The OCC is handing Fintech’s Shadow Banking sector a flashlight

The Treasury wants to bring banking into the 21st century

Last Friday the Office of the Comptroller of the Currency (OCC) announced plans to make it easier for Fintech companies to become nationally-recognized special purpose banks.

This is interesting, because (despite their insistence to the contrary) the OCC isn’t known to be an innovative entity. Like most government initiatives, the OCC’s bureaucracy makes it nigh impossible to modify its charter, adapting only when the winds of change are approaching hurricane status. Eight years, 4,000 companies strong, (and after a year and a half study into the Fintech revolution) the OCC noticed that the SEC is the de facto in-charge agency and now wants to be in a more important position to advocate the direction of the industry.

This is a bit ironic, since many of the non-bank companies providing financial services are non-banks in order to avoid bank regulations.

Regardless, the Fintech industry has matured to a point in which it makes sense for parts of it to join the traditional banking sector. Already the industry is shedding its persona of disassociation (as we noted last week) and as it becomes reliant on large institutional and banking partners it is much more interested in abiding by well-defined regulation.

What this might be attractive to some Fintech companies

In exchange for donning the bridle of regulation, the OCC is offering a series of carrots for Fintech companies. In particular for current Lending Platforms, they offer:

1. Exemption from various SEC laws

   The vast majority of loans today are offered as unregistered securities, which are subject to regulation and rules from the SEC.

2. Exemption from state registration

   Right now most Fintech companies operate on a state-by-state basis. A national bank charter supersedes state authority, and will allow fintech companies access to a potentially much broader market.

3. FDIC insurance

   Lending Platforms who wish to continue serving retail clients can now more easily do so, and provide attractive insured products for their depositors (formerly known as retail investors). For instance, instead of selling a fraction of a 3 year loan to an investor, a depositor will purchase a 3 year CD product. The Lending Platform gets stickier capital, the depositor gets a simple insured product that hopefully still pays more than what you could get at a traditional bank.

4. Access to the Banking System

   Among other benefits, this includes access to SWIFT and the Federal Reserve. Currently Lending Platforms use intermediaries; direct access could speed up transactions as well as provide better liquidity.

5. Credibility, ability to sell loans to other banks faster

   A bank has a fiduciary responsibility, a requirement that Lending Platforms are not currently subject to. This fiduciary responsibility could spur further confidence in other banks in a Lending Platform’s underwriting, and facilitate more transfers of loans which would allow the Lending Platforms an ability to expand.

6. Consolidation/buyout target from big banks

   Notably, the number of banks has decreased from about 8,500 in the year 2000 to just over 5,000 today. This 41% reduction was due in large part to consolidation, as large banks subsumed the smaller banks. A Lending Platform who becomes a bank may be a more attractive candidate for appropriation.

But don’t expect change anytime soon

Ultimately, integration into the banking sector may bring about increased oversight, increased compliance, and better risk management for the fintech companies.

But of course, since this is still the OCC we’re talking about, and the OCC’s announcement began by noting that the agency was on the cutting edge of finance… 154 years ago (thanks Lincoln). Don’t expect any fintech companies to become banks anytime soon.