Payments innovation is coming to America, and it’s coming faster than anyone expected. A proposal recently released by the Office of the Comptroller of the Currency (OCC) signals the agency’s intent to accept applications for a new Special Purpose National Bank Charter for financial technology, or “fintech,” companies.
It’s coming just in time, too, because the United States has become a payments backwater. Many other countries enjoy same-day funds transfers default and even free person-to-person payments, but moving money in the U.S. today is slow, expensive, and largely relegated to decades-old feature sets. This means mom and pop pay more at the register, families back home get less of the money sent from immigrants, and Wall Street waits days for each and every securities trade to settle. Where other countries’ payments systems have iterated and innovated, the U.S. has stagnated.
Why? The law. Before launching a new nationwide payments product today, fintech entrepreneurs must ask permission from no fewer than 54 regulators. Worse, these regulators each enforce their own unique set of laws, each with its own requirements and obligations. The most innovative companies, like those working with digital currency and blockchain technologies, have no way of knowing how — or whether — those laws will apply to them. Our most transformative businesspeople are the worst off.
Entrepreneurs awarded a fintech charter would be exempt from the state-by-state licensing regime that’s holding back the pace of progress in the fintech world. Instead, they would have one primary regulator: the OCC. They could potentially offer their own payments systems, engage in lending, act as exchanges, even issue debit cards.
So what’s not to like? Well, plenty actually, but the good still outweighs the bad. To start, the OCC has made it clear that applying for a fintech charter will be just as difficult, costly, and time consuming as applying for a traditional bank charter. Applicants will still need to set aside significant time and money to seek a charter. Then, once chartered, the special-purpose bank may still be limited in its powers.
While traditional banks can exercise all three so-called “core” banking functions — such as lending, payments and deposit-taking — the OCC signaled it may prohibit a special-purpose bank from deposit-taking. This restriction prompts questions as to what a special-purpose bank’s relationship with other banks would be. For example, would a special-purpose bank still need an account at a traditional bank to pay its employees and vendors? How would a special-purpose bank interface with the Federal Reserve? We’ve yet to hear from OCC on these issues.
One unknown is more unsettling: we have no way of knowing the systemic effects of pre-emptive power accumulated in a single federal regulator for young industry. In today’s state-by-state licensing system, power is diffuse. If one of a fintech company’s many regulators insists on untenable requirements, then operating in that regulator’s state could be difficult and operations in other states are largely unaffected.
If a fintech company’s only regulator insists on untenable requirements, it could be difficult to operate the company at all. Worse yet, a single regulator is potentially more susceptible to capture by entrenched players. The revolving door that contributes to so many regulatory woes in other industries could begin to turn on fintech. These concerns are real and shouldn’t be overlooked.
On balance, though, the likely benefits to consumers and the industry of a fintech charter make the risks worthwhile. Most are mitigated by the simple fact that the fintech charter, as proposed, would be opt-in. Dystopian concerns over a sole regulator captured by special interests, demanding the satisfaction of onerous requirements, seem exaggerated when the regulated companies can simply choose another regulator.
Combine this optionality with the increased certainty and consistency of regulation, and it’s easy to see why there may be many more fintech projects launched when a charter becomes available. More fintech projects means more innovation, more choice for consumers, and a genuine opportunity to develop cutting-edge payments systems in the United States.
Marco Santori is partner and leader of the financial technology practice at Cooley LLP.
The views expressed by contributors are their own and are not the views of The Hill.