Could OCC's payments charter face the same fate as its fintech charter?
The Office of the Comptroller of the Currency has endured a fairly choppy legal ride since unveiling its idea five years ago to establish a special charter for non-bank fintech companies to access a nationwide financial system for lending services without worrying about being licensed to do so in all 50 states.
As such, operators of large payments companies might find it somewhat surprising that Acting Comptroller Brian Brooks is pushing the idea for a similar charter for payments companies — which he'd like to have in place for applicants within a few months.
While the fintech charter introduced in 2015 focused on a bank charter for marketplace lenders, the payments charter would represent "a species of non-depository companies that probably qualify for a bank charter just as surely as the non-depository lenders do," Brooks said during a recent "Banking with Interest" podcast interview with Rob Blackwell, chief content officer of Promontory Interfinancial Network (Blackwell was previously editor-in-chief of American Banker, a sister publication of PaymentsSource).
"Inside the OCC these days, we are talking about it in that way — non-depository lending charters and payment charters, but the rubric for both is the same," Brooks said. "And that rubric is that for more than 20 years, the OCC regulations have said that a bank is anything that takes deposits and makes loans, or engages in payments. It is that 'or' that is really the key."
Such a concept would allow companies like PayPal, Stripe or even some advancing cryptocurrency companies to consider a bank charter, which permits a company to commence a specific aspect of business as a bank. It would include incorporation and a certificate of incorporation, while specifying the rights of a banking institution.
However, it also brings about a level of scrutiny and regulated processes that level the playing field in a way that traditional banks have often sought when competing with similar services increasingly being offered by alternative payment providers.
The OCC is working on the details of such a charter for payments companies, and Brooks is hoping to have something to announce in the "next two or three months," he said. The OCC this week said it had no new information to share regarding the payments charter beyond what Brooks has expressed the past few weeks.
"We need to take really seriously the idea, which a lot of bank trade associations make, that we don't want anything other than a level playing field," Brooks added. "We don't want the payments business of PayPal to be treated more lightly or differently than the payments business of JPMorgan."
PayPal may have a narrower business model than JPMorgan Chase does, Brooks noted, so it may not be subjected to the same depository rules as JPMorgan. "But whatever business they are in, they should be subject to the same level of scrutiny and rigor that a big bank is," he added.
Brooks was elaborating on a concept he earlier discussed on a podcast with American Banker.
With other global initiatives such as PSD2 in Europe delivering a clearer path for fintechs to get involved in banking innovation, a payments charter would offer some pros and cons for banks and payments companies alike. This balancing act is likely to make the process as slow as the fintech charter concept.
"We are working right now on a set of supervisory procedures for these kinds of specialty banks, and we won't take applications until we are ready to go with that," Brooks said. "But believe me, I am operating on Silicon Valley time, not Washington time, so we'll be doing this very quickly."
The backdrop, of course, is that the fintech charter concept did not garner full support from traditional banks, at least in part because they felt unique charters were not as stringent as a standard charter. State banking authorities also were not enthusiastic, simply viewing it as a way to take away their power in controlling money transmitter licenses.
A series of lawsuits from state financial services left the OCC scrambling to rebuild momentum. But so far, no fintech has applied for an OCC charter, as the questions about high capitalization requirements and potential restrictions on non-bank activities of the applicant under the Bank Holding Act remain hot topics. Plus, some question the authority of the OCC to even deliver such a charter.
Earlier this year, the OCC appealed decisions in the Southern District of New York that stalled the fintech charter regulations, and filed an opening brief in April. It is not clear when the Second Circuit might rule on that appeal.
During that time, Square became the first U.S. fintech company to receive conditional approval from the Federal Deposit Insurance Corp. for an Industrial Loan Company charter to pair with Square's prior state charter from the Utah Department of Financial Institutions.
These developments bring new context to the notion that large payments companies could benefit from a payments charter because it would allow them to more easily process payments and provide other services nationwide.
There isn't much to react to at this time regarding a payments charter, because the OCC hasn't brought it into clearer focus, said Sarah Grotta, director of debit card advisory for Boston-based Mercator Advisory Group.
"If the envisioned payments charter model is anything like the existing fintech charter, then this will be something only the largest payments-related fintech businesses will pursue," Grotta said. "The capital demands and compliance infrastructure requirements will rightfully be rigorous and something only larger businesses can maintain."
However, PayPal or Stripe might be interested so they could "remove the bank partnership fees from their operating expenses," Grotta suggested.
PayPal did not respond prior to deadline regarding its view on an OCC effort to soon introduce a payments charter.
"Smaller organizations, I suspect, won't be able to support the requirements and I am uncertain that those businesses focused on crypto currencies will want the increased regulatory oversight," Grotta added.
Brooks, who has experience in the cryptocurrency landscape after his work as chief legal officer at Coinbase, sees the benefit of a charter for crypto exchanges as a way to avoid state-by-state regulation of crypto through a federal charter. But mostly his focus is on the premise that if a charter for non-depository lending companies made sense, then it should also for non-depository payment companies.
The initial fintech charter concept intrigued Google and PayPal enough to reportedly engage in meetings with the OCC, but ultimately the companies backed off the idea of a national charter because of the damage it could do to relationships they had already established with state-level regulators. They also wanted to avoid the mess the OCC had found itself in when state regulators were questioning OCC authority.
"We have the authority to do it today," Brooks noted of advancing a payments charter despite the fintech charter's obstacles. "OCC regulations defining the scope of the bank charter, going back decades, made clear that the agency has the power to do any charter that covers the three key areas (taking deposits, making loans or engaging in payments)."
No matter how it ultimately shakes out, a payments charter is not likely to move along quickly without some stops along the trail of public opinion or legal challenges.
"I’m not really clear what a ‘payments charter’ would be other than an offering that would transcend state bank money transfer regulations, which may incur the ire of the state banking regulators who are trying to develop their own national cross-border capability," said Thad Peterson, senior analyst with Boston-based Aite Group.
"It's way too early to predict the fate of this idea, but it doesn’t strike me as something that will occur in the near term, and certainly not before the next election when the players may well change," Peterson added.
For Brooks and the OCC, it's more of a question of how to get payments companies on a level playing field with banks and, at the same time, address how regulators and consumers alike should be envisioning future financial services.
"We have to get over this idea that the only thing that can be a bank is a depository house in a Greek temple with a big vault in the back," Brooks said. "That is 1940s thinking and that is not how people consume financial services today."
Brooks feels his job as comptroller is "to make the bank charter relevant for every generation" and to also reflect how the nation continues to consume financial services differently.