New York and OCC Battle Over What Is A Bank

When is a bank a bank?  The answer to this question is not simply of interest to your faithful blogger.  It has real important practical consequences for your credit union and the competition it will be facing in the coming years.  Simply put, at what point do the Apples of the world become so intertwined with traditional banking activity that they should be subject to at least some of the same safety and soundness constraints as banks and credit unions?

The answers to some of these questions will begin to be answered sooner than you might think and New York’s Department of Financial Services is playing a leading role in the debate.  Politico has reported that Acting Comptroller of the Currency Brian Brooks plans on shortly allowing payment processors to apply for federal charters with the OCC.  It is not entirely clear from the article, but the OCC is either prepared to argue that payment processors can be licensed under its proposed FinTech charter or can be granted a separate charter unique to their business model.

This news comes as New York is suing the OCC over its authority to charter FinTechs which help process bank transactions but don’t hold deposits.  A case is before the Court of Appeals for the 2^nd Circuit.  DFS argues that the OCC has no authority to grant charters to FinTechs because they don’t accept deposits.  The OCC argues that deposit taking is not a mandatory criterion to be chartered by the OCC.

Even as a decision in the lawsuit is pending, the OCC and DFS have continued their increasingly public debate.  On Wednesday (Law360 subscription required) acting OCC Comptroller of the Currency Brian Brooks and DFS Superintendent Linda Lacewell both appeared at a forum sponsored by the Cato Institute.  Brooks took the opportunity to argue that there is nothing in the national bank act which precludes the OCC from chartering non-depositories.

If he is correct, then over time you will see the nationalization of businesses such as mortgage bankers and licensed lenders who have historically been subject to state consumer protection laws which are generally more extensive than federal requirements.

No matter which side ultimately wins the debate, recent events have underscored just how loosely regulated the payment processing industry is, even as it continues to be free of the traditional regulatory oversight imposed on financial institutions. Recently the CEO of one of the most high profile payment processors, German based Wisecard, was arrested after the company was unable to account for $2.1 billion missing from its balance sheet.