By Lydia Beyoud
Uncertainty over whether fintech companies would get access to the Federal Reserve’s low-cost payments system could give pause to some companies considering a special-purpose banking charter with the Office of the Comptroller of the Currency.
The Fed hasn’t indicated whether non-bank financial institutions could become members of its system, and the issue isn’t addressed in the OCC charter unveiled July 31.
“That’s an indication there may be open issues with the Federal Reserve,” Julie Williams, former OCC acting comptroller and now managing director of Promontory Financial Group, a financial services compliance and consulting firm and subsidiary of International Business Machines (IBM) Corp., told Bloomberg Law.
The Treasury Department’s fintech report, also released July 31, noted the question about Fed access and stressed the need for collaboration between the two agencies.
A Fed spokesman declined to comment on the issue. However, OCC spokesman Bryan Hubbard told Bloomberg Law by email the agency has had “extensive dialogue” with the Fed, other regulators, and stakeholders “on a variety of issues” related to its fintech charter announcement.
The unanswered question about Fed access “indicates that the US has not progressed in its thinking of how it’s viewing its payment systems and the financial services sector,” said Andrew Boyajian, head of banking in North America for TransferWise, Ltd., a global money transmitter.
National banks are required, with few exceptions, to become members of the Federal Reserve System.
The Fed generally reviews applicants for payments accounts on a case-by-case basis. Part of the review looks at whether a company is federally insured. That could be a hurdle for certain types of fintechs that don’t take deposits or require depository insurance but would want a special charter from the OCC.
Broad support in the fintech industry for the OCC’s charter could motivate the Fed to address the the issue.
“I think it will be important for the Federal Reserve to clarify that as soon as they can. And I expect that they will do so,” Jason Oxman, CEO of the Electronic Transactions Association, which includes fintech companies among its members, told Bloomberg Law.
A case in point is TransferWise. The fintech company doesn’t send money across borders, avoiding international transfer fees, but pays into and out of local bank accounts in local currency to transmit payments in more than 70 countries.
Access to the U.S. central bank system could make for significant cost savings. For a company like TransferWise, the Fed’s debit fee is less than 1 cent per transaction, while an initiating bank may charge a business between 7 cents and 25 cents per debit transaction.
In the U.K., TransferWise has already seen the difference access to a central bank system can make. It was the first non-bank to hold a settlement account with the Bank of England and participate directly in the U.K.'s faster payments service.
“We saw a terrific reduction then in price, as a result. We also saw a decrease in risk, because we weren’t relying on those originating banks to facilitate our payments,” Boyajian said. “We would love to see the same thing happen in the U.S.”
Access to the Fed’s payments system isn’t likely to be the determining factor for all fintechs considering an OCC charter.
Cost and time requirements to obtain the 48 state licenses needed for nationwide operations in the U.S. are the major hurdle for many financial services companies.
“A significant motivation of any online lender in deciding to pursue a special purpose charter is going to be the reduced compliance costs associated with having a single primary regulator,” Vincent Basulto, a partner with Richards Kibbe & Orbe LLP’s corporate practice in New York, told Bloomberg Law by email.
The overall regulatory benefits of a single regulator would likely still be enough for the charter to be worth considering, even if the Fed were to decide that fintech charter holders wouldn’t gain access to the payment system, Basulto said.
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