A national banking regulator is offering cutting-edge financial firms a new pathway into the traditional banking system. So far, few of them are biting.
The lack of immediate interest from the likes of LendingClub Corp. LC -0.29% , Square Inc., and others comes in large part from uncertainty about what activities the Office of the Comptroller of the Currency’s so-called fintech charter will allow, what regulatory requirements it will carry, and whether it will hold up in court.
That uncertainty grew Wednesday when the Conference of State Bank Supervisors, a group of state regulators, said it intends to file a lawsuit challenging the OCC’s authority, renewing a previously unsuccessfully legal challenge.
The OCC opened its door to formal applications July 31, giving the states a fresh legal angle to pursue after previous suits were deemed premature. The threat of a protracted battle could make eligible firms more hesitant to apply for the OCC charter, according to people in the industry.
“The OCC does not have the statutory authority to do what they are seeking to do,” said Margaret Liu, deputy general counsel of the Conference of State Bank Supervisors. She wouldn’t specify whether the state regulators planned to sue before or after a company had applied for the charter.
An OCC spokesman said the agency will “vigorously defend” its authority to charter “companies that are engaged in the business of banking, meet the qualifications for becoming a national bank, and apply to conduct business as part of the federal banking system”.
Over the last decade, fintechs—typically nonbank companies offering financial services online—have grown more prominent in lending and payments. They have collected state licenses and joined with banks to connect to the mainstream financial system.
A national license would allow fintech firms to operate across the U.S. without having to comply with state-by-state rules, such as interest-rate limits.
No company has applied for the OCC’s fintech charter yet. Jeffrey Hare, a banking lawyer at DLA Piper, said he is telling clients to take a wait-and-see approach: “You want to be first in line to be second.”
Some firms are signaling they are in no rush to apply.
“The OCC’s new charter is a huge step for regulatory modernization,” said a statement from Richard Neiman, a former New York banking regulator who is head of regulatory affairs at LendingClub, an online marketplace lender. “But marketplace lenders with long track records and robust risk management processes will likely consider all their options.”
Like other large fintech companies, LendingClub is already operating without a federal license. It partners with a bank to benefit from that institution’s federal pre-emption over state laws, allowing it to avoid local interest-rate limits and licensing requirements.
For Square, a payments company that also offers loans to small businesses in its network, obtaining a national bank charter from the OCC could restrict its ability to own nonfinancial businesses, like its food-delivery service Caviar Inc.
“A full bank charter would not be appropriate for Square,” said a company spokesman. “Our other, predominant lines of business are not in products and services that require a banking license.”
Square instead is eyeing a Utah industrial loan company license, which would give it access to federal deposit insurance and avoid other states’ interest-rate limits without needing the OCC charter. It says it is planning to refile an application with the Federal Deposit Insurance Corp., after withdrawing a previous application this summer.
PayPal Holdings Inc. PYPL 1.06% already has licenses in dozens of states. When the OCC was preparing the fintech charter in January 2017, PayPal canceled a meeting with Beth Knickerbocker, who heads the OCC initiative, according to email records. “[We] don’t feel that we would have much else to add,” a PayPal representative said in an email.
PayPal declined to comment. “We do not comment on such conversations in advance of an application being submitted,” said the OCC.
Banks generally face strict capital and liquidity requirements governing how they fund their operations, as well as requirements to lend to people of all income levels. The OCC hasn’t spelled out detailed requirements for fintech firms.
Charter applicants have to submit detailed, long-term business plans. Bank investors must be vetted and share details of their financial history. “It’s like an FBI background check,” said Keith Noreika, a partner at Simpson Thacher & Bartlett LLP and former acting comptroller.
Payments companies, from startups to established players such as Western Union Co. and MoneyGram International Inc., could benefit by replacing state licenses with a national charter—particularly if it came with access to the Federal Reserve’s nationwide payments system, according to industry lawyers.
The OCC said it is discussing this question with the central bank. It “is a matter for [the] Federal Reserve to decide, and I expect that decision will be made based on [the] particular facts and circumstances of each bank,” said Stephen Lybarger, the OCC’s head of licensing, in a statement. The Fed declined to comment.
On Aug. 31, the OCC conditionally approved a national bank charter for Varo Money Inc., a digital banking startup. Varo is seeking a traditional bank charter, rather than a new fintech-focused license, but the OCC’s receptiveness was read by some as a bullish signal.
“It goes to the OCC’s willingness to charter a nontraditional fintech business plan bank.,” said Thomas Curry, a partner at Nutter McClennen & Fish LLP and the former comptroller who initiated the OCC’s fintech charter work.
—Ryan Tracy contributed to this article.
Write to Lalita Clozel at [email protected]