Court Rules Only ‘Depository Institutions’ Eligible For OCC’s Bank Charters

Lights out for the FinTech charter idea?

The Office of the Comptroller of the Currency (OCC) debuted a special purpose charter in 2016 that would have  given FinTechs a leg up on competing with traditional financial services companies.

Nearly four years on, little progress has been made — and now there’s a significant stumbling block.

First, a bit of background: The goal has been — and if things are indeed put to rest with a recent court decision — to standardize a patch quilt of regulations that must be satisfied by FinTechs on a state-by-state basis.

By way of example, FinTechs must cobble together money transmitter licenses from each state in which they operate.

The charter would have granted FinTechs the ability to ply their respective trades without mandating that licenses be gathered piecemeal.

And in effect, these tech-savvy upstarts would have been able to act like banks, operating as banks do, to take deposits and make loans.

But Federal Deposit Insurance Corporation (FDIC) coverage — which protects deposits — proved a sticking point this week.

As reported, the U.S. District Court for the Southern District of New York ruled Monday (Oct. 21) that the OCC cannot in fact issue a charter for non-bank enterprises (a segment that included FinTechs) that are not able to get FDIC backing.

In our view, then, it’s  a case of Catch 22. Can’t get the charter without FDIC coverage. And, conversely, can’t get the FDIC coverage without having products in place that would need such coverage.

In the ruling handed down this week, Judge Victor Marrero said in his decision that the National Bank Act’s “business of banking” clause “unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters from the OCC.”

The ruling, too, said that “only depository institutions are able to receive national bank charters from OCC.”

Regulation, Law and Going Forward

This might be thought of as the second legal blow to the OCC’s special charter bid. In May, as reported in this space, the same judge rejected a motion by the OCC to dismiss a lawsuit that sought to derail the charter. Back then, the New York State Department of Financial Services had argued, through a lawsuit, that the OCC had overstepped its authority with the special purpose charter.

Might the Supreme Court, eventually, be the ultimate arbiter of this debate? Perhaps. The OCC, for its part, has said that it will appeal Marrero’s latest ruling, and said it disagree with the court’s interpretation of the authority granted by the National Bank Act to the OCC.

The issue may seem a bit less than urgent, given the fact that relatively few firms — in fact none as of this past summer — had in fact applied for the charter, given the litigation that has gone back and forth, and which seems set to continue.

Of course there are ways for FinTechs to broaden their services. Square has applied for an industrial loan license to take deposits.

But implicit in the ruling is a nod to state banking regulators as the best equipped to provide oversight of non-banking firms, especially with an eye on anti-money laundering activities.

And it also seems to give the nod to a model that has been taking shape over the past few years, where FinTechs partner with banks to offer a range of products and services. Through the partnerships, banks take deposits and lend; the FinTechs help the banks more fully enter the digital age.

In an interview with PYMNTS, Margaret Liu, senior vice president and deputy general counsel at Conference of State Bank Supervisors (CSBS) said that “the court’s final order makes clear that the OCC cannot turn a nonbank into a bank. CSBS will support New York DFS as its case proceeds.” Last month, a federal judge in Washington, D.C. dismissed a CSBS suit to block the OCC from issuing the charters.

“Unlike the OCC’s proposed FinTech charter, the states aren’t picking winners and losers,” Liu told PYMNTS via email. “State regulation continues to be activities-based. A diverse range of financial service companies — companies of varying sizes and business models — operate under state licenses right now.”

Where once it seemed that a quicker path for non-banks to act like banks would be in the offing, now it seems that … slow and steady wins the race.