When the US created the National Banking System and the Office of the Comptroller of the Currency, also known as the OCC (established in 1863),  the notion of establishing a national bank charter was innovative. It provided the comptroller with authority to grant a national charter.   At the time, a unified banking system seemed valuable.   This system worked because it encouraged national and federal bank savings associations to adapt to the changing needs of their customers and the market in general.  One of the OCC’s first tasks was to issue standardized banknotes.

A national bank charter provides federal approval for a bank to trade on a nationwide basis subject to uniform standards and rigorous federal oversight. All national banks, including special purpose national banks, are organized and governed by the National Bank Act. The corporate organization and structure provisions of the National Bank Act (e.g., classes of shares, voting rights, number of directors, and term of office) govern the corporate structure of national banks.

The OCC charters a national bank while a state bank is charted by state laws, rules, and regulations, that in most cases, mean that they face less restrictive rules than national banks do. These regulations typically conform to federal statutes.

The perpetual advances in technology make financial services and products more accessible and easier to use. What is more, preferences change over time, and this provides tech-driven nonbanking companies the opportunity to offer new ideas to banks on how to service millennials. The OCC has the authority to charter special-purpose national banks. Today the OCC considers it to be in the public interest to grant special-purpose bank charters to fintech companies, based upon the assumptions that:

⇒ A bank regulatory framework will ensure that the fintech companies will safely and effectively serve the need of customers.

⇒ That OFCC supervision will promote consistency in the application of laws across the US

⇒ That providing a path for fintech companies to go national will make the federal banking system more robust.

The OCC will hold Fintech Companies who are granted the charter to the same standards that apply to national banks and federal savings associations. However, the agency may need to account for differences in business models and the applicability of specific laws. For example, a fintech company with a special-purpose national charter that does not take deposits, and therefore is not insured by the Federal Deposit Insurance Corporation (FDIC), would not be subject to laws that apply only to insured depository institutions.  In 2015 the OCC began to study innovation in the financial services industry.  It started a dialogue with fintech companies, banks, the community, academics, and other regulators.

Special-Purpose National Banks(SPNB)

A special-purpose national bank may only engage in activities that are legal for national banks following the relevant statutes, OCC’s regulations, legal opinions, and decisions published by the OCC.  They are subject to the same laws, regulations, examination and reporting requirements, and supervision national banks are.

The Bank Secrecy Act (BSA), anti-money laundering (AML) laws, and the economic sanctions administered by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) fully apply to SPNB’s.

Regulators

The OCC is the prudential regulator and supervisor of national banks. Depending on the structure of the bank and its activities, other regulators have oversight duties as well. A fintech company considering a special-purpose national bank charter conversion would likely need to engage with other regulators as well.   A fintech company that plans to accept deposits apart from trust funds would require approval from the FDIC. Generally, deposit insurance is meant for banks engaged in the business of receiving deposits.

Supervision

A well-developed business plan is a vital component of any charter proposal. The OCC expects applicants to articulate why they are seeking a national bank charter and to provide considerable detail about the proposed bank’s activities.

The plan should define the market and the products and services they will provide. Also, it should realistically forecast market demand, economic conditions, competition, and the proposed customer base. It should cover a minimum of three years and provide a full description of the proposed steps required to accomplish the primary functions of the proposed bank.  The OCC expects the governance structure of any proposed special-purpose national bank to be commensurate with the risk and complexity of its proposed activities.

The OCC will evaluate a proposed bank’s capital to assess individual strength, but also to protect the safety and soundness of the entire federal banking system. Minimum and ongoing capital levels need to be commensurate with the risk and complexity of the proposed activities.  The OCC’s evaluation of liquidity focuses on a bank’s capacity to readily and efficiently meet expected and unexpected cash flows and collateral needs at a reasonable cost.

Compliance and risk management requirements include a well-developed compliance management system that is commensurate with the risks to the proposed bank and includes:

⇒ A program designed to ensure and monitor compliance with the requirements imposed by the BSA, other AML statutes, and related regulations, as well as OFAC economic sanctions obligations.

⇒ A consumer protection program designed to ensure the fair treatment of customers and equitable access to financial services, as well as compliance with Section 5 of the Federal Trade Commission Act.

OCC’s statutory mission includes ensuring that national banks treat customers fairly and provide fair access to financial services. That is why the OCC’s chartering regulation generally requires an applicant for a national bank charter to submit a business plan that demonstrates how the proposed bank plans to respond to the needs of the community.

The OCC expects a proposed bank’s business plan to include alternative business and recovery strategies to address various best-case and worst-case scenarios.

Applications

The Charters Booklet of the Comptroller’s Licensing Manual contains detailed information about that process, which consists of four stages:

⇒ The prefiling stage, in which potential applicants engage with the OCC in both formal and informal meetings to discuss their proposal, the chartering process, and application requirements. At this stage, applicants have to prepare a complete application, including the business plan.

⇒ The filing stage, in which the organizers apply. Applicants have to publish a notice of the charter application just before or after the date of the filing.

⇒ The review and evaluation stage, in which the OCC conducts background and field investigations, and reviews and analyzes the application to determine:

⇒ The reasonable chance of success.

⇒ Whether it will be operated safely and soundly.

⇒ Whether it will provide fair access to financial services.

⇒ Whether it will comply with laws and regulations.

There are four phases:

⇒ The conditional approval phase, in which the OCC decides whether to grant preliminary conditional approval. The OCC imposes several requirements on a bank when it gives prior conditional consent, such as the establishment of appropriate policies and procedures and the adoption of an internal audit system applicable to the size, nature, and scope of the bank’s activities.

⇒ The organization phase, when the bank raises capital, prepares for opening, and the OCC conducts a preopening examination.

⇒ The final approval phase in which the OCC decides whether the bank has met all the requirements and conditions.

⇒Final approval.

The OCC has the authority to grant charters (OCC bank charters) for national banks and federal savings associations under the National Bank Act and the Home Owners’ Loan Act, respectively. That authority includes granting charters to special-purpose national banks.

Inside The Secret Bank Behind The Fintech Boom

Most fintechs do not have the regulatory or the compliance frameworks, nor the lending licenses in place to originate loans, so they mostly rely on the banks for their funding.  Behind the sophisticated phone apps and the mythical explanations about big-data mining and AI-generated lending decisions, most fintechs are merely very aggressive lending operations for unknown FDIC-insured banks.

Once you peep in behind the scenes of many of these supposedly disruptive fintech operations,  it often reveals this sleight of hand – many of them are just overpriced lending operations very similar to WeWork that was exposed in its own prospectus as nothing more than an overpriced lessor of real estate.  In total, since 2010, Silicon Valley has invested more than $175 billion to set the industry up to allegedly disrupt the financial system.

Banks trade for a fraction of the value technology stocks trade for.  This is one of the main reasons why fintechs are so adamant about presenting themselves as tech firms rather than financial firms.  Venture capitalists peddle this myth, gladly – but the market, the old equalizer, is not oblivious at all and in the aftermarket, severely punished many of the fintech “unicorns” that managed to stage public offerings.

State Of Affairs

Lending Club

⇒ Went public in 2014 valued at $5.6 billion.

⇒ Value today = $1.2 billion.

On Deck Capital

⇒ New York-based fintech, it offers instant small business loans.

⇒ Went public in 2014 valued at $1.9 billion.

⇒ Value today = $290 million.

The same happened to many more fintech IPOs – think of names like Funding Circle and GreenSky.  They all positioned themselves as technology start-ups, but this was not strictly true since they were all just leveraging technology to peddle consumer lending.  Investors disagree with their positioning and consider them to be banks, not tech companies.