The Big Idea: The OCC’s Fintech Moment
Throughout the year, we’ll be offering a deeper look at some of the biggest trends we see shaping fintech now and in the coming decade. This week, we’re taking a look at Brian Brooks’s tenure as Acting Comptroller of the OCC and how the nation’s primary bank regulator has taken a more active stance on fintech oversight. As always, if you have any ideas for us, or there’s anything you’d like to know more about, drop us a note at fintechupdate@gmail.com.
Regulation and regulators are less heralded than the fundings, acquisitions, and new products that usually mark fintech news, but often more impactful in the long-term. This year, after years of stalled efforts to increase its touchpoints with the world of innovative financial services, the Office of the Comptroller of the Currency (the “OCC”) broke through in a big way. The big reason? The May appointment of Brian Brooks, formerly the Chief Legal Officer of Coinbase, as the OCC’s Acting Comptroller. Since then, Brooks has used a powerful toolkit to shake things up at the 157-year-old regulator, driving several fintech-focused initiatives that could define the regulator’s roadmap for years to come. That’s why, this week, we’re looking at what Brooks’ tenure may mean for fintech, and we’re asking ourselves “What’s the Big Idea with the OCC’s fintech moment?”
So what’s this all about?
The OCC is the United States’ national bank regulator, responsible for granting national bank charters and supervising the 1,200 nationally chartered banks active in the country (collectively responsible for ~70% of U.S. banking activity). The agency was founded during the U.S. Civil War, based on President Abraham Lincoln’s insight that a national banking system would be bigger, more trusted, more stable, and more competitive than a purely state-led one.
Over the past 160 years, the OCC has evolved its methods and oversight to meet the needs of the evolving banking marketplace; but the fintech wave of the past 10 years has stretched America’s patchwork approach to regulation. New products and tech-focused approaches to financial services have found holes in the fabric. For example, Who should regulate fintech payments providers that move billions of dollars per year but don’t take deposits? Who should be responsible for overseeing cryptocurrency custodial services? If banks can have a license to operate nationally, why should fintech firms be limited to state supervision? As recently appointed Acting Comptroller Brian Brooks recently noted, “[The OCC] can supervise the payments activities of JPMorgan, but [not] the payments activity of Square . . . That seems really weird to me.”
Speaking of Brooks, his appointment to the nation’s top bank regulatory job represents the strongest signal yet that the agency will be more active in the fintech arena. The OCC took a highly visible first step on this path in December 2016, when then-Comptroller Thomas Curry announced the agency would accept applications for special-purpose national bank charters from fintech firms (the so-called “fintech charter”). However, after years of legal challenges from state regulators, the initiative failed to take off. Enter Brooks. Like many of his predecessors, Brooks has a banking and legal background, having held senior positions at banks and law firms, but he differs starkly in his fintech experience, having joined the OCC after years heading the legal department at crypto exchange firm Coinbase. And, in a relatively short amount of time, Brooks has already made his mark by announcing fintech-focused initiatives like a national payments charter and approval for national banks to offer crypto custody services.
Why should I care?
Any time you can make a 160-year-old regulatory institution seem like it’s moving fast, it’s probably worth paying attention, and Brooks’ OCC has looked positively cheetah-like since he took over in May. Brooks’ support for fintech is explicit: He likens banks to “the department stores of 25 years ago” that, as a result of offering customers a multitude of products in a “one stop shop” platform, may be susceptible to smaller shops that offer specialized products or a better customer experience. Continuing the analogy, Brooks believes that the present consumer shift to monoline fintech firms from traditional banks echoes a similar consumer shift away from big-box retailers that offered everything but not particularly well. As Acting Comptroller, he also is trying to solve banks’ relatively slow adoption of tech solutions by improving regulatory clarity, soliciting the industry’s feedback, and encouraging digital banking initiatives while maintaining the safety and soundness of the banking system.
Indeed, Brooks’s early tenure at the OCC followed and has accelerated a flurry of fintech-related activity at the agency, largely across two buckets – bank charters and policy initiatives.
Bank charters: Drawn to the benefits provided by being a bank, including reduced cost of capital in the form of deposits, firms have continued to look for ways to get charters via application and acquisition:
In July, Varo Money became the first fintech to obtain a national bank charter, following a herculean, three-year effort that we covered in February.
Last week, Jiko, a small startup that holds consumers' money in T-bills rather than deposits, became the first fintech to complete the acquisition of a nationally regulated bank.
Lending Club’s February acquisition of Radius Bank is pending regulatory approval, but is expected to close before the end of the year.
Well-known firms like SoFi and Monzo have reportedly applied for charters, which will be reviewed and actioned by the OCC in the coming months.
Policy initiatives: With a goal of improving regulatory clarity, the OCC has worked to create new policy efforts and solicit industry views on its regulation of digital activities, including by:
Releasing an Advanced Notice of Proposed Rulemaking (ANPR) in June, seeking comment on how it should account for evolving technology developments in finance;
Proposing (but not yet formally announcing) a “Payments Charter” that, in its initial incarnation, would preempt state money transmitter licenses and enable companies offering cross-border payments to operate on a national basis; and
Confirming in July that national banks may provide custody services for crypto assets, reducing the perceived compliance and reputational risk that banks may have felt regarding those assets.
What to look out for?
Under the leadership of Acting Comptroller Brooks, the OCC has taken several bold steps in recent months to clarify and expand on its relations positions regarding tech-driven innovations in banking, and we don’t expect that pace to slow in the next two months. A change in White House occupancy in January likely would result in a corresponding change in the Comptroller’s office, and we’re betting Brooks will want to do all he can to solidify his efforts before then, regardless of what happens in the November election. We’re expecting another productive quarter at the OCC, potentially including:
A formal announcement about Brooks’ proposed Payments Charter (...followed by legal challenges if it happens);
New initiatives informed by its ‘evolving technologies’ ANPR, e.g., AI-facilitated credit underwriting; or
Updated vendor management rules designed to improve bank innovation.
Finally, keep an eye out for more charter applications or proposed bank acquisitions, as the market for bank charters among mature or ambitious fintech players heats up. Brooks has stated that he believes in “the value and attractiveness of banks and . . . the federal banking system” for fintech firms, and we believe the remainder of 2020 will continue offering evidence for that conclusion.