OCC to offer fintech firms special purpose national bank charter, with AML, OFAC key to approval

By Brian Monroe
December 8, 2016

The regulator of the nation’s largest banks is embracing technology, with an eye toward ensuring compliance in a broad array of areas, by creating special purpose national charters for financial technology, or fintech, companies.

The move by the U.S. Treasury’s Office of the Comptroller of the Currency (OCC) to allow fintech companies to have the same privileges of national banks, but also require them to follow the same stringent compliance rules – including anti-money laundering (AML) obligations  comes on the heels of the regulator’s recent creation of an Office of Innovation.

The office, which will begin operating in the next few months, will analyze how new technologies and historical financial frameworks intersect to see what fintech firms would fall under the definition of a money services business (MSB), and hence trip AML rules and related requirements, due to how they transfer value.

The office will also analyze other companies in the fintech orbit that use advanced systems, such as artificial intelligence, machine learning and other software and hardware solutions to improve the accuracy, speed and coverage of financial crime compliance programs. The regulator would not be viewing those operations for charters, but to better understand how they help, or hurt, compliance.  

Comptroller Thomas Curry stated that considering fintech charter applications provides businesses a choice without creating a requirement to seek a charter, according to recent public comments.

Companies seeking a charter are evaluated to “ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity,” according to the OCC.

Examples of fintech companies would include operations such as Avant, which grants quick loans to the everyman, Braintree, which bought Venmo in 2012, Chain.com, which transfers value using the blockchain technology that underlines Bitcoin, Circleup, a crowdfunding site, and others.

While some firms, like social biometrics pioneer Socure, are mentioned in the same breath as fintech firms, these operations merely support banks in compliance duties, though use more advanced methods to deal with classic challenges or rote tasks, like customer due diligence and risk assessment scoring.

The decision by the OCC to create the fintech charters is “very timely,” said Brandon Lee, a former compliance officer for a large bank, now turned fintech investor and adviser.

The OCC is concerned more with companies that are “involved in the movement of value,” he said. “The regulator is interested in fintech disruptors to review if they are actually engaging” in such a dynamic, regardless of the newfangled trappings, methods and devices.

That is an important question to answer because there are “tons of millennials and gen-y-ers that are wanting to conduct more faceless banking,” such as sending micro payments, splitting a check with friends by sending them the money directly, investing money in a company that offers micro-financing for startups, and the like, Lee said.

New fintech firms must conform to historic banking rules

While there would be new obligations for compliance specialists, for operations in the U.S. particularly, getting a national bank charter would make it easier for fintech firms to comply with one set or rules, rather than a bevy of regulations at the state and local levels.  

“New technology makes financial products and services more accessible, easier to use, and much more tailored to individual consumer needs,” Curry said. “At the same time, consumer preferences and demands are evolving, driven by important demographic changes.”

Responding to those market forces are “thousands of technology-driven nonbank companies offering a new approach to products and services,” he said. “Five years ago these services either were available only from traditional banks or not available at all.”

Initially, many of these nonbank providers of financial services viewed themselves as competitors of banks, he said. “Now, some financial technology – or fintech – companies are considering whether to become banks.”

These industry developments raise fundamental policy questions, according to the OCC. These include:

·         Is the nation better served when banking products are provided by institutions subject to ongoing supervision and examination?

·         Should a nonbank company that offers banking-related products have a path to become a bank?

·         What conditions should apply if a nonbank company becomes a national bank?

The OCC realizes that the agency also must be open-minded and flexible and learn about the sector because “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, according to the OCC.

AML, OFAC compliance critical to getting a charter

But the regulator made it clear that regardless of the structure, AML rules must be a top-of-mind consideration.

“Other laws that apply to special purpose banks include the Bank Secrecy Act (BSA), other anti-money laundering (AML) laws, and the economic sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).”

As well, appropriate compliance risk management “includes a well-developed compliance management system that is commensurate with the risks to the proposed bank.”

The OCC expects any applicant seeking a special purpose national bank charter to provide a “sufficient description of the proposed bank’s activities for the OCC to fully understand the BSA/AML and compliance risks the proposed bank faces, how it intends to assess, manage, and monitor these risks, and how it would comply with relevant laws, regulations, and requirements.”

At its heart, any fintech firm that gets a national charter “will be held to the same high standards of safety and soundness, fair access, and fair treatment of customers that all federally chartered institutions must meet,” according to the OCC.

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.”