Office of the Comptroller of the Currency proposes fintech charter requirements

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The Office of the Comptroller of the Currency (OCC) announced that it will begin considering applications from fintech companies to become licensed as "special purpose" national banks on Friday.

Successful applicants would be authorized to operate nationally across the US, without the need to gather individual state licenses.

In addition, the regulator published an accompanying paper that outlines proposed "baseline supervisory expectations" applicants would have to meet to become chartered. The OCC is seeking public feedback on its decision and the accompanying paper until January 15, 2017. 

Here are some of the baseline supervisory expectations the OCC outlined last week:

• Having a thorough business plan. The OCC will require fintech applicants to detail the exact products or services they will provide over the next three years, and precisely define potential customer bases. Moreover, the regulator demands that the business plans include concrete measures for promoting financial inclusion. Having to define exact products from the start will likely pose a challenge for most fintechs, as these companies tend to develop products iteratively after launch, and the OCC's requirements may hinder their fundamental working culture. The OCC also expects the business plans to include detailed recovery and exit strategies to cover both best- and worst-case scenarios. 
• Carefully planned governance structure. The OCC stipulates that a fintech's governance structure should correspond to the risk and complexity of its products and services. And the regulator advocates that a company's board of directors take a prominent and active governance role. This is likely partly a response to high-profile management scandals at fintechs including Lending Club and Zenefits, after which both companies' CEOs were forced to resign. 
• Sufficient capital and liquidity. The OCC will require applicants to maintain enough capital and liquidity to ensure business continuity across a range of circumstances, though it is prepared to consider the specific requirements on an individual basis. The regulator will demand that fintechs be able to account for variations in interest rates and market conditions. This is likely a push to stop fintechs from relying solely on uncertain VC funding, and to encourage them to focus instead on monetization strategies that will guarantee steady revenue streams. 
• Compliance risk management. The regulator will require fintechs to demonstrate that they have a compliance system in place that enables them to meet existing OCC regulations for federal financial institutions. However, the OCC may allow exceptions on a case-by-case basis if a fintech can demonstrate that this will not harm consumers and that the change is essential for its business model to work. 

A federal fintech charter is a step in the right direction, despite some omissions. A specialist charter would not exempt fintechs from having to abide by the Consumer Financial Protection Bureau's (CFPB) consumer protection regulations, or from having to obtain the costly deposit insurance mandated for all federally chartered lenders. However, the removal of the requirement to be licensed on a state-by-state basis would ease a major pain point for startups. And while the OCC's proposed charter is likely only applicable to some lenders and payments companies for now, if the measure proves successful, there is a chance similar licenses maybe considered for other fintechs in the future.

Fintech regulations in the U.S. have been extremely restrictive thus far, but those in Europe have proven successful and allowed the region to become a hub of financial technology innovation. The U.S. would be wise to examine the policies in place across the pond and consider how to implement similar ones within its own borders.

The fintech industry is booming, with VC-backed fintech investment growing 106% to reach £10 billion ($13.8 billion) in 2015. But the new business models fintechs are bringing to market also need to be regulated, and the old models aren't sufficient. The approach regulators take will have a significant impact on how big fintech gets and how fast it gets there.

Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on fintech regulation that explains how regulators in Europe are successfully growing fintech innovation and how it's becoming a model for regulators around the world.

Here are some of the key takeaways from the report:

• The financial technology sector is booming, and Europe is a leading region for growth. VC-backed fintech companies in Europe raised £1 billion ($1.5 billion) in funding across 125 deals in 2015.
• With this boom in funding comes a need to regulate the nascent industry. There are a variety of approaches — active, passive, and restrictive — that regulators can take. The EU and the UK, in particular, have taken an active approach, in order to encourage growth.
• The regulation that will have the most impact on the European fintech market is the Second Directive on Payments Services, known as PSD2. It will force banks to open up their systems to fintechs. This will allow fintechs to act as intermediaries between banks and their customers.
• The UK regulator is actively promoting its approach to regulation as a model for other countries to follow. Some of its innovations are already being copied by other regulators around the world.

In full, the report:

• Examines the different approaches to fintech that regulators can take
• Explains the key EU laws that will affect the European financial services industry in the next two years and beyond
• Explores the potential impact of new regulations
• Details the workings of the initiative central to the UK regulator's approach to fintech
• Highlights what can be achieved when regulators, governments, and fintech companies work together

To get your copy of this invaluable guide, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
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The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of fintech regulation.