A regulatory turf war is brewing in the red-hot payments space between the OCC and big banks. Insiders explain what's at stake and how it could impact fintechs.

  • The OCC has been mulling a special-purpose banking charter aimed at fintechs that process payments.
  • Currently, non-chartered fintechs are regulated and licensed state-by-state to process payments.
  • Both state regulators and bank trade associations have opposed the idea of a special-purpose charter, saying that new risks could be introduced by offering charters to fintechs and big tech.
  • The OCC argues that there are no new risks being introduced, but the oversight would be migrated from the state to the federal level.  
  • Visit Business Insider's homepage for more stories.

Over the past decade, fintechs have become more than a niche group of disruptive startups out of Silicon Valley. Today, fintechs like Stripe and Square have achieved massive scale — and valuations — and are an essential part of the financial-services industry.

But most fintechs aren't licensed banks, meaning they don't have a banking charter issued by the Office of the Comptroller of the Currency (OCC), one of the key regulators overseeing consumer banking. Instead, they are regulated and licensed at the state level, which means to operate nationally they have to work with 50 different regulatory bodies.

That could soon change, however, as the OCC is mulling a charter aimed specifically at fintechs that process payments, allowing them to be regulated at a national level. 

As a result, payments fintechs would be able to sidestep state-by-state regulation. The charter would be a national version of a state money transmission license, which fintechs currently have to apply for in each state they operate in.

Through this charter, the OCC would get insight into billions of dollars worth of payments handled by fintechs that currently occur outside its jurisdiction. Similar to the way the regulator now monitors banks, the OCC would review fintechs' control frameworks and risk management.

Read more: Investors say these 22 fintechs are on the brink of becoming household names

Brian Brooks, recently-named acting comptroller of the OCC, is leading the discussion around the payments-focused special purpose national charter. In June, Brooks told the ABA that the OCC plans to unveil a special purpose banking charter he called 'Payments 1.0' as soon as this fall.

Some fintechs have been supportive of the idea publicly, as it would allow them to avoid the state-by-state licensing process and cut costs by getting direct access to payment rails.

But other industry players aren't as keen on it. State regulators believe the OCC is overextending its reach into an area it has no jurisdiction.  

Big banks, too, have taken issue with the OCC's potential proposal. Their argument, in short, is that a national banking charter implies a level of credibility and consumer trust, and missteps by nonbank fintechs with a federal charter could reflect poorly on the whole banking industry.

In a recent letter to Congress, trade groups have also flagged that the charter would grant privileges to big tech companies like Amazon or Facebook that would pose risk to the system. 

Brooks, however, sees the incumbents being motivated by different factors. 

"It's possible that banks are just worried about competitors," Brooks told Business Insider. "But what I would say is the competitors are here, that horse has left the barn."

Regulation of fintechs has evolved in recent years

As fintechs' profile in consumer banking has risen in recent years, the OCC has attempted to understand the best way to regulate the startups. 

In 2016, the regulator proposed a fintech charter, eventually accepting applications beginning in 2018. However, that was met with immediate pushback from state regulators and cross-bank associations. 

The OCC's thinking around alternative charters comes as most fintechs have avoided pursuing a traditional national banking charter due to the time and money required.

Among modern fintechs, only one — Varo — has successfully acquired a national bank charter from the OCC, which was finalized this summer. Most fintechs instead opt to partner with traditional banks, gaining access to their charter in exchange for a cut of revenue.

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The OCC monitors and oversees the activities of the banks that process activities for fintechs. But it doesn't regulate, or have insight, into the operations of individual fintechs. As more payments are done by non-traditional players, a blind spot has developed in OCC's coverage.

"Payments is a core banking activity. It has been a core banking activity essentially forever. Until relatively recently, all payments were done inside of the banking system," Brooks said. "So we had visibility into how that function was working, how it was affecting customers and particularly consumers, and how it added or detracted from economic growth."

Brooks has been advocating that by issuing a charter for these fintechs, the OCC would be able to fully monitor and regulate the payments activities that now happen outside of its jurisdiction.

"Now we're at a point where hundreds of billions of dollars of payments a month are being processed outside the banking system. And so this activity, which is a banking activity, is no longer visible to us," Brooks said.

Currently, the payments charter hasn't been formally proposed, however the regulator could begin accepting applications on the potential charter as soon as this fall, Brooks said on the ABA podcast.

For fintechs, a national charter could help them grow

A payments-specific charter would allow fintechs to focus on one regulator as opposed to a patchwork set of rules spread across 50 states. As a result, fintechs could see a boost in growth, Brooks said. 

"There's a bargain here," Brooks said. "The bargain is the American people are better served by having better and more sophisticated supervision if we have a national bank license, but the companies and their growth trajectory is also better because it doesn't have to deal with state borders."

Many fintechs are supportive of the idea of a national charter as a way to streamline growth in the US. TransferWise, the London-based cross border payments fintech, sees a national charter as a way to bring more competitive pricing to consumers.

"Major international payment players like us are different from a bank, and there should be some sort of regulatory regime in place that reflects how we operate, and also allows us to send payments ourselves," Nick Catino, head of policy at TransferWise, told Business Insider. 

See more: These 38 fintechs are the next generation of breakout B2B stars. Here's who investors have tapped to follow in the footsteps of Plaid and Stripe.

Catino says relying on banks to send money on its behalf can result in higher fees when it comes to international money transfers. Fintechs like TransferWise don't have direct access into payment rails like ACH, for example. But the banks do, and they mark up the cost of moving that money on behalf of TransferWise, resulting in higher fees for consumers, Catino said. 

And a big reason that banks oppose a payments charter is the fear of losing that revenue, Catino said. 

"If we can connect directly to the payment system and send those payments ourselves that eats away at [banks'] revenue," Catino said. 

Meanwhile, state regulators fear losing jurisdiction and revenue from the licensing fees earned on local charters.

"State bank supervisors regulate payment companies like us under a money transmission licensing framework," he added. "They are opposed to it because they don't want to lose their jurisdiction."

To be sure, it's unclear whether all fintechs would be interested in a special purpose charter. Most fintechs and tech companies didn't bite when the OCC started accepting applications for its original fintech charter in 2018, which is currently being challenged by the New York Department of Financial Services in federal court.

Sharon Carmeli, general counsel at BlueVine told Business Insider via email the current proposal wouldn't "change any of our current practices."

"We're keeping a close eye on it to see how it's ultimately implemented," Carmeli said. "In the future, we hope to see an additional OCC fintech charter that is broader and covers more than just payments."

Banks and state regulators have continued to pushback

And while fintechs see the new potential charter as a big boost, state regulators and big banks don't view it that way.

For state regulators, a core part of the argument stems from the OCC not having jurisdiction to expand the definition of the "business of banking" according to the National Bank Act.

The New York Department of Financial Services, which filed a complaint in federal court in 2018 over the initial fintech charter proposal, argues that the definition of banking requires taking deposits, meaning the OCC shouldn't grant bank charters to non-depository institutions like payment fintechs.

When asked for comment, the NYDFS directed Business Insider to its complaint.

Brooks, however, pushed back against that interpretation.  

"There's not a single provision in those 14 volumes that defines banking as taking deposits," Brooks said, referencing the volumes of the NBA sitting on his bookshelf.

"There is a concept called the 'business of banking,' and the 'business of banking' is given to the Comptroller of the Currency as an interpretive matter," Brooks added. "In one of the provisions of that banking code, there's a long list of things that banks do, which includes lots of things that aren't deposit taking. Banks can take deposits. There's nothing that says banks have to take deposits."

See more: SoFi just filed an application for a national banking charter, and CEO Anthony Noto told employees it's a critical strategic step for the $4.3 billion fintech

Meanwhile, banks have their own set of issues with the charter. The American Bankers Association, along with six other bank trade groups, penned a letter in July arguing that issuing charters to nonbank fintechs could introduce more risk into the banking system. 

The ABA directed Business Insider to its letter in response to a request for comment.

"We have serious concerns around the recent discussion of a narrow-purpose payments charter," the groups said in the letter. "These charters could introduce serious risks that would undermine the valuable role that national banks play in our dynamic economy. We believe that a payments-focused charter introduces serious unintended consequences."

On Tuesday, a handful of industry groups, including the ABA, filed a letter to senior leaders on the US House Task Force for Financial Technology. In the letter, the group specifically highlighted concerns around companies like Amazon or Facebook getting a national charter and accessing the Federal Reserve's payments system.  

But Brooks argues that no new risk is being created by regulating fintechs at a federal level. Instead, bringing fintechs under the purview of the OCC simply shifts the risk from state regulators. Brooks, who was previously chief legal officer at Coinbase, has seen first-hand the multi-state compliance process.

"Risk to whom? These companies currently exist. Stripe alone has a market value of $38 billion and processes hundreds of billions of dollars of payments representing most internet merchants today," Brooks said. "So I would not say that providing a supervision platform for that company creates any risks. The risk is there. It's just not being supervised at a federal level."

State regulators are rolling out their own version of a cross-state licensing process

In September, the Conference of State Bank Supervisors (CSBS) announced that it's rolling out a multi-state certification process, dubbed the Money Service Business Networked Supervision. The "one company, one exam" approach is aimed at payments companies moving money nationally. It's looking to simplify the process that payments companies go through to get certified and approved state-by-state.

The initiative would apply to 78 of the largest payments and cryptocurrency companies in the US that handle over $1 trillion a year, according to a release announcing the new listing process.  

Brooks said CSBS' recent proposal indicates that the current system needs to change. 

"That seems to me a recognition that the state-by-state approach doesn't make any sense," he added.

CSBS did not respond to multiple requests for comment.

The 'one exam' is part of the CSBS' 'Vision 2020,' through which the group is looking to modernize non-bank licensing nationally. And Brooks says that the CSBS' plans undermine state regulators' arguments against a national charter for fintechs.

"If you believe that every state is important, then you don't want a 48-state compact," Brooks said. "But if you want a 48-state compact, how about if you take my 50-state compact. You're never going to have a compact better than this. That's called federal law."

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