The fintechs are coming…Why you should care

May 4, 2018 at 10:49 am Leave a comment

You may have seen the news earlier this week that a federal court in Washington, DC dismissed a lawsuit brought by the Conference of State Bank Supervisors alleging that the OCC overstepped its boundaries in publishing a white paper explaining that it had the authority to issue national bank charters to fintech banks (CONFERENCE OF STATE BANK SUPERVISORS, Plaintiff, v. OFFICE OF THE COMPTROLLER OF THE CURRENCY, et al., No. CV 17-0763 (DLF), 2018 WL 2023507).

The ruling was not surprising; after all, good cases, like good wine, have to ripen, and the OCC has yet to issue any formal guidance, let alone a fintech charter.

But don’t be fooled by this minor opening skirmish. The issues that will eventually be litigated are among the most important with which the courts, regulators and ultimately Congress have to deal. Just as the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 fundamentally altered the banking landscape in which you operate, the issues that are raised by this lawsuit and the policy debate surrounding it will have a profound impact on the competitors you face, the products you offer, and how you offer them for decades to come.

In 2016, the OCC announced in a white paper that it had the authority to issue national bank charters to so-called limited purpose banks. Under a little used 2003 regulation, the OCC had the authority, it argued, to provide national charters to non-depository corporations which offered banking products, such as providing loans or check processing. If the OCC is correct, all those vendors that approach you about using their platform to benefit your members will instead have the option of chartering their own bank and competing against you. Since they wouldn’t have to build branches, they would become national competitors overnight.

State regulators are horrified by this proposition. It means, for example, that check cashers and payday lenders could evade state consumer protection laws by getting a federal charter. In addition, they are concerned that large companies such as Apple could compete against traditional financial institutions without having to meet basic regulatory requirements.

This creates a host of legal issues that everyone, including credit unions, have a stake in debating. For example, regulators already have a tough enough time figuring out appropriate capital levels, and lawyers make a living out of making preemption arguments. How do we create an adequate firewall between Apple’s traditional business and an Apple Bank? How do we determine when a computer platform which happens to be available to a consumer in Iowa makes the platform provider subject to Iowa’s laws even if all the processing is done in Washington State? It’s easy to see how credit unions, constrained by field of membership restrictions, and the small independent bank could become obsolete overnight.

Entry filed under: Technology. Tags: .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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