The decision of the Office of the Comptroller of the Currency (OCC) to extend special purpose national bank status to fintech providers in the US will increase market safeguards and promote more efficient operation in the fintech sector.
In December 2016, the OCC announced plans to start accepting applications from fintech providers for charters as special purpose national banks, namely banks that engage in specific, narrowly defined activities
To gain an OCC special purpose national bank charter, fintech applicants will have to meet stringent requirements around their business plans, governance structure, capital adequacy, liquidity, risk management, provisions for financial inclusion, and recovery and exit strategies.
As is generally the case in newly emerging sectors, the fintech market is characterized by high numbers of small participants, which can disappear as quickly as they are formed. Providers often struggle to gain traction among consumers, hampered by low levels of awareness and trust, as well as the high cost of customer acquisition.
Strict regulatory requirements specific to the financial sector present an extra obstacle for fintech start-ups. One workaround is for fintechs to rely on the services of banking platforms, such as solarisBank, that provide shelter under their own banking licenses. However, this arrangement can limit the ability of fintechs to operate freely and unhindered. Another option is for fintechs to apply for a state rather than a federal charter, but this severely limits their catchment areas.
This is why the option to become a special purpose national bank is so valuable. Such banks have the same status and attributes under federal law as full service national banks, meaning chartered fintechs will be able to operate on an equal footing with established providers. This will boost their profile and help cement their credibility in the eyes of consumers, thus improving their chances of achieving viable scale.
By creating a nationally consistent legal and regulatory framework, the OCC will make it easier for fintechs to operate on a wider footing. This will promote economies of scale and thus generate extra funds for further research and development. Eventually, this may result in the emergence of new national fintech champions that could prove as transformative as Google or Apple.
The OCC’s proposals show that it understands the rapidly growing significance of the burgeoning fintech sector, and the need to bring some structure to its rather chaotic and fragmented nature. The industry is starting to move out of its “wild west” phase, and is entering an environment that will prove more conducive to the emergence of providers that will compete more effectively with traditional banks.
By Daoud Fakhri, Principal Retail Banking Analyst