As part of its push to promote innovation in the financial services industry, the Office of the Comptroller of the Currency (“OCC”) plans to allow financial technology (“fintech”) companies to become special purpose national banks. If the proposal is successful, fintech companies could secure a charter providing them with preemptive effects of federal law over the patchwork of state laws under which fintech companies now operate. For example, online lenders could export their home state interest rates to avoid state-specific usury caps while money transmitters would no longer need a separate state licenses. In exchange for this federal cloak, fintech companies would voluntarily subject themselves to the similar OCC supervision as national banks, including consumer protection laws and BSA/AML requirements.
A fintech charter has the potential of facilitating innovative companies. But the states are not likely to cede their regulatory territory easily. State attorneys general, state regulators and the Conference of State Bank Examiners all oppose OCC’s move as an attack on federalism and state regulatory oversight. Those groups fear that the preemptive effect of a federal charter will nullify their ability to protect consumers. Most notably, New York Department of Financial Services Superintendent Maria Vullo has publically stated that she strongly opposed the proposal. Other commentators have suggested that the charter would impart a competitive advantage on large companies that can afford the costly OCC application process to the detriment of small start-ups.
Because of their opposition, the states are likely to mount legal challenges to any final rule. For instance, there is a significant open question about whether OCC’s enabling statute, dating back to 1863, even conveys authority to grant such charters. States might also argue that the charter represents a violation of state sovereignty. Absent a distinct shift in Supreme Court precedent, however, this position seems dubious because such companies are almost always engaged in interstate commerce and because the benefits of state regulation are easily outweighed by the access created by a unified federal system. On the policy side, states could argue that the charter has the potential of eventually bringing almost all non-bank financial activity within the OCC’s ambit, thereby stifling competition and innovation and creating regulatory capture.
Legal and public policy challenges may not be the most effective tool available to states. If the OCC overreaches on the scope of this optional regulatory burden, the states could seize the opportunity to create and adopt a competing uniform code to create a consistent, more favorable alternative to federal law. To compete against the threat of a state-based alternative, the OCC could take steps to sweeten the deal such as helping to ensure that charter holders are granted access to the Federal Reserve System.
The OCC fintech charter holds a great deal of promise. But to reach its full potential, OCC will need to do something familiar to the states—compete.