Regulatory Changes in the Works to Advance FinTech

The US Office of the Comptroller of the Currency announced on July 31st that it would proceed with a plan to offer national banking charters to fintech firms offering loans or online payments, allowing them to bypass the state laws that currently govern fintech and nonbank services. The announcement came after a report from the Treasury Department recommended that the OCC move ahead with its plans to offer national fintech charters, characterized as “…a more efficient, and at least a more standardized, regulatory regime, than the current state-based regime in which they operate.”

Online lenders like SoFi are becoming increasingly ubiquitous, leveraging technology to create a new banking system that exists beyond traditional frameworks. But the “state-based regime” that lenders with nationwide ambitions must follow can be unwieldy. There are two options for lenders – either secure licenses from individual regulators with different laws in all 50 states, like SoFi, or partner with regulated banks, like LendingClub. The new fintech charter would allow companies to disregard state rules and bypass partnering with traditional banks.

By making it easier for fintech companies to operate, federal officials hope they will advance the evolution of fintech companies and services and keep pace in an increasingly competitive financial climate. “Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank,” said Comptroller of the Currency Joseph M. Otting.

The 222-page report, the last of four ordered by President Trump in early 2017 as a review of American financial regulations, made 80 recommendations to help companies “more rapidly adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency,” according to the Treasury Department. Several recommendations were controversial – among them developing national rules for data security and data breach notifications and suggesting that the Consumer Financial Protection Bureau rescind stringent nationwide rules on payday and other short-term loans. Treasury Secretary Steven Mnuchin defended the moves as necessary to “keep pace with industry changes and encourage financial ingenuity to foster the nation’s vibrant financial services and technology sectors.”

State regulators, who have long opposed granting national charters to fintech firms, were less enthused by the announcement. John W. Ryan, president of the Conference of State Bank Supervisors, called the new charter policy “a regulatory train wreck in the making”, advising that state regulators were “keeping all options open” to try to stop it. Unsurprisingly, trade groups representing fintech companies, like The Marketplace Lending Association, lauded the recommendation as “…a major step forward in favor of responsible innovation and greater access to capital for borrowers nationwide.” How national charters will work in practice remains to be seen, but fintech lenders can rejoice for now about a much more favorable landscape for their businesses.