Financial technology ventures would face daunting challenges in meeting the Office of the Comptroller of the Currency’s proposed requirements for a special-purpose national fintech charter, lawyers, tech consultants and entrepreneurs say.
The OCC’s requirements for business plans, capitalization and investor participation may be particularly problematic for a start-up or a relatively small fintech company.
The upshot could well be that the charter initiative—which has been sharply criticized by state regulators and some Democratic lawmakers since its December unveiling—will have a minimal impact on the existing fintech market, Lex Sokolin, global director of fintech strategy for Autonomous Research, told Bloomberg BNA.
“We don’t see a gigantic wave of small companies trying to take advantage of this, which means for larger financial incumbents, there’s not this large, disruptive ‘black swan’ event,” Sokolin said, using a term for an unexpected development with outsized repercussions.
The OCC has touted the charter proposal as designed for fintech companies, but the charter would be a bank charter issued under the National Bank Act of 1863. A requirement singled out as particularly formidable for fintech entrepreneurs is the submission of a three-year business plan, with any variations from the plan during that time calling for OCC review and approval.
“The traditional entrepreneur would typically change his business plan or change things in his business in reaction to what happens in the market or to his company,” George Popescu, a veteran fintech entrepreneur and consultant and now editor of Lending Times, told Bloomberg BNA. “Having to predict in advance what the business will be like in three years, and having to stick with it — I’ve never seen any startup being able to do it, ever.”
And John Douglas, a partner at Davis Polk & Wardwell LLP who heads the firm’s bank regulatory practice, said in a Jan. 25 webinar on the charter, “Even for a business that is not starting up but is still trying to figure out what it wants to be when it grows up, being able to project three years with relative certainty can be quite difficult.”
A sandbox approach could resolve that issue, Popescu said. The U.K., Singapore and other would-be fintech hotbeds are developing programs that shield fledgling fintech firms from some regulations as they get under way.
“They allow the firm to test the waters, and change after some time,” Popescu said.
“A sandbox is a much better idea for how innovation works with these early-stage companies,” Sokolin said. “I’m a big fan of the onramp.”
Curry, though, has publicly rejected the notion of relaxing regulations as a part of a strategy to encourage fintech innovation.
An OCC charter could provide benefits for some fintech companies. An online platform lender could export the interest rate of its home state and avoid usury caps in other states. A money transmitter would no longer need to seek a separate license in every state in which it operates. And the OCC’s seal of approval could make a company more attractive to consumers or to bank partners.
But there are other obstacles to fintech innovation in the charter proposal, such as the yet-unspecified mandate for capital reserves that are a routine part of bank regulation, Veronica McGregor, a partner in the fintech practice of Goodwin Procter LLP, told Bloomberg BNA.
“The two-guys-and-an-Etch-A-Sketch companies won’t be able to meet the capital requirements,” she said.
Some fintechs also could run afoul of the OCC’s authority to vet members of the company board of directors for experience and expertise, McGregor said.
“I don’t think this charter is appropriate for a startup,” she said. “It’s just not: There are too many barriers.”
The fundamental mission of the OCC is to preserve the stability of the banking system, she said: “The whole idea is to manage risk; it’s their whole raison d’etre.”
The fintech charter may prove more appealing to larger, well-established companies. But Douglas and McGregor cited a potential pitfall for chartered companies that may engage in online lending or other fintech activities but that also operate other types of businesses: the 1956 Bank Holding Company Act.
That law applies to a company that owns or exercises significant control over a venture that accepts demand deposits and makes commercial loans or that holds federally insured deposits—and it comes with extensive reporting requirements and restrictions on outside activities. Complying with the Bank Holding Company Act, is “not fun,” Douglas said.
The law could cover a company such as PayPal, which makes loans online, or potentially to venture capitalists backing a fintech operation.
“Having a venture capital firm become a bank holding company,” Sokolin said, “means no venture capital firm will invest in the company using the charter.”
To contact the reporter on this story: Gregory Roberts in Washington at gRoberts@bna.com
To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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