The regulatory path forward for FinTechs seeking to offer banking services on a national scale may have gotten a bit clearer, but it hardly seems shorter.
We may see a pivot where financial services firms undertake the long journey toward regulatory approval — getting federal deposit insurance in place — opting to clear those hurdles rather than risk a legal skirmish with (or even between) regulators.
In the meantime, that pivot may do much to keep regulators from jousting with one another over who has authority over certain FinTech-related services and applications.
To that end, a group of U.S. banking regulators withdrew their lawsuit that sought to block the federal government from granting bank charters to FinTech companies.
Read more: US State Banking Regulators Drop Lawsuit Over FinTech Charters
As to the details, the Conference of State Bank Supervisors (CSBS), the national trade group of bank regulators, announced Thursday (Jan. 13) that it had dropped the complaint in federal court challenging the Office of the Comptroller of the Currency’s (OCC) nonbank charter program. That would be the jousting among regulators, we contend, and at specific issue was Figure Technologies’ application for an OCC nonbank charter.
Figure amended its bank application charter to state that it would apply for FDIC deposit insurance. At a high level, that insurance protects a financial services firm from losing its insured deposits if the entity fails.
Insurance is a basic tenet of banking, stretching back to the Great Depression and the FDIC’s creation in the early 1930s. Under national banking laws here in the states, entities operating as national banks must obtain insurance.
FDIC Insurance in Focus
Figure’s own initial application had not sought that deposit insurance from the FDIC. And Figure, when it filed for a national bank charter from the OCC, said that “A national bank charter would allow Figure to offer a cohesive set of products and services nationwide, focus its compliance efforts on the requirements of a single regulator, reduce its legal and regulatory costs and risks, and offer its customers and business partners the security of dealing with a federally regulated and supervised national bank.”
Back in 2020, the CSBS sued the OCC, opposing the OCC’s creation of a new national bank charter for nonbank companies.
The CSBS said at the time of the filing that the OCC was expanding its authority beyond legal limits, and said in its complaint that “For many decades, and long before the OCC’s interest in nonbank FinTech companies like Figure manifested itself in the Nonbank Charter Program, nonbanks have unquestionably been subject to state regulatory authority and state law — including but not limited to licensing, examination and reporting requirements, usury laws, and a variety of other consumer protections.”
The December 2020 suit also alleged that the nonbank charter has always been a new type of special purpose charter “improperly created … without requiring that the charter recipient engage in deposit-taking or that it obtain deposit insurance from the Federal Deposit Insurance Corporation.”
The OCC, for its part, has stated that a national bank need not necessarily have deposit insurance in place to operate as a national bank.
Now, with the January withdrawal of the suit levied by the CSBS against the OCC, at least some of the debate between regulators over the relatively nascent FinTech space may go (perhaps uneasily) quiet. Unless and until another firm looks to get a charter in place from a company that does not seek to be FDIC insured.
For the FinTechs themselves, the withdrawal of the suit sets up a bit of a double-edged sword. The FDIC-insurance point of contention, and the ultimate governing authority tied to national bank charters, still may arise as issues at some point in the future. In the meantime, companies like Figure Technologies and its FinTech peers will opt to obtain deposit insurance or perhaps not look to gain a charter at all, eyeing the regulatory hurdles (and the specter of more litigation down the road).
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More