The OCC's Unimaginative Approach to Innovation

The Office of the Comptroller of the Currency is refashioning itself to be innovation friendly. It started appropriately by admitting that it had a problem: “a low risk tolerance for innovative products and services.” It then set out to remedy the problem by, among other things, setting up an innovation office and proposing a special purpose national bank charter for fintech firms. That’s all well and good, but the proof of the pudding is in the eating. Based on the terms that the OCC laid out in its recent draft document on “evaluating charter applications from financial technology companies,” there is not going to be much pudding eating.

The fintech chartering initiative includes flashes of hope. For example, the OCC recognizes that safety-and-soundness in the fintech context may look different than it does in the traditional banking context. The OCC also seems to appreciate that fintech firms may advance financial inclusion in new ways. The proposal also recognizes that the charter is not the right avenue for every fintech firm. But the OCC’s proposed approach is fraught with problems.

The OCC’s approach to the charter reflects a counterproductive fixation with the fintech firms’ success and survival. One of the markers of an innovation culture is an acceptance of failure, which can help to form the basis for future success. The OCC insists that charters will only be granted to firms able to show “a reasonable likelihood of long-term success.” Aren’t the consumers and small businesses that use a firm’s products and services and a firm’s funders in the best position to assess whether a firm will succeed? Why does the OCC need to weigh in on a company’s prospects for success? The government should not be in the business of prognosticating commercial success.

The OCC’s preoccupation with ensuring that the fintech firms it charters survive manifests itself in needlessly burdensome requirements, including having to get the OCC to sign off on a business plan. Any “significant deviations” from that plan—such as introducing new products and services or new funding sources—will require obtaining an OCC “non-objection.” Depending on how hard these OCC permission slips are to obtain, fintech firms—which often rely on being nimble—might lose the flexibility that they need to adapt rapidly to customer demands. This ironically will make the firms more likely to fail because they cannot react without regulatory permission. Bureaucratic hurdles that bind fintech firms to their original business plan will hinder innovation, not foster it.

Whatever the merits of the OCC’s methods with depository institutions, they are unnecessary here. All the OCC needs to worry about is that the company can wind down its operations in an orderly fashion that protects consumers. The proposal does include a requirement to formulate such exit strategies, which is reasonable. But it also includes capital requirements designed to keep the firm in business and mandatory “recovery planning ... to remain viable under stress.” Such requirements are not needed for customer protection and may dissuade firms from pursuing a charter and deprive consumers of their services.

Innovators need not apply if they don’t meet OCC requirements. For example, the OCC will not accept charter applications from firms unless some of their directors and managers “have experience in regulated financial services.” Innovation often comes from people who not only think outside the box, but are from outside the box, meaning they may not have their roots in the regulated financial industry. Insisting that they do seems counterproductive.

The OCC proposes requiring fintech firms lending to consumers and small businesses to enter into formal financial inclusion plans. Rather than embracing the new options that fintech offers businesses and consumers who have traditionally lacked access to financial products and services, the OCC proposes to require fintech firms to prove their commitment to inclusiveness by checking the OCC’s arbitrary boxes. Proof could include, for example, “participation in governmentally insured, guaranteed, or subsidized loan programs.” Getting fintech firms hooked on subsidized lending hardly seems pro-innovation. Or firms could make “investments in certain funds or organizations.” These “voluntary” contributions to organizations of the OCC’s choosing look like a toll that fintech firms have to pay simply to open their doors.

Firms must include in their financial inclusion plans the “terms and conditions under which [they] will provide lending or financial products and services to consumers or small businesses.” Not only does committing to particular terms inhibit the firms’ flexibility, but the OCC could use this as a backdoor way of imposing rate caps or other terms not contemplated by the law.

More generally, the proposed approach remains too vague. In response to concerns about lack of transparency, the OCC offered that “applicants would have an opportunity to ask questions about the process, including the conditions for approval, through multiple prefiling meetings with OCC Licensing and supervisory staff.” It is precisely this make-it-up-as-we-go approach that has people worried. An interactive process is good, but when the published standards are constructed around unbounded OCC discretion to impose requirements of varying stringency, private negotiations do not contribute to transparency.

The OCC is right to be thinking about innovation. The approach the OCC proposes to take for fintech firms is not conducive to innovation. It embodies a regulatory approach that is fixated on keeping banks alive, not on keeping barriers to entry low and allowing failing firms to go. This proposal needs a version 2.0.