“What we’re trying to do is to create a bank charter that is flexible enough not only to cover the legacy structure of large banks, but also to anticipate changing consumer preferences in a world of unbundling.” That’s how Acting Comptroller of the Currency Brian Brooks, who succeeded Joseph Otting as the head of the OCC on May 29, 2020, describes a current project at the OCC: developing the “version 1.0” of a special payments charter to be introduced as early as this fall.
Brooks has hands-on experience of the fintech industry; his most recent position, prior to the OCC’s top spot, was as Chief Legal Officer of Coinbase, an $8 billion Silicon Valley startup that is one of the largest digital currency platforms in the world with over 30 million users.
Why create a new charter? To adapt the financial services industry to changing consumer behaviors. Brooks’ stance is that consumers no longer want to receive all financial products and services from the same company (their bank). “There is an unbundling happening in certain segments,” he declared on a recent ABA Banking Journal podcast episode. For example, payments once ran only through banks. That’s why, according to Brooks, “segments of what used to be done only by banks are now also being done in other areas, including payments and lending.”
The basis for the new payments charter is to offer federal preemption and OCC supervision to a broader definition of “bank”—but a definition the OCC has used for a long time. “For decades, the OCC has said a bank is anything substantially engaged in any of three areas: depositing, lending, or payments,” Brooks said. “You don’t have to do all of them.”
It doesn’t make sense to separately license global payments businesses on a state-by-state basis, Brooks argues. “The purpose of the OCC in the first place is to provide a single national platform to knit together the national economy through financial services,” Brooks said. “The bank charter has to evolve to fulfill that original mandate.”
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A national version of the familiar state money transmission license. Access to the Federal Reserve payments system will be a 2.0 feature. So, for the first 18 months of the Payments Charter, as Brooks envisions it, any entity obtaining that charter will still need a traditional bank partner in order to operate. However, the charter would offer a national platform with preemption, which could make it a very attractive option, compared to the current state-by-state licensure situation.
One argument against launching a special payments charter is that it would bring unfair competition to the marketplace and threaten traditional banks. Brooks doesn’t agree. “I think the traditional [banking] model is always going to have value because deposits are a cheap source of funding and we have a federal regime that includes deposit insurance,” Brooks explained. “I don’t buy the argument that granting a special-purpose charter is somehow an existential threat to the incumbent banks.”
Another argument relates to financial inclusion. Since the Community Reinvestment Act (CRA) uses deposits as its basis, any payments fintech that does not accept deposits wouldn’t be subject to it. “What we have to do is be creative about the way that we measure the benefit created by our charter, and what is the rational, intelligent, but not overly burdensome concomitant benefit we’d expect them to plow back into their communities,” Brooks said. “Rest assured, these charters will have some kind of financial inclusion expectation.”
Seitz is WBA operations manager and senior writer.