Why an OCC payments charter may not become reality
WASHINGTON — The Office of the Comptroller of the Currency has not even awarded a first-of-its-kind charter to a fintech firm, and the agency's leader is signaling plans to craft a new license for payments companies. But legal observers say the same obstacles standing before the fintech charter could trip up the new version meant for money transmitters.
Acting Comptroller of the Currency Brian Brooks has frequently talked up a potential charter tailored for payments firms since taking office in May, saying it would massively reduce compliance burdens for up-and-coming companies while bringing nonbank payment activity under the umbrella of national supervision.
But just as the agency's effort to provide a narrow-purpose fintech charter has been slowed by a lawsuit challenging the OCC's authority, experts say it is unclear what would shield a future payments charter from a similar legal battle.
“It’s the same thing,” said Margaret Liu, senior vice president and deputy general counsel for the Conference of State Bank Supervisors, which along with the New York State Department of Financial Services have asked judges since 2017 to throw out the fintech charter. They have argued the OCC lacks the authority to grant a federal charter to companies that offer banking services without seeking deposit insurance.
“What they are doing is exactly what we and New York have sued on," Liu said of the payments charter idea. "There seems to be an effort through interviews and talking points to create a distinction that doesn’t exist.”
But just as it has regarding the fintech charter, the OCC counters that there is not anything novel about the agency offering a narrow-purpose payments charter. A spokesperson for the agency added that a recent federal court decision striking down the fintech charter is limited to the jurisdiction of the Southern District of New York.
“The public discussion regarding granting national bank charters to banks primarily engaged in payments services mistakenly assumes a new ‘type’ of charter, potentially asserting a new ‘authority. That’s not the case,” said Bryan Hubbard, the agency's chief spokesperson.
“In considering applications from companies engaged in the payments aspects of banking, the OCC is exercising long-existing authority in accordance with existing regulations and published procedures."
The OCC and other supporters of a payments charter have characterized the idea as a logical extension of the OCC's oversight of national banks. Bringing nonbank payment providers into the banking regulatory environment, Brooks has said, would make the system safer in the long term, and keep the OCC's charter relevant amid advances in financial technology.
“The OCC is the only agency that provides comprehensive nationwide supervision of institutions," Brooks said in a virtual conference at the Brookings Institution last month. "There's no other organization that does that in the banking system, and given that payments is one of the core banking functions, we don't want it to leave the supervisory field of vision.
"We want to be able to continue to ensure the safety and soundness of the system without letting the core activities bleed into the shadow banking system, where it has now gone."
A key part of the appeal for both the payments charter and the more generic fintech charter is that they would not require deposit insurance, distinguishing licensed companies from traditional banks and freeing them from being supervised by the Federal Deposit Insurance Corp.
But that distinction breeds a very real risk of litigation.
Legal challenges over the fintech charter by both the CSBS and the New York state's banking regulator have focused on their argument that the OCC lacks the statutory authority to offer a charter without deposit insurance. All of CSBS' suits were dismissed, but one brought by New York in 2018 currently sits in front of the 2nd U.S Court of Appeals after the OCC lost the case in U.S. District Court for Southern District of New York last fall.
With the case still pending, no company has yet come forward to apply for the OCC's fintech charter.
“Whether a payments charter would be less likely to attract a lawsuit depends, at least in part, on the legal theory that the OCC uses to support it,” said Karen Solomon, senior of counsel at Covington and former deputy chief counsel of the OCC. “If the theory underlying the payments charter is the same, then prospective plaintiffs may try to use the same arguments used in the fintech charter litigation.”
With a payments charter from the OCC, fintech firms would suddenly have access to a lucrative national version of a money transmitter license. Currently, nonbank payments companies interested in doing business nationally must apply for and maintain money transmitter licenses on a state-by-state basis.
But even after a decision is reached in the Second Circuit on the 2016 fintech charter, other legal observers say the case has a strong chance of arriving someday before highest court.
“This is Supreme Court material, I’ve always thought,” said Cliff Stanford, a partner with Alston & Bird.
Until that day comes — which could take years — the fintech charter and its prospects will likely continue to languish in legal limbo. “We need to get through the time this issue is going to take in the courts. It’s just going to need to wind its way through the system before we get certainty,” Stanford said.
Stanford emphasized that a theoretical payments charter has a real appeal for fintech companies interested in that business model. It’s also possible, he said, that a payments charter will be less controversial in the long run than the broader fintech charter proposed by former Comptroller Tom Curry in 2016, given the differences in consumer protection politics between lending policy and payments policy.
“With lending, states and consumer groups are focused on usury rates and consumer protections,” Stanford said, citing concerns from some consumer groups that fintech lending charters could facilitate predatory lending that skirts state interest rate caps. “Payments is different — not to say there aren’t consumer protection components, but I’m wondering if that’s the idea behind this. The payments charter might not draw the same attention as the fintech charter.”
But state bank regulators and their advocates dispute that any meaningful distinction exists.
The CSBS has argued that the OCC’s fintech charter represents a stark overreach of federal authority at the expense of state regulators. The group has also pointed to progress they’ve made in simplifying and streamlining the process of acquiring a money transmitter license in several states simultaneously through their Nationwide Multistate Licensing System. A multi-state agreement allows companies to apply for financial services licenses in 27 states, including money transmitter licenses, at once.
“What the states have done is create a way to rely on each other and look at everyone's work at the same time, all in a compressed time frame,” Liu said. “It’s shorter, but we’re doing it in a way that preserves the states’ ability to protect their consumers and have responsible actors operating in their jurisdictions.”
But other analysts say states may never be able to compete at scale with the federal government when it comes to chartering or licensing fintech companies.
“States naturally want to preserve or expand their authority, but it’s far from clear that they can offer the best regulatory structure for a national business,” said Jeffrey Naimon, a partner at Buckley. He added that while state regulators have made “significant progress in trying to create more uniformity, they still have a very long way to go.”
“There would be much less interest in a national bank charter for payments activities if the states could pull that kind of effort together,” Naimon said.
Also still uncertain is whether the Federal Reserve would need to allow access to its payments rails for a company receiving one of the special-purpose charters to truly benefit from federal licensing.
Even Brooks has suggested that the payments charter may need to be rolled out in two phases: an initial version 1.0, without access to the Fed’s payment system, and a version 2.0 to be revealed about 18 months later that does have that access. But whether the Fed will be open to the change remains to be seen.
“National banks by charter are members of the Federal Reserve System,” said Naimon. “Is the Fed going to give a special purpose national bank membership and allow it direct access to the Fed’s payments rails? I don’t think we know yet.”
The OCC has disputed both the substance and scope of the 2019 decision made in the Southern District of New York, when U.S. District Judge Victor Marrero ruled in favor of the NYDFS and found that the OCC did not have the legal authority to issue bank charters without deposit insurance.
With its appeal pending, OCC spokesperson Hubbard suggested that the OCC is free to continue offering its special-purpose fintech charter outside of the Southern District. (In court, Judge Marrero denied a request from the OCC to confine the scope of its ruling against the agency to New York, writing that "the Court is not providing injunctive relief of any kind, nationwide or otherwise.")
“One great characteristic of our legal system is that 94 district judges may differ in their legal interpretation and their decisions may be appealed, potentially reaching the Supreme Court,” Hubbard said.
“That process has corrected many district-level rulings that initially turned out to be on the wrong side of history,” he added.