Fintech maybe driving headlong into the middle of a core American philosophical debate.
The US Department of Treasury released in July its report entitled A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation.
Counselor to the Secretary of the US Department of Treasury Craig Phillips was the most recent guest on the podcast of the Commodities Futures Trading Commission’s Chief of Market Intelligence, Andrew Busch.
Office of Comptroller of Currency’s Fintech Charter
Among the topics discussed was the idea of a national bank charter for fintech
“Treasury supports the OCC’s (Office of the Comptroller of Currency) effort to launch a special purpose national bank charter for fintech.” Philips stated.
The OCC is a Department within the US Treasury; it was created as part of the National Bank Act of 1863, itself an effort to help finance the Civil War.
The OCC charters and regulates national banks; by that, it regulates a national banking system.
In order to be a national bank, a bank, like Chase, would be licensed or chartered by the OCC, and then the bank would by pass almost all state financial regulations in favor of OCC’s regulations.
On July 31, 2018, OCC announced it would begin accepting national charter applications from financial technology companies.
“The Office of the Comptroller of the Currency (OCC) today announced it will begin accepting applications for national bank charters from nondepository financial technology (fintech) companies engaged in the business of banking.” OCC said in a statement from July 31 announcing the move.
“Over the past 150 years banks and the federal banking system have been the source of tremendous innovation that has improved banking services and made them more accessible to millions. The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy,” said Comptroller of the Currency Joseph M. Otting. “The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America. 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.”
Hamilton Vs. Jefferson
Financial technology companies falling under a national regulator is the most recent blow to one of the deepest and long standing political philosophical US, federalism or state’s rights which was first championed by Thomas Jefferson.
For those like Thomas Jefferson, there is a general fear and distaste for federal power; Jefferson himself feared that the tyranny of the monarchy would just be replaced by the tyranny of the federal government.
Indeed, Jefferson and another founding father, Alexander Hamilton, who favored more central power and was the original visionary for the national banking system, had a significant political rivalry, exactly over this issue.
A Time Magazine story noted:
“In Jefferson’s view, centralized government was simply European-style tyranny waiting to happen again. Informed by his upbringing in agrarian Virginia, he dreamed of a society of property-owning farmers who controlled their destiny. While a manufacturing economy was driven by avarice, a republic resting on the yeoman farmer would keep “alive that sacred fire” of personal liberty and virtue.
“Hamilton, of course, had risen meteorically in the world of urban commerce. Naturally, he believed that a flourishing merchant economy would sow opportunities for all. Further, it would produce a philanthropic, knowledgeable and enterprising people. Jefferson once equated cities with ‘great sores,’ but in Hamilton’s eyes they were focal points of societal health, providing a foundation for wealth creation, consumerism, the arts, innovation and enlightenment. A clash between the two Founding Fathers was inevitable.
“The economic program instituted by the Treasury secretary triggered Jefferson’s suspicions, but it wasn’t until he learned what Hamilton had preached at the Constitutional Convention that he put together the whole puzzle. He saw as dangerous Hamilton’s push to strengthen the central government and presidency. And he detected an intent to secure the sway of the ‘financial interest’ over Congress and foster the growth of a new moneyed class. All of it would menace republicanism and the agrarian way of life. Jefferson was sure that before long, Hamiltonianism would produce in America the same evil cause-and-effects he had witnessed in Europe: monarchy and rigid social stratification leading to massive poverty and widespread urban squalor.”
This issue is fought over the tenth amendment which states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”
In layman’s, it means anything that’s not specifically in the Constitution is left to the states.
This debate is not cut and dry because while fintech is obviously not in the Constitution interstate commerce is.
For those like Jefferson, they would interpret interstate commerce as narrowly as possible, leaving to the state the bulk of regulation and law making.
Meanwhile, those like Hamilton believe that a financial institution needing to operate in multiple states should have one- rather than fifty- set of regulation to follow.
Having OCC create a national fintech charter system and as such creating one federal regulator to replace state regulators is yet another blow to federalism or state’s rights.
The Affordable Care Act passed under former President Obama was another blow to state’s rights.
How Will the Fintech Charter Work?
The US Treasury expanded on how the charter might work in their report.
“The OCC released a proposal for a special purpose national bank charter for financial technology companies and solicited comments on that proposal in December 2016. As proposed, the OCC special purpose national bank charter would allow charter applicants that make loans or engage in payments activities to:
- Adhere to a uniform set of national banking rules, rather than seeking state-by-state lending or money transmission licenses, with frequently conflicting requirements, or partnering with a bank to access bank charter benefits (e.g., the ability to export interest rates);
- Operate without FDIC deposit insurance, to the extent applicants would not take deposits; and
- Be subject to the same standards and level of supervision as similarly situated national banks, including capital, liquidity, consumer protection and financial inclusion requirements based on the business model and risk profile of the chartered company.”
The report continued: “Marketplace lenders (MPLs) and payment companies are examples of fintech firms that may be interested in applying for the OCC special purpose national bank charter. MPLs may be attracted to an OCC special purpose national bank charter because it would reduce licensing and regulatory cost by consolidating supervision under one primary national regulatory structure, which would allow them to efficiently provide credit to consumers and businesses across the country. Payments companies might look to the charter to obviate the need to obtain money transmission licenses in all 50 states. The charter might also allow them to acquire potentially more efficient access to payment systems, reduce operating costs and provide national scalability.”
Effectively, if a fintech company engaged in banking activity- that is lending, deposits, etc.- and operated in multi-states, they could apply for what is a “special purpose” national bank charter and then it would fall exclusively under the regulation of the OCC.
