This summer, the OCC rolled out a new special purpose banking charter as had been promised for some time. The purpose of this charter type is to provide the means for fintech companies to get into financial services with their own federal banking charter. The requirements of the special charter are still rather rigorous, and not meant for early start-up type fintechs, but it does provide a less cumbersome path to bank status. Without a charter, fintech need to rely on securing banking type services through a sponsorship arrangement with another chartered organization as has been done for decades in merchant services and prepaid, or by securing licenses in each state. State money licenses permit fintechs to provide some banking services in each state where the license is granted. With the launch of a federal charter, fintechs could just apply for a single charter that will allow them to operate in every state, under one set of rules. So it is no surprise that state banking officials, seeing a loos of business, are suing the OCC. As summarized in Finextra:
“US state financial regulators are to renew their litigation efforts over the recent decision by the Office of the Comptroller of the Currency to create a special purpose charter for financial technology firms.
It’s the second time that the Conference of State Bank Supervisors (CSBS) has filed suit against OCC. A previous attempt was dismissed by a federal court judge as the OCC had not yet committed to the programme.
With the OCC’s 31 July announcement creating a federal fintech charter, the CSBS Board has decided to reaffirm its commitment to challenge the OCC’s action.
The CSBS alleges that the OCC is over-reaching its authority in granting charter status to non-banks.
John Ryan, CSBS president and CEO, states: “If the OCC is allowed to proceed with the creation of a special purpose nonbank charter, it will set a dangerous precedent that any federal agency can act beyond the legal limits of its authority. We are confident that we will prevail on the merits.” “
In the meantime, some fintech organizations are waiting in the wings, such as Square who has pulled their current charter application waiting for clarification. Other companies like Varo Bank are not waiting around and are pursuing a full-fledged charter. More on that here.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group