More Clarity on Fintech Regulation Should Lead to More Innovation

The U.S. Office of the Comptroller of the Currency announced earlier this month that it would begin accepting applications for national bank charters from fintech companies, a move that will likely streamline the regulatory process for pioneers in the banking space.

The long-awaited decision by the OCC has been met with some applause, some criticism and many unknowns.

But regardless of whether you think the OCC overreached or whether the decision is prudent, it should certainly lead to more fintech startups and more innovation in this space, especially in the Boston area.

On the heels of the announcement, David Jegen, a partner at the Cambridge-based venture firm F-Prime Capital, said he sees the move as having the possibility of introducing a great new path for startups.

“The greatest benefit of the OCC fintech charter could be on a startup’s operational flexibility,” he said. “Fintech startups that partner with banks need them to approve numerous aspects of their business including changes to marketing materials and product features. It’s a real impediment to a ‘test and learn’ culture. With their own bank charter, startups would have an in-house compliance team that understands their business and products, and could be significantly faster in approving changes and ultimately bringing products to market.”

Boston already has some major fintech companies, including Circle, LibertyX and Envestnet. Many community institutions, notably Eastern Bank and Digital Federal Credit Union, are already investing heavily in fintech as well. Furthermore, the city is flush with capital. TechCrunch recently reported that venture investment in Boston had already hit $5.2 billion in 2018, putting us past New York City and second only to Silicon Valley.

However, up until this year – or this month, depending on your point of view – the regulatory framework had made it extraordinarily difficult to prepare for the future.

Ben Malka, another partner in F-Prime Capital’s fintech group, previously said before the OCC charter announcement that fintechs needed to contemplate regulation even before proving that their concept worked.

That’s because until recently, fintech companies had to get licenses in 50 different states with 50 different cost structures, obviously a very timely process.

This did start to change earlier this year when several states, including Massachusetts, signed a compact led by the Conference of State Bank Supervisors.

The compact made it so if one state regulator reviewed and approved key elements of state licensing including IT, cybersecurity, the business plan, background check and compliance with the federal Bank Secrecy Act, then other participating states would agree to accept that work as their own. 

“It’s a great thing, because it’s an attempt to remove some bureaucracy,” Fran Duggan, CEO of the Connecticut-based fintech firm Payrailz, said at the time.

The announcement of the OCC charter has drawn harsh criticism from the CSBS, who sued the OCC for proposing a fintech charter earlier this year.

“An OCC fintech charter is a regulatory train wreck in the making,” John W. Ryan, president and CEO of the Conference of State Bank Supervisors, said in a statement. “Such a move exceeds the current authority granted by Congress to the OCC. Fintech charter decisions would place the federal government in the business of picking winners and losers in the marketplace. And taxpayers would be exposed to a new risk: failed fintechs.”

To be sure, not everything in the OCC’s plan should be glossed over, particularly the way in which Community Reinvestment Act efforts are evaluated by the OCC. But more clarity on fintech regulation will be of great encouragement to aspiring fintech entrepreneurs.

Malka said he would prefer multiple regulators because he believes that nurturing innovation requires balance – leaving all the power to one entity would not be what is best for startups, he said.