On July 31, 2018, the U.S. Treasury released its 223-page report on Nonbank Financial, Fintech and Innovation (the “Treasury Fintech Report”). And on the same day, the Office of the Comptroller of the Currency (the “OCC”) announced that it was accepting applications for special purpose national bank charters from fintechs (the “OCC Fintech Announcement”). The Treasury Fintech Report includes a recommendation that the OCC establish a special purpose national bank charter for fintech firms. The significance of the immediate release of the OCC Fintech Announcement the same day is noteworthy. These are important developments for banks, credit unions and fintechs with broader implications for regulators and consumers. In our world of rapid technological change, innovation, and changing behaviors and needs of consumers, their significance is notable. This article summarizes what these developments mean for banks and fintechs.
Of the two, the OCC Fintech Announcement has more immediate significance, while the Treasury Fintech Report provides directional framing of the U.S. government’s aspirational goals to foster fintech initiatives for both banks and fintechs. However, the Treasury Fintech Report is significant because, as a report of the U.S. Treasury, it indicates that the U.S. administration recommends and supports steps to encourage technological innovation in the delivery of financial services within the U.S.
The Treasury Fintech Report is fundamentally a set of over 80 recommendations to other federal and state regulators and legislators for them to consider. It will still be necessary to monitor and understand the actual steps taken by federal and state regulators and legislators in response to these recommendations. With the exception of the OCC’s announcement about accepting applications from fintech firms for special purpose national bank charters, it is not clear when visible steps will actually be taken on the recommendations (other than the OCC Fintech Announcement) or the extent to which the details will differ from the recommendations set forth in the report. Banks and fintechs will need to continue to comply with existing laws and regulations in their current form until any actual changes are adopted and implemented. Fintechs will not benefit from recommendations until responsible parties make decisions to act on them and promulgate changes to laws, regulations, or policy.
The OCC Fintech Announcement provides an immediate opportunity for fintechs to carefully consider. As summarized below, the OCC grants charters to conduct banking business to national banks and federal savings associations. Some fintechs have expressed an interest in a national bank charter for several years. Accordingly, the OCC solicited comments on the charter concept and licensing standards over the past two years. The OCC Fintech Announcement indicates the OCC will immediately begin accepting, consistent with a recommendation in the Treasury Fintech Report, applications for special purpose national bank charters from fintechs, thus greenlighting those firms to apply. This charter would enable fintechs to engage in the core banking functions of paying checks or lending money, but not taking deposits. Thus, it may not be an attractive alternative for some fintechs.
For banks, it raises the immediate concern of increased competition relating to certain core banking functions. State banking regulators and community banks have previously warned, commented, and taken other actions challenging the appropriateness of national bank charters for fintechs. For example, the Conference of State Bank Supervisors and the New York State Department of Financial Services have sued to stop plans for special purpose OCC charters for fintechs. Since the release of the OCC Fintech Announcement, new warnings have been made. State regulators, community bankers and others raise important concerns that should and will undoubtedly be considered.
For fintechs pursuing special purpose national bank charters, this move will usher in considerable federal oversight and expose them to compliance and safety and soundness expectations on a level they have not previously experienced. The rigors of the application process will, in some respects, provide an insight into the broad set of obligations that must be met by the applicant on an ongoing basis if the charter is approved. Further, once a special purpose national bank charter is obtained, the firm will experience ongoing federal regulatory oversight through regimented examinations and supervision.
The Treasury Fintech Report
The Treasury Fintech Report references important facts relating to changing consumer banking practices and market trends. It notes that both the financial crisis of 2008 and technological innovation have had a significant effect. In support, the report indicates:
The landscape for financial services has changed substantially. From 2010 to the third quarter of 2017, more than 3,330 new technology-based firms serving the financial services industry have been founded, 40% of which are focused on banking and capital markets. In the aggregate, the financing of such firms has been growing rapidly, reaching $22 billion globally in 2017, a thirteen-fold increase since 2010. Significantly, lending by such firms now makes up more than 36% of all U.S. personal loans, up from less than 1% in 2010. Additionally, some digital financial services reach up to some 80 million members, while consumer data aggregators can serve more than 21 million customers.
The Treasury Fintech Report also notes the importance of fintechs and other nonbanks in consumer lending in 2018, stating that “…nonbank firms constitute a significant share of the overall funding provided across these lending segments. For example, nonbank companies account for 58% of the outstanding non-mortgage consumer loan market and 58% of the total residential mortgage market as of the first quarter of 2018.”
As previously mentioned, the Treasury Fintech Report includes over 80 recommendations. These recommendations are summarized into four categories:
- Embracing digitization, data and technology;
- Aligning the regulatory framework to promote innovation;
- Updating activity-specific regulation; and
- Enabling the policy environment.
The recommendations can be found throughout the report and in Appendix B. Appendix B is useful because, in addition to neatly listing the relevant legislative or regulatory body (or bodies) that would need to execute on the related recommendation, it ties each recommendation to the corresponding core principle(s) for regulation of the U.S. financial system found in Executive Order 13772, signed by President Trump on February 3, 2017. These recommendations are not detailed in this paper. Note that some of its recommendations relate to laws and rules that apply beyond banks and fintechs. For example, this is true concerning the Treasury Fintech Report’s recommendations regarding the Telephone Consumer Protection Act (TCPA), the Fair Debt Collection Practices Act (FDCPA), and the payday lending rule. And some of its recommendations are directed to entities besides federal and state regulators and legislators, such as self-regulating organizations.
Here are some highlights from the recommendations found in the Treasury Fintech Report:
- The U.S. Treasury Dept. recommends steps to reduce, modernize and update regulations to facilitate innovation by both banks and fintechs.
- Federal and state bank regulators should provide a regulatory sandbox to foster “…meaningful experimentation with innovative financial services” through lowered state and federal regulatory impediments.
- States should harmonize their regulations with federal regulators to promote innovation.
- Legislation should be enacted to facilitate standardized digital notarizations, and other steps should be taken to support lenders adopting end-to-end digital mortgage loans.
- Legislation should be enacted to modernize debt collections through the codification of rules directing reasonable digital communications that reflect consumers’ preferred methods of contact/communication.
- Secure and reliable access by consumers to their financial account and transaction data is essential. Upgrading the regulatory system, including the commensurate data protection standards, is recommended for consumer revocation of consent and scope of data access, moving away from screen-scraping and other less secure methods of data access, greater transparency for consumers with improved data accuracy, and addressing uniform national standards and liabilities for data access and data breach.
- Treasury supports steps to develop and implement faster payment systems.
- Treasury recommends that the Federal Communications Commission (FCC) provide clear guidance on reasonable methods for consumers to revoke consent under the TCPA. Congress should consider statutory changes to the TCPA to mitigate unwanted calls to consumers and provide for a revocation standard similar to that provided under the FDCPA.
- Treasury recommends not implementing the Consumer Financial Protection Bureau (CFPB, now renamed the BCFP) payday lending rule such that individual states would continue to regulate short-term, small dollar lenders.
- IRS and other government technology updates are recommended, but the related budget issues are acknowledged.
The OCC Fintech Announcement
There are significant barriers for fintechs simply attempting to obtain bank charters. Banks are subject to restrictions on their nonbanking activities and holding companies that own banks are subject to related restrictions under U.S. banking laws. Given these barriers, fintechs have generally chosen to comply with myriad federal and state laws and regulations applicable to nonbank financial firms. One set of examples relates to state laws and regulations applicable to money transmitters (entities that provide money transfer services or payment instruments).
States as well as the federal government charter banks and savings institutions. The OCC charters national banks and federal savings associations. It also regulates and supervises them. National banks and federal savings associations are generally exempt from state usury laws and other state banking laws and regulations. However, state fair lending laws and regulations continue to apply.
A fintech might want to obtain a special purpose national bank charter from the OCC in an attempt to exempt it from such state usury laws and other state banking laws and regulations. Nevertheless, because both federal and state fair lending laws and regulations will continue to apply, there are still significant costs to be considered. For example, fair lending-related compliance processes must be assessed and put in place.
The OCC Fintech Announcement is clear that there will be compliance obligations:
Fintech companies that apply and qualify for, and receive, special purpose national bank charters will be supervised like similarly situated national banks, to include capital, liquidity, and financial inclusion commitments as appropriate. Fintech companies will be expected to submit an acceptable contingency plan to address significant financial stress that could threaten the viability of the bank.
New fintech companies that become special purpose national banks will be subject to heightened supervision initially, similar to other de novo banks.
The OCC Fintech Policy Statement also makes it clear that a fintech must provide or support fair access to financial services and fair treatment of customers:
The OCC also expects a fintech company that receives a national bank charter to demonstrate a commitment to financial inclusion. The nature of that commitment will depend on the company’s business model and the types of products, services, and activities it plans to provide. By providing a high standard similar to the Community Reinvestment Act’s expectations for national banks that take insured deposits, the financial inclusion commitment will help ensure that all national banks provide fair access to financial services and treat customers fairly.
Moreover, the OCC Fintech Policy Statement indicates that applicants will also need to consider compliance with Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) standards, along with related reviews and complaint monitoring reviews:
Further, proposals that include financial products or services that have predatory, unfair or deceptive features or that pose undue risk to consumer protection, would be inconsistent with law and policy and would not be approved.
Nevertheless, the OCC Fintech Announcement provides a path for fintechs to reduce their applicable state regulatory burdens. And state regulators, community bankers and others have raised concerns that the OCC Fintech Announcement likely results in an unfair playing field between banks and fintechs. However, the OCC Fintech Announcement is also clear that obtaining such charters will come at a price: ongoing compliance with a host of applicable federal banking law and safety and soundness requirements. Further, there is likely no escape from federal and state fair lending compliance for fintechs that obtain such charters. Fintechs considering a special purpose national bank charter must continue to assess the potential compliance burdens and challenges that come with such status.
The Treasury Fintech Report and the OCC Fintech Announcement are important news for banks, fintechs, and consumers given our changing world.
The Treasury Fintech Report indicates that the U.S. financial regulatory system is attempting to catch up with the rest of the world in supporting innovative financial services that will benefit consumers directly or indirectly. The recommendations highlight the issues that have received significant focus. A close watch on the efforts by Congress, as well as by federal and state regulators and legislatures, to address the recommendations in the report is advisable and commenting on their actions is prudent. Time will tell whether the recommendations Treasury makes to Congress, as well as to federal and state regulators and legislatures, are influential in driving that effort.
Given the OCC Fintech Announcement, a fintech firm should assess whether a special purpose national bank charter is in its best interest and consistent with its business objectives, and whether it can meet the requisite corporate governance, risk management, compliance, capital and liquidity, and contingency planning standards, both as part of the application process and on an ongoing basis. Moreover, even if a fintech firm decides not to seek a special purpose national bank charter from the OCC, it will need to continue to assess potential regulatory compliance obligations as partners and vendors to banks, given the explicit compliance obligations that bank regulators and the BCFP have put in place for managing third-party relationships. This is particularly important given data suggesting that banks plan on increasing the adoption of partnerships with fintechs and plan to increase their expanding use of technology.
Banks will need to quickly assess how they will respond to both the OCC Fintech Announcement and the Treasury Fintech Report. Evaluating and committing to fintech partnerships and technological innovations and investments are logical steps that banks and fintech firms should consider. And even if these steps are already under way, heightened scrutiny by banks and fintechs seems justified in light of the announcement and the report. Actions taken by banks that change processes previously compliant from a regulatory standpoint will likely result in a need for such banks to reassess the impact of changing technology and relationships with their ongoing bank compliance obligations.
Innovation is relentless, and the needs and desires of consumers change. Banks, regulators and others need to adapt. The Treasury Fintech Report and the OCC Fintech Announcement are important news for banks and fintechs and indicate that the federal government supports change.
 https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf See also, the related U.S. Treasury Department issued fact sheet and press release: https://home.treasury.gov/sites/default/files/2018-07/Nonbank%20Financials%20EO%20-%20Fact-Sheet%20FINAL.PDF and https://home.treasury.gov/news/press-releases/sm447
 https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html. See also, the OCC Policy Statement (the “OCC Fintech Policy Statement”) and the Comptroller’s Licensing Manual Supplement: Considering Charter Applications From Financial Technology Companies (the “OCC Licensing Manual Fintech Supplement”): https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-other-occ-policy-statement-fintech.pdf and https://www.occ.gov/publications/publications-by-type/licensing-manuals/file-pub-lm-considering-charter-applications-fintech.pdf
 Credit unions are not-for-profit organizations providing banking services that are controlled and owned by their members. They differ in important ways from banks. However, for simplicity of analysis here, they are not separately discussed. Many of the same concerns expressed for banks relating to fintechs and the implications of the Treasury Fintech Report and the OCC Fintech Announcement may also likely be relevant to credit unions.
 See Exploring Special Purpose National Bank Charters for Fintech Companies (December 2016) and Evaluating Charter Applications From Financial Technology Companies (March 2017): https://www.occ.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf and https://www.occ.gov/publications/publications-by-type/licensing-manuals/file-pub-lm-considering-charter-applications-fintech.pdf
 There are open questions regarding the legal authority of the OCC to grant charters to a “bank” that does not accept deposits. See, e.g., Roth, “OCC will grant fintech special purposes national bank charters,” Banking & Finance Law Daily (Wolters Kluwer, Aug. 8, 2018).
 Maria T. Vullo, Superintendent of the New York Department of Financial Services, submitted a comment letter to the OCC in opposition of a proposal to create a new national bank charter for fintech companies. https://www.dfs.ny.gov/about/press/pr1701171.htm. See the letter to the OCC from Robin L. Wiessmann, Secretary of the Pennsylvania Department of Banking and Securities, at http://www.dobs.pa.gov/Documents/Secretary%20Letters/All%20Business/10.6.17%20Fintech%20Licensure%20Letter.pdf.
 https://www.nacha.org/system/files/resources/Dec-12-2017-Ruling-NYDFS-OCC-Fintech-Charter.pdf, https://www.consumerfinancemonitor.com/wp-content/uploads/sites/14/2018/05/CSBS-dismissal.pdf.
 See ICBA Statement on Treasury, OCC Regulatory Announcements (August 1, 2018) at https://www.icba.org/news/press-releases/2018/08/01/icba-statement-on-treasury-occ-regulatory-announcements; Statement by CSBS President & CEO John W. Ryan titled “CSBS Responds to Treasury, OCC Fintech Announcements” (July 31, 2018), https://www.csbs.org/csbs-responds-treasury-occ-fintech-announcements; and Statement by DFS Superintendent Maria T. Vullo on Treasury’s Endorsement of Regulatory Sandboxes for Fintech Companies and the OCC’s Decision to Accept Fintech Charter Applications (July 31, 2018) at https://www.dfs.ny.gov/about/statements/st1807311.htm.
 Treasury Fintech Report, p. 4. Report citations omitted.
 Treasury Fintech Report, p. 79. Report citations omitted.
 See, e.g., 12 USC Sec. 24 and the Bank Holding Company Act of 1956.
 OCC Fintech Announcement, p. 1.
 OCC Fintech Announcement, p. 2.
 OCC Fintech Policy Statement, p. 3. Concerns have been raised that these financial inclusion requirements are vague and could represent lower requirements. See, e.g., “Less is more for OCC's fintech financial inclusion plans,” American Banker (Aug. 3, 2018). However, the OCC’s Deputy Comptroller for Licensing, Steve Lybarger, is quoted in the article as stating that “[i]In no way, between the original draft and the final supplement, is there any intent of the agency to lessen that commitment going forward.”
 OCC Fintech Policy Statement, p. 3-4.
 Existing state law compliance burdens for fintechs were described by Mike Whalen of Goodwin Procter as a “50-state hodgepodge.” See “Silicon Valley’s Invasion of Banking Just Got Key U.S. Go Ahead, Bloomberg News (July 31, 2018):https://www.bloomberg.com/news/articles/2018-07-31/tech-firms-can-win-bank-charters-as-occ-unveils-fintech-policies
 See, e.g., “ICBA Statement on Treasury, OCC Regulatory Announcements” (Aug. 1, 2018): https://www.icba.org/news/press-releases/2018/08/01/icba-statement-on-treasury-occ-regulatory-announcements and “CSBS Responds to Treasury, OCC Fintech Announcements” (July 31, 2018): https://www.csbs.org/csbs-responds-treasury-occ-fintech-announcements