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OCC fintech charter might better fit payments companies, not digital lenders

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OCC fintech charter might better fit payments companies, not digital lenders

Fintech companies in the payments space, rather than digital lenders, might be best suited for the recently launched special-purpose national bank charter.

The Office of the Comptroller of the Currency's long-awaited fintech charter has added another route for fintech companies to take toward the same destination: regulatory oversight at the national level and closer integration with the federal banking system. Fintechs can already undertake the application process for a regular national bank charter or an industrial loan company charter. They can also stick with partnerships and obtain individual state licenses. But while digital lenders were initially considered a natural fit for the OCC's new charter because they operate nationally, the charter excludes what could be a key source of funding for those companies, former Comptroller of the Currency Thomas Curry said in an interview.

The special-purpose charter would let a company undertake some core banking activities, such as making loans and paying checks, at the national level. But the fintech charter does not enable companies to take deposits. That means companies like LendingClub Corp. and On Deck Capital Inc. might be better off applying to become standard national banks to give them access to insured deposits as a funding base, Curry said.

Payments companies, on the other hand, would get to enter the federal banking system without the regular charter's inclusion of deposit activities, Curry said. There needs to be "flexibility and willingness" to bring fintech companies into the national banking system, he said.

Several major payments companies have tested the waters of taking on banking regulation in recent years. Square Inc., which currently partners with banks to make loans, has expressed a desire for a direct banking license rather than working through partnerships and would be an "obvious candidate" for the fintech charter, MoffettNathanson analyst Lisa Ellis said.

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The OCC would likely require a special-purpose bank to have a plan showing movement toward profitability by the close of its third year, just as it requires for a standard bank charter, said Curry, now a co-leader of the banking and financial services group at law firm Nutter McClennen & Fish. Many digital lenders have failed to show consistent profitability, whereas payments companies have.

Still, four months after the charter was approved, no companies from either sector have submitted an application. Lawsuits filed after the charter's announcement pose a "big overhang" on potential applicants, said Jackson Mueller, an associate director at the Milken Institute's Center for Financial Markets. But Curry, who spearheaded the charter's creation during his time at the OCC, said the current absence of applicants is not concerning.

"I actually don't think that's significant at all," Curry said. "If you go back to a standard full-service charter, there's a lot of discussion and interaction between an applicant and the OCC's licensing division before a formal application is submitted."

One part of that interaction would be submitting a draft application for the special-purpose charter, a step that occurs before the company would file a formal application, a current agency official said in an interview. The agency would then have 120 days to review the draft application.

The OCC expects the first draft application by the end of 2018 or early 2019, the person said, adding that the regulator could deny the application during that process.

Uncertainty around what companies will apply for the special-purpose charter comes at a time when de novo banks are emerging at a faster clip, compared with the drought of new banks that followed the financial crisis. One high-profile fintech company, the digital-only bank Varo Bank NA, received preliminary approval for the standard national bank charter in August.

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Fintech companies that recently began the process to become industrial loan companies but backed out, a group that includes at least one large payments company, could be considering the special-purpose charter instead.

Social Finance Inc., Square and Nelnet Inc. all recently applied to become ILCs before rescinding their respective applications. Square says it is strengthening its submission and plans to refile. The most recent ILC approved by the Federal Deposit Insurance Corp. was in June 2008.

Square and PayPal Holdings Inc. declined to comment on their plans, as did digital lenders OnDeck, GreenSky Inc., LendingClub, SoFi and Kabbage Inc.

While the OCC's charter could give a company more consistency than a state-by-state regulatory approach, some companies plan to stick to the state model.

Elevate Credit Inc. prefers direct state license lending as opposed to a national program, Chief Legal Officer Sarah Cutrona said in an interview. She said Elevate has strong, direct relationships with state regulators and can more easily schedule meetings with them than with a federal regulator.

"It's easy to manage when you can put them in different pockets of very similar laws," she said.

Elevate holds 17 state licenses and offers its products in 40 states through bank partnerships with Republic Bank & Trust Co. and FinWise Bank, among others.

Prosper Marketplace Inc. is also not considering the special-purpose charter in the near term, CEO David Kimball said in an interview. Prosper has 20 state licenses and lends in almost every state through its bank partnership with WebBank.

"We have an existing model right now that works very well for us," Kimball said.