The number of national bank charter applications at the Office of the Comptroller of the Currency has dropped sharply under President Joe Biden, as the agency wraps up its review of existing charter applications.
Under former Comptroller Brian Brooks, who was appointed by former President Donald Trump, 14 companies filed for national bank charters in 2020. That number dropped to three in 2021 under two consecutive acting comptrollers hand-picked by Biden.
The picture looks even more uncertain for financial technology firms. Under Brooks, who was widely viewed as fintech-friendly, seven fintech firms sought charters in 2020. Only one requested a charter in 2021. Payments firm First Blockchain Bank and Trust NA applied Feb. 3, but it withdrew its request April 15.
"The message coming from the OCC, and Democrats more broadly, is not encouraging applications, particularly compared to the previous administration," said Ian Katz, managing director at bank consultancy Capital Alpha Partners. Requests are down in part because there is a "strong message to the industry that [firms'] applications will be looked at skeptically."
The political sentiment toward charters, particularly for fintechs, has changed dramatically since Brooks left office. Blake Paulson took the temporary helm of the OCC in January 2021. Under his tenure, just two of the fintech firms that applied for conditional national charters in 2020 received approval: Protego Trust Bank NA and Paxos National Trust.
Acting OCC Comptroller Michael Hsu, who took the reins in May, has made no promises on charter approvals.
Speaking Nov. 3 at a summit of the American Fintech Council, Hsu said the OCC has completed the review of bank charter applications and cryptocurrency-related interpretive letters that the agency initiated in May. Without giving specific details, he said that soon, "OCC determinations and feedback to bank charter applications will be communicated."
However, Hsu also remarked at the summit that the entry of fintech companies into the banking world raises significant concerns within the administration. In many cases, he said, fintechs may engage in "synthetic banking" not overseen by federal regulators.
A big consideration in granting fintech charters, Hsu said, is whether they can show their services "really put the consumer first [and] financial stability first."
Experts said the path ahead for fintech charters will be tough under Hsu's leadership.
"Certainly with regard to the fintech companies, Michael Hsu has been very upfront that he's going to be a lot more cautious. I think he'll be true to his word on that," said Daniel Stipano, a partner at law firm Davis Polk, who formerly worked as a senior attorney at the OCC.
New sheriff in town?
The situation may get more onerous for would-be applicants, should Saule Omarova, Biden's nominee, be approved by the Senate.
Omarova, whose nomination faces a political battle in the weeks ahead, has argued that the advent of fintech companies likely amplifies systemic risk.
"There is reason to not be encouraged that she would welcome you with open arms," Katz told S&P Global Market Intelligence.
Even if she is not confirmed, fintech companies face significant challenges, Stipano said.
"It's going to be a tougher road for them," the lawyer said. "The path for those companies was challenging to begin with, but now there's going to be a lot more scrutiny and more of a go-slow approach with these types of charters. I don't think it's impossible for them, but the hurdles are going to be higher."
In addition to the lack of applications in the Biden administration, there have been several withdrawals of requests filed under Trump.
Some include First Blockchain, ViZ Bank & Trust and Monzo Bank USA NA. San Francisco-based Monzo withdrew its application Oct. 4. Oportun Financial Corp. drew headlines when it withdrew a charter application Oct. 8.
George Selgin, a senior fellow at the libertarian Cato Institute, said the expected roadblocks under President Biden have led to discouragement for the companies with existing requests.
"Regulators have not thrown out the red carpet," said Selgin. "There are frustrations felt by some applicants that have caused them to throw in the towel."
Under the magnifying glass
Among other demands, the government generally requires charter applicants to hold capital of about $15 million to $20 million, and they must show that they meet safety and soundness requirements and file a business plan. Those plans are expected to be scrutinized more heavily under the Biden administration, according to Chris Cole, senior regulatory counsel at the Independent Community Bankers of America, or ICBA.
The plan "details everything that you're going to be doing, what products you're going to be issuing, how much commercial lending you're going to be doing," Cole said in an interview. "The Biden administration will certainly scrutinize those very closely."
The OCC declined a request for comment.
One key area of focus is cryptocurrency, Cole said. That would include stablecoins, which are digital assets designed to maintain a stable value by being pegged to a currency or commodity. Cole said regulators will look at "what are they using to back up stablecoin and how are they disclosing this to consumers."
He noted that the ICBA favors any political developments that would level the playing field between fintechs and more traditional financial institutions.
The complexity of charter applications may be discouraging some fintech companies that do not know as much as regular banks, leading them to find a different path.
"They're trying to pick a strategy that is best tailored to their desires and their expertise," Carleton Goss, counsel at law firm Hunton Andrews Kurth LLP, said in an interview. "A number of fintechs have partnered with banks. That's a growing area, and we're definitely going to see more of that in the future."
As the Biden administration lays down more hurdles for the charter process, technology will reshape the future of banks, but it will not replace them, according to Bert Ely, a principal at Ely & Co. Inc.
"This chartering business … is quite a fluid and contentious situation," Ely told S&P Global Market Intelligence. "Over time, the technology being developed by the fintechs will be absorbed to a great extent by [Federal Deposit Insurance Corp.]-insured banks, who will continue to constitute the core of what we call the banking business."