At the last House hearing on fintech, Missouri Republican Congressman Blaine Luetkemeyer floated the idea of a national bank charter for fintech companies. The idea is still in its infancy but it could have a profound effect on fintech in America and possibly the world.
What is a National Bank Charter?
The National Bank Charter was the brainchild of one of America’s most significant Presidents, , who in 1863 with the Civil War raging, signed the National Banking Act.
Here’s part of the explanation from the Office of Comptroller of Currency (OCC).
To meet the government’s financial needs during the Civil War, President Lincoln and Treasury Secretary Salmon P. Chase borrowed from foreign governments and American citizens, instituted the country’s first general income tax, and printed paper money – so-called ‘Greenbacks.’
To promote opportunity, a dynamic economy, and a stronger Union, Lincoln and Chase conceived the national banking system and the Office of the Comptroller of the Currency to regulate and supervise it. Lincoln took pride in signing the National Currency Act, which he believed would provide ‘great benefit’ to the people and the government.
‘The national system,’ he declared in his State of the Union message of 1864, ‘will create a reliable and permanent influence in support of the national credit and protect the people against losses in the use of paper money.’
Along with the act, Lincoln authorized the creation of the OCC, which would issue national banking charters.
“Our country’s leaders provided the Comptroller with the authority to grant a national charter because they recognized the public value of a robust, unified, and nationwide system of banks,” the OCC noted recently.
Fintech and National Bank Charters
The OCC has the power to issue what are known as “special purpose national bank charters”, and according to a December 2016 white paper by the OCC, it is this charter which the OCC believes is most appropriate for fintech:
A question raised by technological advances in financial services and evolving customer preferences is whether it would be appropriate for the OCC to consider granting a special purpose national bank charter to a fintech company. For a number of reasons, the OCC believes it may be in the public interest to do so.
First, applying a bank regulatory framework to fintech companies will help ensure that these companies operate in a safe and sound manner so that they can effectively serve the needs of customers, businesses, and communities, just as banks do that operate under full-service charters. Second, applying the OCC’s uniform supervision over national banks, including fintech companies, will help promote consistency in the application of law and regulation across the country and ensure that consumers are treated fairly. Third, providing a path for fintech companies to become national banks can make the federal banking system stronger. The OCC’s oversight not only would help ensure that these companies operate in a safe and sound manner, it would also encourage them to explore new ways to promote fair access and financial inclusion and innovate responsibly. Fintech companies vary widely in their business models and product offerings. Some are marketplace lenders providing loans to consumers and small businesses, others offer payment-related services, others engage in digital currencies and distributed ledger technology, and still others provide financial planning and wealth management products and services.
What would a National Charter Provide
A nationally chartered bank becomes a part of the Federal Reserve system. It allows the fintech company to conduct business as part of the national banking system with the OCC as its regulator.
What are the Responsibilities of a Nationally Chartered Bank?
Federally chartered banks, including these fintech companies, need to go through a stringent approval process. They are required to maintain a minimum in assets, asset/liability percentages, provide a business plan, a corporate governance plan. Failure to meet their duty could result in the revocation of the charter.
The Varo Money Example
Thus far, there has been one high profile example of a fintech company applying for a national charter: Varo Money, an app which provides a variety of online banking services including checking and savings accounts and loans.
Here’s part of a July 2017 story from American Banker:
While policymakers are still busy debating how fintechs should be regulated, one firm has decided to push ahead with its own plans.
A mobile-only financial institution called Varo Money announced Tuesday that it has filed formal applications with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. to become a national bank.
We’d be the first national bank in U.S. history that is designed for people who want to bank on their cellphones,” Colin Walsh, its CEO and co-founder, said in an interview. “We’re suddenly now putting a personal banker in your pocket.
So-called special purpose national banks can be defined quite broadly and will likely include fintech companies which perform far more than only mobile banking apps. Digital wallets which can hold crypto-currency could one day be considered among a host of fintech ideas.
Federalism
As the issue of national charters for fintech heats up, it will be debated in the context of federalism. Federalism has been debated since the beginning of the republic, most closely associated with Thomas Jefferson, America’s third president.
The Revolutionary War was for many of the founding fathers about removing a tyrannical and intrusive monarchy in England which attempted to impose its will on the colonies.
For Jefferson and others like him, the fear was that this tyrannical and intrusive government ruled by the monarchy would only be replaced by an equally tyrannical and intrusive federal government which would also impose its will on the states. For this reason, the 10th amendment, which granted to the states anything not in the constitution, became a part of the bill of rights.
As sensible a concept as federalism is, it was also used to justify the institution of slavery. The Southern states used the 10th amendment to continue that abomination. Since slavery – part of a compromise between Southern and Northern states – was not abolished by the Constitution, it was up to each individual state to decide whether the practice should continue.
The Southern states felt –much like Jefferson feared – that a tyrannical federal government was trying to impose its will, and the Civil War was the result.
While the Civil War was ostensibly about slavery, states’ rights also took a great hit with the South’s defeat. It took a further hit when most of these same states up until the 1960s used the same states’ rights argument to impose separate bathrooms and restaurants on blacks; blacks were also forced to sit at the back of the bus.
With the passage of the Civil Rights Act of 1964, not only were civil rights restored to blacks, but states’ rights took another hit.
No one will argue that having states regulate fintech would somehow jeopardize civil rights, but the regulation of fintech will evolve, based at least in part, on the dynamic the civil rights movement had on states’ rights.
States rights, as Jefferson saw them, have been curtailed significantly since he was alive.
The Constitution Is Not that Clear
It goes without saying that fintech is not mentioned in the US Constitution, but that does not mean the US Constitution said nothing on the regulation of fintech.
Inter-state commerce was mentioned in the Constitution and it left to Congress to regulate inter-state commerce. Unless a fintech company wants to do business in its home state only, it will still be subject to federal laws concerning inter-state commerce.
