Banking
Dear Fintech, The OCC Wants to Welcome You to The Family
March 16, 2017
Congratulations fintech, you did it. The OCC wants fintech companies who are interested and meet the criteria, to apply for a Special Purpose National Bank (SPNB) charter if they so choose, according to a licensing manual published by the agency.
“Providing a path for fintech companies to become national banks can make the financial system stronger by promoting growth, modernization, and competition,” is one of several arguments they make in their decision to move forward. And it would be optional, something a company could choose to pursue.
“The OCC will expect an SPNB applicant whose business plan includes lending or providing financial services to consumers or small businesses to demonstrate a commitment to financial inclusion,” they say and that commitment must be documented in an official plan which must be put up and submitted for public comment. Basically, the entire process will be very public so it’s unlikely that companies will slip through and become banks without anyone really knowing.
New York’s Department of Financial Services nonetheless issued a heated response to the proposal. “The imposition of an entirely new federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape will invite efforts to evade state usury laws and other consumer protections, stifle small business innovation, create institutions that are too big to fail, and increase the risks presented by nonbank entities,” they wrote. They see the move as an attack on their in-state regulatory powers. “The proposal threatens to create an entirely new federal regulatory program, creating serious regulatory uncertainty that threatens to invade state authority and sovereignty.”
Read the OCC’s charter licensing manual here
Read the NYDFS response here
Two U.S. Senators Say ‘Not So Fast’ to OCC’s Plans for Limited Charter
January 10, 2017
Senator Sherrod Brown (D) and Jeffrey A. Merkley (D) both believe that the OCC does not possess the authority to grant the limited purpose charters it plans to move forward with. In a letter penned to Comptroller Thomas Curry on Monday, Brown and Merkley raise several concerns including that such charters would only blur the lines between banking and commerce, pointing out that an applicant need not necessarily be a fintech company to apply, nor need or want to accept deposits.
“As state banking supervisors have pointed out, because so many companies under an alternative charter would be exempt from the Bank Company Holding Act, nothing would ensure that both bank and currently impermissible non-bank activities were intermingled in one company, and that a commercial entity could not create or acquire an alternatively chartered company,” they write.
Brown and Merkley’s other concerns may be premature since the OCC is currently seeking information from the fintech industry on such issues in its official 13-question Request for Comment (found on the last pages of this document).
The full letter submitted to Comptroller Curry can be viewed here.
The OCC Wants Online Lenders to Become Limited Purpose Banks
December 2, 2016
Earlier today, Comptroller of the Currency Thomas J. Curry announced that the OCC will move forward with chartering financial technology companies that offer bank products and services that meet their high standards and chartering requirements.
“We have decided to move forward and to make available special purpose national charters to fintech companies for a few basic reasons,” he began saying during a speech at the Georgetown University Law Center. “First and foremost, we believe doing so is in the public interest. Fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters.”
Curry also responded to critics who argued that a limited charter would put fully regulated banks at a disadvantage competitively. “The reality today is that the 4,000 fintech companies out there are already competing with national and state banks, without regard to any of the national bank responsibilities and under a patchwork of supervision,” he said. “Granting national charters to the companies who desire and warrant one doesn’t weaken the competitive position of existing banks or the dual banking system. In some ways, it levels the playing field because statutes that by their terms apply to national banks would apply to all special purpose national banks, even uninsured ones.”
Applying for this charter would be optional, not a requirement.
Like the Treasury RFI last year, the OCC has put up an official 13-question Request For Comment that is open until January 15th.
Those questions are:
1. What are the public policy benefits of approving fintech companies to operate under a national bank charter? What are the risks?
2. What elements should the OCC consider in establishing the capital and liquidity requirements for an uninsured special purpose national bank that limits the type of assets it holds?
3. What information should a special purpose national bank provide to the OCC to demonstrate its commitment to financial inclusion to individuals, businesses and communities? For instance, what new or alternative means (e.g., products, services) might a special purpose national bank establish in furtherance of its support for financial inclusion? How could an uninsured special purpose bank that uses innovative methods to develop or deliver financial products or services in a virtual or physical community demonstrate its commitment to financial inclusion?
4. Should the OCC seek a financial inclusion commitment from an uninsured special purpose national bank that would not engage in lending, and if so, how could such a bank demonstrate a commitment to financial inclusion?
5. How could a special purpose national bank that is not engaged in providing banking services to the public support financial inclusion?
6. Should the OCC use its chartering authority as an opportunity to address the gaps in protections afforded individuals versus small business borrowers, and if so, how?
7. What are potential challenges in executing or adapting a fintech business model to meet regulatory expectations, and what specific conditions governing the activities of special purpose national banks should the OCC consider?
8. What actions should the OCC take to ensure special purpose national banks operate in a safe and sound manner and in the public interest?
9. Would a fintech special purpose national bank have any competitive advantages over full service banks the OCC should address? Are there risks to full-service banks from fintech companies that do not have bank charters?
10. Are there particular products or services offered by fintech companies, such as digital currencies, that may require different approaches to supervision to mitigate risk for both the institution and the broader financial system?
11. How can the OCC enhance its coordination and communication with other regulators that have jurisdiction over a proposed special purpose national bank, its parent company, or its activities?
12. Certain risks may be increased in a special purpose national bank because of its concentration in a limited number of business activities. How can the OCC ensure that a special purpose national bank sufficiently mitigates these risks?
13. What additional information, materials, and technical assistance from the OCC would a
prospective fintech applicant find useful in the application process?
Read the OCC’s 17 page report on the matter. The Request For Comment and submission instructions are at the end of it.
UK’s P2P Pioneer Wants to Be a Bank. Who’s Next?
November 16, 2016
UK’s P2P pioneer Zopa is changing its stripes to turn into a bank.
The 11-year-old company, upbeat about the regulatory environment in the UK that is looking to bring innovation and entrepreneurship to banking, will apply for a license soon. “Zopa has a history of creating innovative retail-facing financial services, driving consumer choice and transparency. We are responding to the positive regulatory environment and building on our experience to bring yet more choice to the market,” said CEO Jaidev Janardhan in a press release.
The new Zopa Bank will be a retail bank and provide deposit and savings accounts, thereby giving the company a stable funding source for its P2P platform.
This trend has also picked up pace across the pond, at home. For online lenders like SoFi that are adding lending products faster than they can secure sources of capital, the prospect of becoming a bank may now be more tempting than disrupting them. Marketplace lending companies in the US including Avant, Prosper and Lending Club are struggling to retain and grow investors on their platforms.
While tightening credit and raising rates to prevent delinquencies is one way to keep investors, some companies like SoFi have also started hedge funds to buy up their own loans. The advent of online lending promised to offer alternatives to the already chunky, fragmented banking system which was further straitjacketed by regulation like the Dodd-Frank Act which mandated banks have stricter lending standards. However, the rapid proliferation of the industry has brought forth concerns like fast depleting capital and waning investor interest.
Will alternative lenders in the US also drink the kool-aid and become the entity they intended to overhaul?
Debanked: Europe’s ING Bank, Commerzbank to Slash Jobs, Go Digital
October 3, 2016Europe is debanking.
Last week, two large European banks — ING and Commerzbank announced they are slashing jobs and spending the savings on digitizing its their businesses.
Amsterdam-based ING Bank will slash 7,000 jobs, around 3500 jobs in Belgium and another 2300 in the Netherlands. The savings ( around 900 million euros in five years) under the bank’s ‘Think Forward’ strategy, will be used to migrate to a single integrated banking platform in the Netherlands and Belgium. Separately, ING will also invest 800 million euros in digital initiatives over the next five years.
“Customers are increasingly digital and bank with us more and more through mobile devices. Their needs and expectations are the same, all over the world, and they expect us to adopt new technology as fast as companies in other sectors,” said CEO Ralph Hammers in a statement.
ING is not alone in marching towards technology; Germany-based Commerzbank also said that it will slash approximately 7,300 jobs over the next four years and spend 700 million euros annually on technology under its ‘Commerzbank 4.0’ strategy. Later this month, the bank plans to roll out ‘One,’ an integrated sales interface, enabling the bank’s sales staff and customers to interact and transact on the same platform and by 2020, it aims to have 80 percent of its relevant business processes digitized.
“It is inevitable that the various measures and intentions announced today may have a significant impact on many of our colleagues. It means some functions will change significantly in nature,” said Hammers.
The move from major banks is coming at a time when fintech is heating up — Europeans startups raised $348 million (£238.2 million) in the first quarter of the year, up from $337 million (£230.6 million) in the first three months of 2015. And with banks deciding to go lean, it could only open up the opportunity for more collaboration than competition among banks and startups.
Again? Wells Fargo Fined $100 Million for Creating Fake Accounts
September 8, 2016The CFPB fines Wells Fargo, again — this time for opening unauthorized deposit and credit card accounts.
The agency fined the bank $100 million after employees opened “more than two million deposit and credit card accounts” unbeknownst to borrowers, racking up fees and charges, the CFPB said in a statement. Wells Fargo is also required to pay $2.5 million in customer refunds.
According to an internal analysis conducted by the bank, employees opened 1.5 million deposit accounts and 565,000 credit card accounts, issued debit cards and enrolled customers to online banking without consent, for bonuses and meeting sales goals.
“Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses,” said CFPB Director Richard Cordray. “Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed. Today’s action should serve notice to the entire industry that financial incentive programs, if not monitored carefully, carry serious risks that can have serious legal consequences.”
This is strike two for Wells Fargo from the CFPB which alleged that the bank indulged in illegal student loan practices by charging consumers illegal fees, not reporting credit score information accurately and a failure to provide adequate disclosures for payment information. The bank agreed to settle the case for $4 million.
Watch out Bank Tellers, Robots are Coming for your Job
March 31, 2016
Watch out bank tellers, robots are coming for your job.
Investment in private fintech companies and upstarts has grown ten fold from $1.8 billion in 2010 to $19 billion in 2015 and in the same time, bank staff has been slimming down as investors bet on automated finance to eventually overthrow banking. Already, 46 percent of private funding has gone to lending companies selling cheaper loans easily.
The ambition to oust bank behemoths however will need continuous fueling. As things stand now, these lenders are nowhere close to managing that coup. Revenue impact from the digital banking upstarts cause a one percent dent in the $850 billion global banking revenue.
It may be negligible but not to be neglected, investors might say. In the US, online lenders like Lending Club and Prosper Loans sold loans worth $8 billion last year and are looking at a target market of $254 billion, 8 percent of the total consumer credit market.
In its report, Citigroup predicts that US and European banks will shed 1.7 million jobs by 2025 as the banking sector undergoes its own “Uber moment,” forcing banks to automate some lines of business. Anthony Jenkins, former Barclays CEO translates this to halving the number of branches and people over the next few years. If this is an eventuality, different markets will take different paths to get there.
While Nordic and Dutch banks have cut total branch levels by around 50 percent from recent peak levels, branch openings in the top US cities including Seattle, Denver and Dallas have increased between 2-17 percent in the last five years. Part of the reason is because customers still have to visit a branch for identity verification but mostly the benefits (easy access, brand recall) of having a bank branch in wealthy states outweighs the costs involved. “With wealth concentrated in the top cities in the US, a strong branch presence in these cities allows banks to capture wealth,” the report said.
Though the transition of the branch’s role from transactions to advisory/consultancy is imminent, the pace has been gradual, about 11-13 percent since peak pre-crisis. That number could reach 30 percent by 2025. As for the US, there are 15 percent less tellers than there were in 2007.
But the banks want in and are willing to pay. Citigroup and Goldman Sachs have been active in seeding fintech rivals. In the last five years, Citigroup has invested in 13 companies including Square.
Is it time to make another David and Goliath reference?
Banks Admit They’re Scared of Startups
March 16, 2016If you cannot keep up with everything that is happening in fintech, you are not alone.
In the post financial crisis world, fintech startups perched themselves in the crevice between the big world of banks and the regulatory reform which controls their free reign. And since then, financial upstarts have only multiplied.
From P2P insurance, realty crowdfunding, marketplace loans and not to forget bitcoin, the capital infusion in fintech testifies for the market hype. In its report in November last year, CB Insights estimated that $24 billion has been invested in fintech startups and half that amount ($12.2 bn) was invested in 2015 alone.
It can be argued that some of these startups with multibillion dollar valuations are essentially smaller banks without the frills. Take SoFi for example, the San Francisco-based online lender is which worth $4 billion known for its touting we-are-not-a-bank image but provides most services from student loans, mortgage lending, personal loans to loan refinancing without the “bank branch.” The company also wants to start a hedge fund.
So, are the banks feeling left out? It depends on whom you ask, but a recent report from PwC surveying 544 CEOs, revealed that 23 percent believed their businesses were “at risk” by fintech innovation and 67 percent of the respondents said that they were under profit margin pressure.
“We thought we knew our customers, but FinTechs really know our customers,” the report quoted a senior bank official as saying. The report ranked consumer banking, payments and wealth management to be disrupted the most by these fintech startups.
The big bucks and the hype that follows it has made regulatory authorities sit up and take notice of the financial services upstarts and bring them under the supervisory purview. And while that may be legitimizing their foothold on the industry, the real questions around project revenues, possible exits and the companies’ wherewithal to handle a complex credit market remain unanswered.
Are we really at a tipping point of innovation or is it just new wine in old bottles?
