Think of a significant policy idea on which the Obama and Trump administrations agree.
Stumped? You probably didn’t think of banking, where the Democratic and Republican parties are almost always opposed. But the idea of a special purpose national bank charter — a national licence to operate — that would support fintech innovation has been promoted by both.
The suggestion was originally floated by the Office of the Comptroller of the Currency — one of the US’s financial regulators — under President Obama, and has also been taken up with enthusiasm by the OCC under President Trump’s comptrollers, Joseph Otting and Brian Brooks.
The idea behind fintech charters is that banking is made up of three separable activities — payments, lending, and deposit taking. Separability is important for fintechs because the most burdensome bank regulations stem from deposit taking. A national charter for non-deposit taking fintechs would in theory give them more freedom to innovate, without threatening the financial system.
Advocates of the charter point to the difference between China, where fast-moving payment companies such as Alipay have revolutionised finance, and the US, where payments remain fragmented and subject to a patchwork of regulations. A charter would help to close the gap by giving fintechs one set of national regulations, without the heaviest rules designed for deposit-takers.
But separability leads quickly into very deep legal waters.
To start, it sets up a conflict between the OCC and the Federal Reserve. The Fed regulates deposit-taking banks, so it would not directly supervise banks with fintech charters. But, as national banks, they would have access to the Fed’s real-time payment system, and be entitled to use its emergency liquidity facilities. Fed privileges without Fed supervision, in other words.
The charters “create a problem for the Fed that it never had before — on a daily basis, the Fed is going to back up the activities of these fintechs,” says Professor Saule Omarova of Cornell Law School.
Prof Omarova and several of her colleagues argue that the charters are “a dangerous power grab” based on an ambiguity in the National Banking Act of 1863. That law allowed the OCC to give charters to companies engaged “in the business of banking” but did not define exactly what that was. So the OCC is playing “an interpretive trick,” she says: “just because Congress never specified what banking is, [they] think they can decide.”
The Fed is not the only regulator that would lose power if the fintech charters are widely adopted. So would the state regulators that control lending and payments for companies without national charters. The most powerful of them, the New York Department of Financial Services, has sued the OCC to block the fintech charters; the case is on appeal.
This legal set-to explains why, more than two years after the OCC invited companies to apply for fintech charters, none have done so. As one chief executive told #fintechFT, “Who wants to be first, and spend the next four years in court?”
“It’s crazy that we are resorting to 19th century texts and resolving this policy debate through the courts rather than by fresh thinking for the 21st century,” says Meg Tahyar, co-head of the financial institutions practice at law firm Davis Polk.
There are other issues at stake too. A core principle of US banking law is that companies that own banks cannot also control non-banking companies. But that rule would not apply to non-deposit taking banks chartered by the OCC. The worry is that after a few small fintechs receive the charters, Amazon, Facebook, and Google would be next, and would start to dominate the financial system.
“It is about concentrated power across industries,” Prof Omarova says. “Power of that kind always translated to political power. It could lead to a situation where we would never be able to reclaim public control over the shape of the financial system.”
Not everyone agrees about the threat from Big Tech. “I don’t think the OCC charter is going to be extended that far,” says David Zaring of the department of legal studies at Wharton Business School. “I don’t think they want to be on the hook for problems at Amazon’s version of Alipay. They have not suggested they are interested in breaking down the barrier between banking and commerce.”
The question of lighter-touch regulation for fintechs will depend on legal fights set to play out over years. Meanwhile, the US continues to fall behind Asia and Europe in financial technology.
Quick fire Q&A
Company name: Thunes
When founded: 2016
Where based: Singapore
CEO: Peter De Caluwe
What do you sell, and who do you sell it to: Thunes is a business-to-business cross-border payments network focused on emerging markets.
How did you get started: Established in 2016 as part of TransferTo, Thunes was carved out in 2019 to focus on its payments network.
Amount of money raised so far: $70m
Valuation at latest fundraising: N/A
Major shareholders: Helios Investment Partners, GGV Capital and Checkout.com
There are lots of fintechs out there — what makes you so special: Thunes connects businesses in emerging markets to the global economy, making cross-border payments more affordable, accessible and efficient.
Further fintech fascination
Crypto chronicles: Financial Times columnist Martin Sandbu argues that the creation of a central bank-issued digital currency is “a matter of when, not if”, and that there is a first-mover advantage for those that act quickly. The European Central Bank has launched consultations on a digital euro, looking at how it would be designed and used.
Regulators advance: The UK’s financial regulator, the Financial Conduct Authority, has banned the sale of cryptocurrency derivatives to retail investors, reports the Financial Times. The regulator said that the products were “ill-suited for retail consumers due to the harm they pose,” citing concerns over valuation and volatility.
Follow the money: US-based Root Insurance has filed for an IPO that could value the company at $6bn, says Business Insider. The insurtech, which sells motor and home insurance in 29 states, was most recently valued at $3.6bn. The filing follows the successful IPO of fellow insurtech Lemonade earlier this year.
Follow the money (2): Macy’s, the US department store chain, is to take a stake in buy-now-pay-later specialist Klarna, reports the Financial Times. The deal also includes a partnership under which the retailer’s customers will be able to split their online purchases into four interest-free payments.
Trendwatch: Sifted has taken a look at European fintech funding this year and found that business-to-business companies are proving far more popular with investors than consumer focused ones. European fintechs have raised €6.3bn this year, but most of that has gone to B2B companies. Meanwhile, S&P Global reports that European banks have become consistent investors in fintechs, especially in sub-€10m deals.
AOB: Former Barclays executives have teamed up to launch Pennyworth, a UK digital bank for young professionals and middle managers, according to Finextra; the Chinese city of Shenzhen is trialing a digital yuan, reports TechCrunch.
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