Upstart financial firms like Square, Lending Club and SoFi could soon have some of the same powers now held by their older, stodgier banking competitors.
The nation’s top bank regulator, the Office of the Comptroller of the Currency, said Friday it would start issuing bank charters to online lenders, payment companies and other financial technology firms. The move could allow those firms to simplify their businesses but also require them to undergo the same type of federal examinations now reserved for traditional financial institutions.
So-called fintech companies have pushed the OCC to allow them to seek federal charters, and the agency has been considering the move since earlier this year. In a speech Friday at the Georgetown University Law Center, Comptroller of the Currency Thomas Curry confirmed that the agency would move forward with the plan.
He said that the agency decided to do so because “first and foremost, we believe doing so is in the public interest,” adding that fintech firms “hold great potential to expand financial inclusion, empower consumers and help families take more control of their financial matters,” according to his prepared remarks.
A bank charter allows a company to provide several types of financial services — ones that are difficult or impossible to offer without a charter. For instance, only banks have direct access to the payment systems used to process credit- and debit-card transactions, meaning firms such as San Francisco payments provider Square Inc. cannot provide its services without them.
Lending companies can make loans without a bank charter, but to do so they need to be licensed in every state where they do business and follow individual state lending laws that, in some states, cap interest rates.
To avoid the cost and complexity of state licensing and state rules, many online lenders — including market leaders Lending Club and Prosper, both based in San Francisco — issue their loans through deals with chartered banks, which can lend nationwide and aren’t bound by state rate caps. But those relationships can be costly.
Scott Pearson, a Los Angeles attorney who specializes in financial-regulation issues, said lenders will probably be the firms most interested in seeking one of the OCCs new charters.
“It’s going to create essentially a new option — rather than partnering with a bank or engaging in state-by-state compliance, you could pursue a charter,” said Pearson, a partner in the Los Angeles office of Ballard Spahr.
The ability to seek a bank charter could also mean more bargaining power — and lower costs — for fintech firms that opt to continue working with banks.
Removing banks from the lending process also could clear up some uncertainty for fintech lenders, who have faced scrutiny over the legality of the loans issued through those relationships. Still, it’s far from clear how many companies will actually apply for bank status.
In his statements Friday, the OCC’s Curry said fintech companies should not expect a “lighter touch” from his agency.
“I have made it clear that if the OCC grants a national charter in this area, the institution will be examined regularly and held to the high standards the OCC has established for all federally chartered institutions,” he said.
That means, said Pearson, that while some companies will be interested in a bank charter, getting and keeping one will be a difficult and expensive proposition and may make sense only for big, established firms.
“This is not going to be an easy charter to get,” he said. “There’s an awful lot of cost associated with being a bank and complying with federal bank supervision. You’re going to need a big legal department and a big compliance department.”
It’s not known when the OCC will begin issuing this new class of charters. The agency on Friday asked industry representatives and advocacy groups to submit comments on its proposal by Jan. 15.
The agency wants to know, among other things, how it should ensure that fintech firms provide their services to low-income consumers and small businesses.