the government is trying to provide a framework that will entice companies to sign up.
A bank charter offers financial technology firms a clear set of national standards, as opposed to a patchwork of local and state rules that many have complained are burdensome and confusing for small companies trying to grow. Just like the oversight that applies to traditional banks, the OCC’s special charter will exempt financial technology firms from some state laws, like requiring a license to engage in certain types of business.
Financial technology firms would be subject to rules like those that try to prevent customers from laundering funds. Companies that accept federally insured deposits would also have to adhere to laws that seek to prevent racially discriminatory lending.
Being designated as a national bank could help extend financial technology firms’ reach by making them established, giving confidence to potential customers and investors wary about new business models.
The OCC’s announcement comes as the fledgling financial technology industry faces some headwinds. After years of rapid growth, many of the largest U.S. online lenders have struggled this year. Increased competition and concerns about regulation have put pressure on shares of small business lender OnDeck Capital. LendingClub replaced its chief executive in May, rattling debt investors already focused on an uptick in loan defaults. Avant Inc. slashed its target for new loans and reduced its workforce in June, eight months after its founder said he was building “the Amazon of financial services.”
The OCC and other regulators have faced pressure to balance the need for more oversight of fintech without stifling innovation. As such, the OCC is attempting to tailor some of its rules to accommodate the different business models used by various financial technology firms. For example, while alternative lending companies seeking charters will have to hold minimum levels of capital to buffer against losses, the OCC is asking companies that don’t fund loans through their own balance sheets to propose what those levels should be.
The banking industry offered some initial support Friday, with American Bankers Association CEO Rob Nichols saying that he is encouraged that financial technology firms would be held “to the same standards of safety, access and fair treatment’ ” as banks.
But not everyone liked the OCC’s framework. Consumer advocates said any charter that exempts financial technology firms from certain state laws could allow for abuses.
“The most effective consumer protection laws at the state level should not be undermined by bad new financial products that could open the doors for predatory lending,” said Courtney Robinson of the Center for Responsible Lending.“A federally chartered [financial technology] lender would avoid state interest rate caps, leaving people vulnerable to financial services abuse.”
The OCC released a white paper outlining the issues that it’s considering around a financial technology charter, and is inviting the public to provide feedback by Jan. 15.
The OCC, which spends the bulk of its time regulating Wall Street banking, doesn’t need to go through a time-consuming rule-making process to add financial technology, because it already has the power to issue so-called “special purpose charters.” These types of charters have typically been used by trust banks and credit-card banks. The agency had already been laying the groundwork for future regulation of financial technology firms. The OCC said in October that it is setting up an innovation office meant to deal with developments in industry technology, staffed in Washington, New York and San Francisco.
Federal Reserve Governor Lael Brainard also discussed the financial technology industry in a speech last week in Washington. She said that if regulators are too tough, it could push innovations outside the banking agencies’ reach, “potentially creating greater risks and less transparency.” But she also said tech firms must understand that companies lending to consumers and handling their savings need strong government oversight.
“While ‘run fast and break things’ may be a popular mantra in the technology space, it is ill-suited to an arena that depends on trust and confidence,” said Brainard, whose agency regulates financial holding companies and has formed its own internal group to study financial technology firms.