You’re Invited – Join the Atlanta Chapter of the BayPay Forum on February 19 for a 2019 Fintech Legal and Regulatory Panel Discussion

On Tuesday, February 19, from 6-8:30 pm, the Atlanta chapter of the BayPay Forum will meet at Bryan Cave Leighton Paisner’s offices in Midtown Atlanta for a networking reception and panel discussion on the state of fintech regulation.

Start 2019 on solid footing with an engaging panel discussion reflecting on regulatory responses to faster payments, open banking/APIs, blockchain applications and ICOs, and other innovations.  Panelists will include Dick Fraher, Vice President and Counsel to the Retail Payments Office at Federal Reserve Bank of Atlanta; C. Ryan Germany, General Counsel and Assistant Commissioner of Securities & Charities, Office of Georgia Secretary of State Brad Raffensperger; Ben Robey, BSA/AML Compliance Specialist at MSB Compliance, Inc.; and Ken Achenbach, Partner at Bryan Cave Leighton Paisner.  The panel will be moderated by Barry Hester, Counsel at Bryan Cave Leighton Paisner.  Details and free registration are available here using the passcode BRYANCAVE. 

Participants will take away product and service design implications and a better understanding of the consumer protection, safety and soundness, jurisdictional, other policy issues at play.  Discussion will address, among other issues:

On July 31, 2018, the OCC announced that it had finalized parameters for its new limited-purpose financial technology national bank charter and is ready to begin taking applications.  This release follows several years of formal deliberation on the topic and coincided with the release of a 222-page U.S. Treasury report on innovation.  Industry reactions have been wide-ranging – will this level the playing field or usher in a FinTech “apocalypse“?

Highlights of the OCC notice include:

• Designation of the charter type as a national bank.  Like its other special-purpose charters, including the non-depository trust company or the credit card bank, the FinTech charter will be a “national association” in the National Bank Act sense of the term.  As the saying goes, membership will have its privileges (and burdens):  capital requirements, examinations, and federal preemption of certain state laws.
• Eligibility for qualified applicants that plan to conduct activities “within the business of banking.”  Pursuant to existing OCC regulations, a limited-purpose national bank not engaging in fiduciary activities “must conduct at least one of the following three core banking functions:  receiving deposits; paying checks; or lending money.”  In its FinTech charter announcement, the OCC notes that it “views the National Bank Act as sufficiently adaptable to permit national banks to engage in traditional activities like paying checks and lending money in new ways.  For example, facilitating payments electronically may be considered the modern equivalent of paying checks.”
• A requirement for a commitment to “financial inclusion.”  We will see how this element is administered.  In theory it provides a non-depository parallel to the Community Reinvestment Act (“CRA”).
• Publication and comment period.  Just as for other types of national banks, applications will feature newspaper publication requirements and will be generally subject to public review and comment.

The OCC stated that its decision to open the door for this new form of national bank “is consistent with bi-partisan government efforts at federal and state levels to promote economic opportunity and support innovation that can improve financial services to consumers, businesses, and communities.”  Comptroller Otting added:

Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition.  It also provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.

Treasury’s report is consistent with these themes, noting, “A forward-looking approach to federal charters could be effective in reducing regulatory fragmentation and growing markets by supporting beneficial business models” and that the OCC should proceed with “thoughtful consideration” of FinTech charter applications.  Treasury also calls out specifically the need for updating regulations that relate to data aggregation, for addressing those which have become “outdated” in light of technological advances (e.g., in the mortgage lending and servicing space, according to Treasury), and for a regulatory approach that enables “responsible experimentation” in the financial sector.

Podcast: Play in new window | Download

Our unannounced and unplanned summer hiatus is over, and Jonathan and I are back in the studio to provide the latest episode of The Bank Account.  Between travel for various banking conferences, a full work plate, and a few summer vacations, we stepped away from the podcasting studios for a few months (or three months exactly), but now we’re bank and re-energized!

Joining us in the studio is Terry Ammons.  Terry is a partner with Porter Keadle Moore LLC and the host of GroundBanking, PKM’s podcast on innovation in the financial industry.  If you’ve enjoyed The Bank Account, I suggest you also give GroundBanking a listen; I know I’ve enjoyed the first several episodes.

Before turning to the intersection of banking and fintech, we spend a little time on another industry focus for PKM that personally interests Jonathan and me, craft beverages.   We also each select our “rest of life” beer:  Terry selected Automatic by Creature Comforts Brewing Company, Jonathan selected a Sierra Nevada Pale Ale, and I went with a 420 Extra Pale Ale by Sweetwater Brewery.

Terry, Jonathan and I then turned to looking at some of the interesting interactions we’ve each seen between depository institutions and fintech companies.  We looked at the strengths of each and how partnerships can help each thrive in the 21st century.  We also examined some of the diligence items that are necessary in any such partnership.

We hope you enjoy this episode of The Bank Account.  This is the fourth and final podcast episode we recorded in Phoenix.  As you can see (and hear), we stepped outside on the grounds of the beautiful Arizona Biltmore hotel and enjoyed beautiful February weather.  Unfortunately, while the surrounding area seemed completely quiet before we started recording, once we hit record, every moving van, dump truck and other sound-making person, plant, animal and equipment seemed to invade our lovely spot.  But we think the quality of the conversation with Jay (and the lovely weather and environment) more than makes up for any audio issues.  We hope you enjoy the conversation with Jay as much as we did. 

On April 20, 2017, the American Banker reported that U.S. Bank’s new high-end credit card features an interesting differentiator from the high-end cards recently introduced by other large credit card issuers.  U.S. Bank’s new high-end credit card significantly incents mobile usage over conventional swipe or chip dip for purchases.  While the other card offerings typically provide triple miles for travel and entertainment purchases, the U.S. Bank “Altitude Reserve Visa Infinite” card puts its money on getting cardholders to enroll their cards in mobile wallets – Apple Pay, Android Pay, Samsung Pay and Microsoft Wallet.

For a generation of customers who want to do everything, or as much as possible, on their phones, millennials have not adopted mobile payments as quickly as expected. Personally, I constantly encourage everyone to enroll their cards in the mobile wallet on their phone ASAP and use it that way at every opportunity.

I do that for two reasons –  1) it is much more secure than swiping your stripe or dipping your chip and 2) it is much faster than inserting your chip card at the terminal to complete the transaction.

Plus, it looks really cool to wave your phone at the terminal and “boing” you’re done. I smugly watch the people in line behind me watching this transaction with interest.

The transaction is more secure because the phone wallets keep card credentials in a secure element on the phone, which is highly resistant to hacking, and more importantly, does not transmit real card credentials to the merchant. Instead, the merchant only receives a one-time use tokenized version of your card credentials. This means that if the merchant’s database is hacked, the tokenized version of your card credentials that are exposed are just useless gibberish.

This saves the card issuer from eating losses under Reg Z for unauthorized transactions and crediting your account for charges the hacker racked up on a spending spree for fenceable goods. Actually, most of those unauthorized charges flow back to the merchant who was hacked, but the issuers whose cards are exposed typically do not recover their full costs.

Amid criticism from virtually every possible constituency, on March 15, 2017, the Office of the Comptroller of the Currency (OCC) released a draft supplement  to its chartering licensing manual related to special purpose national banks leveraging financial technology, or fintech banks. As we indicated in our fintech webinar discussing the proposal last December, the OCC is proposing to apply many conventional requirements for new banks to the fintech charter. While the OCC’s approach is familiar to those of us well versed on the formation of new banks, there are a few interesting items of note to take away from the draft supplement.

• More bank than technology firm. Potential applicants for a fintech charter should approach the project with the mindset that they are applying to become a bank using technology as a delivery channel, as opposed to becoming a technology company with banking powers. While the difference might seem like semantics, the outcome should lead potential applicants to have a risk management focus and to include directors, executives, and advisors who have experience in banking and other highly regulated industries. In order to best position a proposal for approval, both the application and the leadership team will need to speak the OCC’s language.
• Threading the needle will not be easy. Either explicitly or implicitly in the draft supplement, the OCC requires that applicants for fintech bank charters have a satisfactory financial inclusion plan, avoid products that have “predatory, unfair, or deceptive features,” have adequate profitability, and, of course, be safe and sound. Each bank in the country strives to meet those goals, yet many of them find themselves under pressure from various constituencies to improve their performance in one or more of those areas. For potential fintech banks, can you fulfill a mission of financial inclusion while offering risk-based pricing that is consistent with safety and soundness principles without having consumer groups deem your practices as unfair? On the other hand, can you offer financial inclusion in a manner that consumer groups appreciate while achieving appropriate profitability and risk management? We think the answer to both questions can be yes, but a careful approach will be required to convince the OCC that it should be comfortable accepting the proposed bank’s approach.

Podcast: Play in new window | Download

Jonathan and I were joined by Ken Achenbach for Episode 6 of The Bank Account in which we discuss the OCC’s newly announced special purpose charter for FinTech companies.

Among the topics covered in this discussion are how we view the OCC’s announcement, how existing banks may want to look at the announcement, and the largest challenge that we think may emerge for FinTech companies entering the banking space.

Unfortunately, the highlight of this episode… me completely cracking up during Jonathan’s introduction… will have to wait until a later blooper reel.  It was early enough in the recording that we decided to start over.

Please click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

You can also follow-us on Twitter for updates between podcast episodes @RobertKlingler and @hightowerbanks.

The fintech industry has justifiably greeted the OCC’s announcement of a national fintech charter with optimism. But one area where we have seen significant confusion is the possibility of the fintech charter being granted without deposit insurance, and the implications thereof.

Background.  On December 2, 2016, OCC Comptroller Thomas Curry announced that the OCC is planning to take applications from fintech companies wishing to obtain a special purpose national bank charter.  These banks would be national banks with the same privileges and obligations as traditional full-service national banks, but with specialized business plans and that may or may not choose to have deposit taking authority.

In his remarks, Comptroller Curry expressed his excitement about the great potential to expand financial inclusion and reach unbanked and underserved populations.  At the same time, clearly recognizing that there are some industry players that are worried about new sources of competition from fintech banks, or that these new banks might otherwise have unfair advantages, Curry took great pains to seek to alleviate those concerns in his remarks and in the OCC’s white paper on the proposal.

Curry acknowledged that it will be difficult for the agency to determine the requirements to charter a fintech bank because of the “diversity of approach” among fintech companies. He noted that, for example, a payments model would be different than a marketplace lending one. However, he said that the OCC is a “firm believer in tailored innovation” and has the existing framework to evaluate these issues in the chartering process.  Consistent with existing OCC regulation, the white paper states that a special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: receiving deposits, paying checks, or lending money.

On November 29, 2016, the FDIC, as part of its Community Banking Initiative, held an outreach meeting in Atlanta.  While the FDIC has indicated that it will publish a handbook regarding applications for deposit insurance in the coming weeks (which we’ll also summarize), we thought it made sense to provide a few highlights from that meeting:

Mechanics.  The mechanics of the chartering process are the same as before.

Business Plans.  As expected, there will be greater scrutiny on business plans, making sure that banks stick to their business plans post-opening, and (not expressly stated but as translated by me) ensuring that the results of the bank’s business plan do not deviate greatly from the original projections (i.e., providing for limited ability to take advantage of natural growth in the new bank’s markets or lines of business during the first three years of operations if not reflected in projections).  Approvals to deviate from one’s business plan will not be granted under most circumstances.

Atlanta Partner Jonathan Hightower authored a BankThink piece in the American Banker on May 9, 2016 titled “Don’t Ignore This FDIC ‘Request for Comment.’”  The discusses FDIC Financial Institution Letter FIL-32-2016,  which asks for comment on the agency’s plan to explore the economic inclusion potential of mobile financial services.

Jonathan notes “banks’ focus on mobile products not only provides innovative benefits to underserved consumers who may lack branch access, but in light of regulators’ interest in the potential for mobile technology to expand economic inclusion, this focus may also help institutions overcome regulatory and community-based challenges to mergers.”

Click here to read the whole article.