Fintech’s Fast Pass to Traditional Banking is Now Cut Off Posted by AVCU on 9:30 AM

Tech start-ups trying to become banks will now have to take a slower, more traditional route. (CNBC.com, 10/24/19)

Fintech companies had welcomed a special bank charter that cleared a quicker path for them to become a bank. But that was dealt a blow this week as a federal district court in New York decided that the Office of the Comptroller of the Currency, the regulator issuing the charters, didn’t have the authority to do so.

The ruling highlights the sometimes murky nature of tech companies getting into banking. It also means that finance start-ups will have to go through the same drawn out process as everyone else.

“It’s a step back for fintechs that are looking long term to become banks,” said Lindsay Davis, fintech analyst at CB Insights. “A fintech charter helped streamline that regulatory process for a company getting into the market.”

The “fintech charter” looked to expedite the process by allowing a start-up to offer lending or payments products without having to accept FDIC insurance, or comply with banking regulations state-by-state. A spokesman for the agency said it “disagrees with the decision and the court’s interpretation of the authority the National Bank Act grants the OCC”  and plans to appeal the ruling.

Without the special exception, getting a national bank charter tends to take around 18-24 months, according to Deloitte.

“This might be a longer process than fintechs would have anticipated — the other options are lengthy and cumbersome,” said Alaina Sparks, head of Deloitte’s fintech team. “The OCC charter sparked tremendous interest and got people thinking about new options.”

Advocates of the fintech charter said it would have increased competition by allowing new entrants to the financial system. But the ruling was a win for state regulators, many of whom wanted to block the pathway for fintech. They pushed back on non-banks’ potential to operate across the U.S. without needing to comply with state-by-state laws, which included caps on loan interest rates.

″The decision stops OCC’s attempt to usurp state authority by establishing a federal fintech regulatory framework at the expense of consumers,” New York’s superintendent of financial services, Linda A. Lacewell, said about the court ruling. “This decision makes the financial well-being of consumers from New York and around the country a priority."