Financial technology companies, or FinTechs, have experienced a meteoric rise over the last five years. During that period, the amount of investment funneled into FinTechs has risen from $1.5 billion to about $24 billion. They received another shot in the arm several months ago when the Comptroller of the Currency (OCC) announced plans for a new type of license that will allow FinTech companies to provide services nationally under a Special Purpose National Bank Charter, and thereby avoid the arduous process of individual state licensing. To be eligible for this coveted charter, the FinTech Company will have to be engaged in at least one of the following banking functions: receiving deposits, paying checks or lending money.
At the moment, the FinTech occupy only a small part of the overall banking market in the U.S., particularly in the commercial or wholesale markets. However, we have already seen how technology is directly reshaping or disrupting economic sectors including retail, ride sharing (taxi services) and vacation rentals/ travel among them. There is little doubt the FinTechs will have a significant influence on banking services in the future. We may not know yet exactly how, or how fast, but it appears changes are coming.
At Strategy Law, we spend much of our “working day” addressing banking issues, structuring debt transactions, and negotiation and drafting all manner of loan documents. While it is far from clear how FinTech companies will affect the wholesale banking sector in the future, most of the action thus far being on the consumer side of things, one must anticipate that inroads will be made.
One development at the government level, which may have a profound effect, is the new Special Purpose National Bank Charter, which could be a boon for FinTech companies as they will not be required to obtain a license in every state in which they wish to operate, and where regulatory and compliance costs could otherwise amount to between $2 and $5 million a year per company, based on some estimates. Companies can instead operate nationally under a Special Purpose National Bank Charter. However, FinTech companies are not getting off without regulation. Like their more traditional counterparts, they will still be required to, among other things, address financial inclusion as part of a three-year business plan (a standard regulatory requirement), develop a formal plan for failure and have a hands-on board of directors.
It also is likely new battles will be fought in the political realm concerning the activities of the FinTechs, with or without the Special Purpose National Bank Charters. Traditional banks generally don’t espouse an encouraging view on FinTech companies. Camden R. Fine, Chief Executive of the Independent Community Bankers, said, “A FinTech charter poses risks to taxpayers and the financial system by endowing these nonbank companies with a federal bank charter.” Another nebulous cloud lingering over FinTech companies is the status of the deposit insurance offered by the Federal Deposit Insurance Corporation. A further concern expressed by banks and consumer advocates is the possibility that a national charter for FinTech companies could allow new online lenders to evade state caps on interest rates and other local rules designed to cut down on predatory lending. All such topics are certain to be debated going forward.
Time will determine whether FinTech companies actually develop into the powerhouses their proponents claim as their destiny. Regardless of their future, they have already begun affecting the consumer finance industry as they have, according to many experts, changed the expectations consumers have of financial institutions. The online and app-centric models of FinTechs, sometimes offer customers real convenience in conducting banking activities. Importantly, however, they also create and actively market the image that they are friendlier and more convenient. Banks are investing heavily to compete in these areas as well. This begs the obvious question of whether the traditional banks will be at the forefront of utilizing the best techniques the FinTechs offer, incorporating those innovations into their own business practices. For individuals involved in the wholesale areas of debt financing, a related question is whether or how the application of FinTech led technologies will be incorporated into the wholesale sector.
Several years from now when we look back at the effect the current FinTech period has had on the banking sector, the ability of FinTech companies to alter customer attitudes about financial services may be the point that is most remembered.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions related to this article should be addressed directly to Strategy Law, LLP.