States must rework their arguments against OCC fintech charters

Innovation and competition are critical for driving improvement in our economy, allowing new and better ways of solving old problems and preventing more-established firms from getting too comfortable.

While these positive changes to our phones, cars and homes are clear, there are less obvious areas, like regulation, where innovation is also leading to better outcomes.

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For example, take a look at what’s happening with financial technology (fintech). New technology and systems are increasing access to financial products for consumers and lowering prices.

However, the current regulatory status quo is outdated and threatens to limit the possibilities of fintech. The Office of the Comptroller of the Currency (OCC) is working to change that. 

The OCC has taken an innovative step by offering a banking charter for a newer, outside-the-box industry: fintech firms that do not take traditional bank-style deposits but do provide lending or money transmission services.

Unfortunately, the states, concerned that it will give federally-chartered institutions an unfair advantage, have sued to stop the OCC.

While the states have a point — the OCC’s move does come with some risk — they (and their residents) would be better served insisting that Congress allow them the opportunity to compete on an even playing field. That way consumers can get the full benefit of innovation and competition in both finance and government.

Fintech is helping make financial services more affordable and accessible, including in the areas of lending and money transmission. Consumers are able to get better prices and service, frequently from the convenience of their phone, from new non-bank providers.

Unfortunately, these non-bank firms labor under an unfair regulatory disadvantage compared to their state- and federally-chartered bank rivals: They have to comply with a patchwork of state-by-state laws while banks enjoy broader consistency thanks to the federal laws they primarily operate under.

The OCC is seeking to address this by making it easier for fintech firms to become, for all intents and purposes, “banks.” While these firms will subject themselves to the burdensome requirements of having a federal charter, they will also get the benefits of being a bank.

The Conference of State Bank Supervisors (CSBS), an organization that represents state financial regulators, and the New York Department of Financial Services (NYDFS) have both sued the OCC to prevent them from issuing such a charter.

The CSBS and NYDFS argue that the OCC is overstepping its legal authority in offering charters to non-depositories and intruding on states’ jurisdiction over non-bank lenders and money transmitters.

They argue that the charter will harm consumer protection and that OCC-chartered firms will have an unfair competitive advantage over their state-licensed competitors because they can tap into the power and regulatory consistency afforded banks.

A more cynical read would be that the states are seeking to protect the lucrative licensing fees they would lose if state-licensed firms got a federal charter instead.

However, this doesn’t mean that the states are entirely wrong. They are right that the nationally chartered fintech banks would have a competitive advantage over their state-licensed non-bank rivals, just as banks now have an advantage over non-banks.

Further, even if the states wanted to, they couldn’t offer a competing non-depository bank charter because federal law requires state-chartered banks to take federally insured deposits in order to get benefits like the ability to lend nationwide under one set of laws governing interest. This is the states’ most legitimate grievance and the thing they should focus on fixing.

Rather than suing to prevent regulatory innovation by the OCC, the states should go to Congress and secure the ability to issue licenses or charters that can compete with the OCC’s new charter. This will enable states and the OCC to compete on innovation instead of litigation, and allow consumers to reap the benefits.

Brian Knight is the director of innovation and governance and a senior research fellow at the Mercatus Center at George Mason University.