Disruption: Fintech Companies and Lending Activities
November 13, 2018
By Michael Shuster
Traditional banks have always been the main source of lending for most consumers. In most cases, a borrower would proceed to a national bank to apply for a loan whether purchasing a new home, funding a business transaction or having other financial needs. These banks are highly regulated to ensure fair practices and overall compliance. While there were other lending institutions such as credit unions, private banks and hedge funds, consumers were comfortable with the larger, regulated traditional banks. However, beginning with the 2008/2009 financial crash, certain functions have started to shift to non-traditional sources. Over the last several years, there has been a technological boom and disruption to the banking and lending industry. For example, lending services that were traditionally provided by financial institutions are now also being delivered by fintech companies. These companies have taken an initiative to pursue innovative strategies to grow and expand their businesses. They are forcing traditional banks to adapt in order to remain relevant and competitive. Consumers desire convenience, accessibility, and ease of use and companies continue to develop, offer and enhance new financial products and services to meet the needs of their users. Customer preferences continue to evolve with the use of technology, and companies need to embrace this innovation to meet the demands of the changing landscape.
On July 31, 2018, the Office of the Comptroller of the Currency (“OCC”) announced they will begin accepting applications from non-depository fintech companies engaged in lending activities. The federal government highly regulates and supervises each traditional institution, but fintech companies were regulated on a state-by-state basis. This charter would allow fintech firms to operate under a single federal license and compete with traditional banks. In order to be eligible for the special purpose national bank charter, the company needs to engage in one or more of the core banking functions of paying checks or lending money, but not offer depository accounts. Successful applicants will be required to comply with the rules and regulations that apply to all national banks and will be subject to the same high standards. In addition, they will be subject to ongoing oversight; and will be supervised similar to national banks including in areas such as capital, liquidity, and risk management; and will need to demonstrate a commitment to financial inclusion.
Applicants will be required to submit a business plan discussing their proposed business operations. They must also develop a contingency plan to address financial stress. During the application process, the OCC will consider whether the proposed bank has a reasonable chance of success, will be operating in a safe and sound manner, will provide fair access to financial services, will provide fair treatment to customers and will comply with applicable laws and regulations. Further, the OCC will determine whether the proposed bank can reasonably be expected to achieve and maintain profitability and foster healthy competition. The OCC will evaluate each submitted business plan and determine if the risk is acceptable and the charter should be approved. If approved, the OCC will continue to supervise and monitor the bank to ensure that they are executing their strategy and meeting their goals and objectives.
While the charter will provide opportunity to fintech companies, there are still challenges and concerns ahead. An approved fintech will not receive all of the benefits of a full-service bank, but will still need to comply with the rigorous oversight and regulation. There is also a risk that the charter will fail down the line as several organizations, including the Conference of State Bank Supervisors, are attempting to block the charter. In addition, consumer advocates are opposing the charter noting that it will expose new risks including failed fintech companies and predatory lenders. These parties want to protect consumers from being deceived or treated unfairly during the loan origination process and want to promote responsible lending practices. For these reasons, the charter has not been gaining as much traction as initially expected and the OCC has only received a handful of applications.
The federal charter is a unique opportunity for fintech companies, but it is not the only option available nor the perfect solution. Each company needs to evaluate their strategic goals and objectives to determine if this charter is the correct fit. Overall, the charter is encouraging and a step in the right direction attempting to create opportunity and growth to innovative companies in a changing environment.
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- Disruption: Fintech Companies and Lending Activities