The current regulation for fintech companies requires them to secure individual state licenses and comply with a number of state-specific regulations. Fintech companies often face challenges during this process, as it is expensive for the companies and also risky for the customer protections. Many companies must comply with additional layers beyond the requirements of the individual state regimes, including the federal regulation and oversight.

In 2018, the OCC announced the plan to issue “Fintech Charters”, which are the special purpose national banking (“SPNB”). Under this plan, it would start accepting the applications from non-depository fintech companies for the SPNB.

The initial idea behind the Fintech Charters is that: there are three crucial activities of banking – lending, payments and deposit takings. However, it is important to separate these activities, as the most burdensome regulations are from deposit taking. Having the national charter of non-depository fintechs would then allow, in theory, more freedom for them to innovate whilst not threatening the financial system.

The Fintech Charters would also allow non-depository fintech companies to provide their services without having to obtain the individual state licenses. Fintech companies under the Fintech Charters would additionally be able to operate as a bank, once they acquired the SPNB, under the Securities Act of 1933.

The plan of OCC soon meets with a number of strong challenges.

First, the charters face conflicts with the Federal Reserve (“the Fed”). As the Fed only regulates depository banks, it will not regulate the “banks” under the Fintech Charters. Nevertheless, the fintech companies could still access the real-time payment system of the Fed, as they would be considered national banks with the grant of the SPNB. The charter would then pose a great threat to the regulatory power of the Fed, as well as the power of state regulators that control lending and payments for companies without national charters.

Second, there are issues over the principle included in the US banking law, which states that companies that own banks cannot control non-banking companies. This rule, however, would not apply to non-depository banks of the Fintech Charters. The worry that stems from this issue concerns the possible domination over the financial systems of the bigger fintechs who would receive the charters, such as Amazon and Facebook. Lacewell v. OCC progress

The New York’s Department of Financial Services (“NYDFS”) in Lacewell disapproved of the OCC’s plan. According to their arguments, the OCC’s regulatory authority does not have the power to grant a charter to non-depository institutions.

The United States District Court for the Southern District of New York (“SDNY”) rejected the OCC’s decision to dismiss a suit by the New York State Department of Financial Services (“NYDFS”) and indicated the agreement that the OCC was exceeding its authority for attempting to issue Fintech Charters to non-depository fintech companies. This led to the decision of the OCC to file an appeal to the 2nd Circuit in Lacewell v. Office of the Comptroller of the Currency.

The result of the 2nd Circuit will hold significant impact for nonbank market participants. A ruling in favor of the OCC is likely to result in a major transformation of the regulatory landscape of the fintech industry. It is therefore important for fintech companies and legal organisations to closely pay attention to the progress of this ruling.

For Fintech companies trying to navigate the current and proposed regulations is tricky and many of the larger fintech companies are waiting for the outcome of the new regulations and pending litigation to make their move.  If we have learned anything from COVID, it is that the digital landscape is changing at accelerated speeds and the fintech industry has an ever increasing potential for changing the market going forward.

FLI regularly advises clients on corporate portfolio management and strategy, with a key focus on global roll-outs and investments. With over 17,000 lawyers worldwide in over 100+ jurisdictions, FLI benefits its clients by providing access to local industry and jurisdictional experts. If you would like to discuss how this may relate to your outside counsel requirements or to explore how FLI may render assistance to your firm both domestically or in cross-border matters, please feel free to get in touch with Daniel Casares-Lauritsen at dcasares@first-law.com

1. https://talkingtech.cliffordchance.com/en/industries/fintech/pros-and-cons-of-the-occ-s-new-fintech-charter.html
2. https://www.jonesday.com/en/insights/2020/01/occ-fintech-charter-headed-to-the-second-circuit
3. https://www.ft.com/content/7e702192-472a-4ce8-98e7-f26756df7eec
4. https://www.lexology.com/library/detail.aspx?g=ad48bb5c-0d16-44f4-a4ee-0a986b90dfc7