“We’ve satisfied ourselves that we don’t need a new regulation or a new statute on it,” Brooks said.
A charter would give these companies the ability to operate across state borders with a single set of rules, as well as to expand the suite of financial services they offer.
Though the Office of the Comptroller of the Currency’s action is welcome for those that could apply, it’s giving heartburn to banks and credit unions, which joined together to urge the agency to “proceed carefully, deliberately, and transparently.”
The push to broaden who receives bank charters touches on hot-button debates such as whether non-depository institutions should have direct access to the U.S. payments rails — giving them the ability to transfer money without going through a bank — and what the proper separation is between banking and other types of commerce.
And another major question follows from those: Could this give tech giants like Google and Amazon the ability to bypass banks altogether if they sought a charter?
“If you take the position that you don’t have to be a deposit taker, it’s difficult to understand what the limiting principle would be, whereby not only a PayPal could be a national bank but any company in America could be a national bank,” said Greg Baer, president and CEO of the Bank Policy Institute, which represents big banks.
Brooks — who might not hold his position long, depending on the outcome of the U.S. presidential election — didn’t disagree with that possibility but said big conglomerates have not expressed interest in a charter. (PayPal, which serves more than 300 million consumers and businesses, has also not publicly indicated that it’s interested.)
“But if Amazon were to show up, or if Google were to show up and say, ‘Gee, we want this company to be a bank,’ I mean, we would look at it on the merits,” he said.
Financial Innovation Now — a group that represents Amazon, Apple, Google, Intuit, PayPal, Square and Stripe — praised Brooks’ “leadership and vision,” in a statement.
“The United States needs a more flexible and modern regulatory system that fosters more new entrants, competition, and a wider array of choices for consumers and small businesses,” Executive Director Brian Peters said. “FIN members’ payments products are already heavily regulated by the states, and we may not necessarily seek to obtain an OCC charter.”
Brooks said offering the charter to these firms has the potential to transform the way others view what it means to offer banking services. Institutions that don’t take deposits are not covered by the Bank Holding Company Act, he said, so the parent company wouldn’t face the type of restrictions that normally prevent banks from also owning non-financial companies.
“If we stop thinking about banks as entities, and we start thinking about banking as a service, you can imagine that companies are going to stop thinking about whether they want to be a bank and start talking about instead if they want to have a bank,” he said.
“I’m increasingly thinking of this agency as an activities regulator, not an entity regulator,” Brooks said.
Still, there is considerable uncertainty as to what exactly a “payments bank” would get out of the deal. Bypassing multiple different licensing processes in various states would certainly cut costs. But it’s unclear whether the Federal Reserve would allow them the bigger prize of an account at the central bank, which would allow them to settle their own transactions.
The multistate licensing system is “a barrier to entry, so we support a charter for those reasons,” said Nick Catino, head of policy at TransferWise, a multicurrency payments transfer firm that hasn’t said whether it would pursue a charter.
“But where there’s subsequent access to Fed services, like the payments systems, that’s where consumers really benefit,” he added, noting that the Bank of England has given his company a settlement account. “Think of banks as an expensive middleman. Customers eat those costs.”
The Fed hasn’t yet expressed openness to expanding the types of institutions that are directly plugged into the payments system, which is heavily regulated to prevent fraud and ensure accurate transfers of money. That — along with the pending litigation with the states — suggests this is a matter that could drag out for years.
The Fed declined to comment for this story.
Brooks guessed “it would take one to two years of [the Fed] watching these companies operate before they got comfortable, which is appropriate.”
More broadly, he said his agency should regulate activities that fall within the definition of banking — taking deposits, making loans or facilitating payments.
“If you went back 10 years, the OCC regulated about 100 percent of payments,” he said. “And then because of a bunch of technology innovations, some of that work that used to be done in banks started leaking outside the system.”
“I can supervise the payments activities of JPMorgan, but I can’t supervise the payments activity of Square,” he added. “That seems really weird to me.”
There’s another wrinkle in Brooks’ plans: A federal judge ruled last October that the OCC cannot issue bank charters to institutions that don’t take deposits, a win for the New York Department of Financial Services, which argued that the national agency can’t charter such institutions without action from Congress. The OCC is appealing that decision.
Brooks said the ruling doesn’t apply nationally.
“We certainly are not going to violate his order in the Southern District of New York,” he said. “But with all due respect, if a company in California, which is not subject to the Southern District of New York’s jurisdiction, wants to do this, and they have a business plan that does not operate in the Southern District of New York, we’re going to look at that in our capacity as the regulator of national banks.”
Margaret Liu, deputy general counsel at the Conference of State Bank Supervisors, said the states believe that the OCC is stepping outside its authority by trying to charter non-depository institutions.
She pointed to efforts by state regulators to harmonize their licensing processes and argued that a license is a better fit for many innovative companies.
“When you confer a charter on an entity, that’s kind of a validation of their business model. It is saying, ‘I think you’re going to succeed,’” she said. “A state license is not a value judgment on a business model. A state license is a determination that you have met a set of objective criteria. You might succeed, you might not.”
But Miller Whitehouse-Levine, who handles industry relations at the Blockchain Association, which represents crypto companies, said a national regulator is a better fit for payments, an inherently borderless service.
“Especially in the case of crypto businesses, these are all services that are provided over the internet and are therefore not limited by geographic boundaries,” he said. Some of the group’s members would likely be interested in the charter, he said.
Seven groups representing banks and credit unions of all sizes said in a letter on July 29 that the OCC should make sure that “any change being contemplated” for new charters is subject to public comment.
“The issues being considered have broad implications for the banking system and longstanding policy determinations,” they wrote.
Brooks said the public will get the opportunity to comment on any formal application.
He also said payments companies with charters would be subject to all of the same rules as a traditional bank, but its actual activities would drive how those rules apply. He emphasized that their business model would still result in some capital and liquidity requirements.
“Payments banks will certainly be subject to capital rules,” he said. “The application of those rules to a payments bank will result in a different number than the application of that rule to a bank that, for example, takes credit risk, because a payments company that doesn’t make loans doesn’t have any credit exposure.”
He conveyed urgency in having banking activities regulated rigorously, no matter which firm is doing them.
“If we go on like for another 10 years, half the financial services activity that’s currently being done in banks will be done by somebody else,” he said. “And I won’t be able to ensure the safety and soundness of it.”