The Office of the Comptroller of the Currency (OCC) has announced that it is moving forward with a proposal to charter and supervise a special purpose national bank for fintech companies. Loosely defined, a “fintech” company is a firm that uses new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services. In response to the OCC’s announcement in April 2017, the Conference of State Bank Supervisors (CSBS), an association of state banking regulators, filed a lawsuit against the OCC in the U.S. District Court for the District of Columbia, seeking declaratory and injunctive relief to prevent the OCC from going forward with its proposal.

OCC’s Proposal

The OCC argues that its chartering authority under the National Bank Act includes the authority to charter special purpose national banks, including trust banks and credit card banks. Given the technological advances in financial services and “evolving customer preferences,” the OCC has determined that it should consider granting a special purpose bank charter to a fintech company. The OCC says in its December 2016 white paper, “Exploring Special Purpose National Bank Charters for Fintech Companies,” that if it decides to grant a charter to a particular fintech company, “the institution would be held to the same rigorous standards of safety and soundness, fair access, and fair treatment of customers that apply to all national banks and federal savings associations.” The OCC does, however, concede that the agency may need to account for differences in business models and whether certain laws apply. For example, a fintech company that does not take deposits would not be required to have FDIC insurance and would not be subject to laws that only apply to federally-insured depository institutions.

If the OCC grants a special purpose national bank charter to a fintech company, the fintech bank could only engage in activities that are permissible for national banks. In other words, if a run of the mill national bank cannot engage in a particular activity under its charter, a fintech national bank could not engage in that activity — the special purpose charter is limiting rather than expansive.

CSBS Lawsuit

In a Jan. 13, 2017, letter from the CSBS to the OCC’s Legislative and Regulatory Activities Division, the CSBS argues that the OCC does not have statutory authority to issue a limited purpose national bank fintech charter and that such a charter would “distort the marketplace for financial services, with a federal agency arbitrarily picking winners and losers.” The issuance of such a charter, argues the CSBS, would create uncertainty and risks pertaining to access to critical government resources, including the payments system and the federal safety net and would effectively preempt state’s ability to protect customers.

In its argument, the CSBS says that courts have held and Congress has made clear that the OCC is prohibited from chartering a national bank that does not take deposits unless the charter is for a special purpose bank expressly authorized by statute. The special purpose banks expressly authorized by Congress are trust banks, bankers’ banks and credit card banks. Absent specific congressional authority, the CSBS argues that the OCC cannot issue a special purpose fintech bank charter.

In the 1980s, the OCC was shot down by a federal district court in Independent Bankers Association of America v. Conover for the OCC’s attempt to issue national bank charters to special purpose institutions that only engaged in lending and did not accept deposits. In that case, the court held that the OCC lacked the authority to charter such special purpose “nonbank banks” because those special purpose institutions did not accept deposits and thus would not meet the definition of carrying on the “business of banking” and were not otherwise specifically authorized by the National Bank Act or other federal banking law.

What’s Next for Fintech?

Just as nature abhors a vacuum, so does the OCC. Historically, when presented with changes in the market place, the OCC has worked to find a way to fill any void by giving national banks expanded authority, even when they have to fight the courts for after-the-fact permission. Indeed, most states’ banking laws have embedded in them a “wildcard” statute that provides that if a national bank can do it, so can a state bank, subject to the state’s authority to limit such authority by regulation.

If the OCC prevails in the CSBS lawsuit and goes forward with accepting applications from fintech companies for limited purpose bank charters, the going will still be slow as the bank regulator works out the kinks. Applying the normal de novo bank chartering process to any new kind of financial services company will require adjustments and different answers to basic questions: how much capital does a fintech bank need to execute its business plan? Which of the consumer protection laws and regulations will apply? How will rising interest rates affect the fintech bank’s risk management plan? Can a bunch of techno-geeks actually run a bank, and if real bankers are involved, can they execute on a high tech plan?

A proposal does not necessarily spell success for the idea, but times are changing and with them, how we view banking services: a fossil like the Bank Lady even banks on her iPhone these days.

KATHRYN REED EDGE is a member in the Nashville office of Butler Snow LLP with offices in Tennessee, Mississippi, Alabama, Colorado, Pennsylvania, Georgia, Louisiana, New York, New Mexico, Hong Kong, Singapore and London, England. She is a member of the firm’s Regulatory and Government Relations Group and concentrates her practice in representing regulated financial services companies. She is a past president of the Tennessee Bar Association and a former member of the editorial board for the Tennessee Bar Journal.