In a series of recent interviews (including with the American Bankers Association and a podcast with the ABA Banking Journal), Acting Comptroller of the Currency Brian Brooks discussed the Office of the Comptroller’s (OCC’s) plans to soon roll out another special purpose national bank (SPNB) charter specifically geared toward payments companies. This “payments charter” could be especially appealing for those companies looking for a national licensing platform for their payments business because it would provide federal preemption of state money transmitter licensing and related laws, which would eliminate the need to obtain a license to operate in each state.
Brooks said the OCC envisions a two-phase rollout of the new charter. The first phase would consist of Payments Charter 1.0, which Brooks characterized as a basic national money transmitter license. The second phase, which would consist of Payments Charter 2.0, would follow about 18 months later and include the additional feature of direct access to the Federal Reserve’s payments system. This would provide the chartered company the ability to clear payments through the Federal Reserve System directly rather than through a correspondent bank, clearinghouse, or financial institution.
The proposed payments charter would bring into the national banking system those companies that offer payment processing services but do not take deposits or make loans. Brooks indicated that the primary driver behind the payments charter is the realization that consumers increasingly may not want to receive all financial services from a single source. While banks have traditionally provided three fundamental banking functions—deposit taking, lending, and payments—Brooks previewed how the evolving needs of consumers may necessitate a different approach, and that in some cases, it may be more beneficial for companies to just focus on one of these banking functions.
According to Brooks, “It’s not clear that customers always want their financial services in a bundled form. One of the reasons for a rise in fintech is an unbundling that is happening.” Brooks noted that cheap deposits used by banks are less relevant for the more “tech-enabled” fintechs, where cheap sources of lending are less relevant. “I don’t buy the argument that granting a special purpose charter is somehow an existential threat to the banks,” he said. Furthermore, Brooks noted that because so many financial services companies do business across the globe it is harder for the United States to argue that these companies need licenses at the state, not federal, level.
Brooks also discussed some additional elements the OCC is considering as it formulates the new charter, including what a chartered company’s community reinvestment and financial inclusion responsibilities should be, and how best to calibrate safety and soundness requirements for companies that generally do not bear credit risk as it is traditionally viewed.
The proposed payments charter, as articulated by Brooks, would be narrower in scope than the OCC’s previously proposed SPNB charter for nondepository fintechs, and would not include nationwide lending authority (which means the payments charter would not raise the issue of interest rate exportation). Further, this charter presumptively would be configured to place the chartered institution beyond the jurisdiction of the Bank Holding Company Act and the Federal Reserve Board. Thus, this initiative may be especially appealing to companies involved in payment processing but also engage in activities not permitted for bank holding companies.
However, we can expect broad and vigorous opposition to the proposed payments charter from state banking regulators and licensing authorities, as well as consumer groups that also opposed the OCC’s fintech charter, and it also will likely be criticized by Congress—especially since one of the express purposes of the charter is preemption of conflicting state law. There also may be divergent views at other federal banking agencies, including the Federal Reserve, which could create additional obstacles.
Further, we are several months away from the November election, which could result in a new administration come January 2021. While the Obama administration Comptroller of the Currency Thomas Curry introduced the SPNB charter for fintechs during his tenure, it is not clear whether a new administration would be similarly supportive of changes that diminish state authority. These potential legal and policy challenges could cause fintech companies interested in getting a payments charter of this nature and opening for business in a commercially viable timeframe to defer action on a charter until the legal landscape seems more settled.
Brooks indicated that the OCC will release more detailed information about the new payments charter sometime this fall. We will keep our readers posted on any developments.