New financial tech charters may speed up industry acceptance

Silicon Valley startups working on payments and peer lending, as well as financial aspects of cybersecurity and data analytics, might soon call banking giants like Wells Fargo, Bank of America and Citigroup industry peers.

But do they really want to be?

The federal Office of the Comptroller of the Currency recently said it intends to offer financial technology firms special charters, which would allow companies like Mint, Square and Stripe to be recognized as special-purpose banks. The proposed rule is in the public comment phase.

Such a charter would enable the companies to offer consumers and businesses debit cards, loans and savings accounts in all 50 states instead of going to each state for permission. At the same time, the companies would be regulated just like any bank, which means they must meet capital and liquidity requirements as well as offer credit to people with low incomes and/or minorities.

Silicon Valley has not fared well of late operating in highly regulated industries — note the problems of medical device startup Theranos and human resources firm Zenefits. And there’s arguably no other industry more regulated than banks: In addition to the Office of the Comptroller, the Federal Deposit Insurance Corp., the Federal Reserve and the Consumer Financial Protection Bureau oversee such institutions.

For financial startups, the cost and headache of complying with federal regulations may be too much to bear. A study by the Federal Reserve Bank in St. Louis found that community banks (with assets of less than $10 billion each) collectively spent about $3.5 billion in 2014 on such matters.

Yet charters offer benefits to both company and regulator. The startups get recognized as legitimate players in finance, while regulators get to keep a closer eye on a fast-growing industry that has been increasingly encroaching on markets held by traditional banks. From January through September last year, financial technology firms had raised a total of $17.8 billion, according to a report by CB Insights and KPMG.

“I think the lightbulb has gone on in the minds of regulators,” said Walt Mix, head of the financial services practice at Berkeley Research Group and a former commissioner of the California Department of Financial Institutions. “There is clearly something afoot on both the state and national levels.”

Startups in the financial world work on a broad array of products. Some might be good candidates for a charter, while others may be better off without one.

Mountain View’s Mint, a subsidiary of Intuit, offers consumers free online tools to manage their money. Ant Financial Services Group, an affiliate of Chinese e-commerce giant Alibaba, operates a payment service and credit rating system. Vancouver’s Trulioo makes technology that verifies customer identities. A number of startups specialize in digital currencies like Bitcoin.

Very few startups actually offer loans and deposits, without which a bank charter would seem unnecessary. But the companies may want to eventually offer those services as they expand.

“Banks are so backwards in technology,” said Bill Harris, the former CEO of PayPal and Intuit who is now head of Personal Capital, a firm with offices in San Francisco and San Carlos. “There is so much more that can be done to make banking better.”

Personal Capital offers people free personal finance software and then sells them investment advice. Harris says he wants to use analytics to help the company manage all aspects of consumers’ financial portfolios, including loans and deposit accounts.

The Internet and mobile devices are transforming the industry, with companies “trying to harness the power of connected computer technology,” Harris said.

The comptroller’s plan to grant charters reflects this new reality, he said. Harris actually wanted a charter back in 2010 to start an online bank. But regulators denied his application because the country was still trying to recover from the global financial crisis.

“At the time, there were too many failing banks,” Harris said. “They were in a very scared mode. We’re less scared today.”

So far, reactions from traditional banks have been mixed. The American Bankers Association has publicly supported the Office of the Comptroller’s charter plan.

“This is a bank charter for (financial technology) companies that will hold them to the same standards of safety, access and fair treatment,” Rob Nichols, the group’s president and CEO, said in a statement. “Maintaining high standards is the best way to ensure customers have access to the best financial products and services.”

But some banks are wary of losing customers to technology-focused firms, said Harris, noting that PayPal faced plenty of opposition from banks when the company launched in the late 1990s.

Harris says banks will just have to get better at technology. If banks can’t do it themselves, they will probably just acquire startups. Capital One, for example, bought San Francisco interactive design firm Adaptive Path in 2014 to help it build online products.

A banking charter for financial technology companies might make it easier for bigger banks to go on Silicon Valley shopping sprees. Companies already recognized and regulated by the Office of the Comptroller might make them more attractive to potential buyers, said Jeffrey Alberts, a partner with the law firm Pryor Cashman in New York.

A financial technology firm “successfully complying with regulations will be considered a good thing,” said Alberts, a former federal prosecutor in the U.S. Attorney's Office of the Southern District of New York.

If you can’t beat them, regulate them. And then buy them.