Why One Startup Is Desperately Seeking Regulation

As a general rule, most startups aren’t too happy when the regulator comes around, and it is rarely indicative of good news. Uber had many wonderful years of asking for forgiveness instead of permission and managed to build a worldwide ridesharing empire on the strength of that conviction. These days, however, Uber is spending its time, increasingly, in court and has even managed to allow things to break down completely in Austin such that it doesn’t operate there anymore.

The era of forgiveness instead of permission may be coming to an end.

And while that is bad news for a startup like Uber, as it turns out, instinctive fear of the regulator is not an endemic condition among startups. Some, like Circle, not only like regulation but are knowingly and intentionally courting more of it because they think it will help them do business better.

Circle is a payments company and one that has concluded to seek a charter from a federal banking regulator. Said charter will mean that Circle will face tighter scrutiny but great ease operating on a national scale.

“[A federal banking license] is appealing, both because of our long-term strategy but also because it takes a lot of the cost and complexity of working with many third parties out of the equation,” said Circle Chief Executive Jeremy Allaire, who declined to comment on specific government discussions.

Officials at the Office of the Comptroller of the Currency (OCC), the national bank regulator, told the Boston startup they would weigh its request.

“We need to be open to discussing it and working through it,” said Comptroller of the Currency Thomas Curry, referring generally to bank charters for FinTech companies. “And I think that’s the sea change in attitude here at the OCC.”

The OCC would not comment on Circle or any other firm’s charter acquisition efforts.

On some level, Circle’s move seems strange. Since many nonbank FinTech firms are technically outside of the boundaries of federal oversight, they leverage that as an opportunity to operate differently (and often more swiftly) than their bank counterparts. But Circle, which has grown quickly since founding in 2013, comes well-financed and with a clear vision for what it wants to be — the firm that uses bitcoin (and other digital currency) as the tech that can transfer any currency anywhere.

And that, said Allaire, is just the beginning, as Circle aspires to a broader reach in financial services than just payments alone; lending or investing advice could also become part of the business’ function.

“We think the FinTech industry could benefit from different forms of national charters for online banking activities,” he said, noting that Europe and China already have national or cross-border licenses for nondepository electronic money transfer services.

But those do not exist today, hence Circle’s quest for an OCC charter, as its other option is to go state by state getting licensed to perform services like loans or money transmission.

“A FinTech charter would help solve the trouble that innovators have had in partnering with banks,” said Jo Ann Barefoot, a former deputy comptroller and now a senior fellow at Harvard University’s John F. Kennedy School of Government.

But a full-scale bank charter would also invite more detailed federal scrutiny of business models, board structures and capital levels, though some of those issues can be avoided if a FinTech firm sought a “limited-purpose” charter from the OCC.

The OCC offers few limited-purpose charters, mostly for trust companies or credit card issuers. In the last 10 years, it has issued eight such charters.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.

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