One of the more interesting financial services debates taking place in Washington, D.C., this year concerns the decision by the Office of the Comptroller of the Currency to accept applications from payments companies to obtain a national bank charter.
The OCC is an independent agency within the Treasury Department that charters, regulates and supervises all national banks. The decision, announced in June, would preempt state regulatory authority and grant national bank status to companies that do not accept deposits as traditional banks do.
Acting Comptroller of the Currency Brian Brooks argues that extending national bank charters to payments companies would increase efficiency in the licensing process, promote technological innovation and provide more options to consumers. The new system would bypass the careful licensing process that states have created to regulate financial technology (fintech) and payments companies, as well as preempt the measures that states have implemented to protect consumers.
According to the Conference of State Bank Supervisors, 79% of all U.S. banks are regulated at the state level, and states are the primary regulators of “nonbank” companies, which include fintech companies, money transmitters and mortgage lenders. The oversight conducted by states of nonbank financial companies has been effective in providing strong consumer protections by examining each company during the licensure process and applying state usury laws and other consumer protection measures. This proven system and the protections that come with it would be hampered by any fintech or payments charter that the OCC implements.
The new system would bypass the careful licensing process that states have created to regulate fintech and protect consumers.
NCSL strongly supports the preservation of the dual banking system established by Congress and believes the system enables state governments to apply laws and regulations that best serve the needs of local economies and citizens. Furthermore, any federal preemption of state banking authority should be done only by Congress, not federal agencies like the OCC.
In May 2019, the U.S. District Court for the Southern District of New York rejected the OCC’s attempt to create a charter for fintech companies, stating that the “business of banking” as written in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business,” among other things. The issue is still in litigation and, despite a change in administration and congressional composition still to be determined, the debate will not be settled anytime soon.
States have clearly demonstrated over the last decade that they are best equipped to charter and regulate nonbank financial companies during this period of incredible technological innovation. While consumers want options, they also want to be protected. Through the regulatory system that states have crafted, both of those goals have been achieved.
Tres York is a policy specialist in NCSL’s State-Federal Relations Division.