The debate on deposit insurance in the spotlight
The regulatory path ahead for FinTechs seeking to offer nationwide banking services may be a little clearer, but it hardly seems any shorter.
We can see a pivot where financial services firms take the long journey to regulatory approval – the implementation of federal deposit insurance – choosing to eliminate these obstacles rather than risk a legal skirmish with (or even between) regulators.
In the meantime, this pivot can do a lot to prevent regulators from squabbling over who has authority over certain FinTech-related services and apps.
To that end, a group of US banking regulators has withdrawn its lawsuit that sought to block the federal government from granting bank charters to FinTech companies.
Read more: US state banking regulators drop lawsuits over FinTech charters
As for specifics, the Conference of State Banking Supervisors (CSBS), the national trade group for banking regulators, announced Thursday (January 13th) that it had dropped the lawsuit in federal court challenging the Office of the Comptroller of the Currency ( OCC) non-bank charter program. This would be a tussle between regulators, in our view, and at the specific issue was Figure Technologies’ request for a non-banking charter from the OCC.
Figure amended its banking application charter to indicate that it would apply for FDIC deposit insurance. At a high level, this insurance protects a financial services business against the loss of its insured deposits in the event of the entity’s bankruptcy.
Insurance is a core principle of banking, dating back to the Great Depression and the creation of the FDIC in the early 1930s. Under national banking laws here in the states, entities operating as national banks must get insurance.
Focus on FDIC insurance
Figure’s own initial application had not requested this deposit insurance from the FDIC. And Figure, when filing for a National Banking Charter with the OCC, said that “a National Banking Charter would enable Figure to offer a cohesive set of products and services nationwide, focus its compliance efforts on single regulator requirements, reduce its legal and regulatory costs and risks, and provide its customers and business partners with the security of dealing with a federally regulated and supervised national bank.
In 2020, the CSBS sued the OCC, opposing the OCC’s creation of a new national banking charter for non-banking businesses.
The CSBS said at the time of filing that the OCC extended its authority beyond legal limits and said in its complaint that “For many decades, and long before the OCC’s interest in FinTech companies not banking as Figure does not manifest itself in the non-banking charter program. , non-banks have unquestionably been subject to state regulatory authority and state law – including, but not limited to, licensing requirements, review and reporting, usury laws and a variety of other consumer protections.
The December 2020 lawsuit also alleged that the Non-Banking Charter has always been a new type of special purpose charter “improperly created…without requiring the beneficiary of the charter to engage in deposit collection or to obtains deposit insurance from the Federal Deposit Insurance Corporation”.
The OCC, for its part, said a national bank does not necessarily need to have deposit insurance in place to operate as a national bank.
Now, with the January withdrawal of the CSBS lawsuit against the OCC, at least some of the debate among regulators over the relatively nascent FinTech space may be calming down (perhaps with concern). Unless and until another company seeks to set up a charter from a company that does not seek FDIC insurance.
For FinTechs themselves, withdrawing from the lawsuit is a bit of a double-edged sword. The point of contention between the FDIC and insurance, and the ultimate governance authority tied to national bank charters, may yet arise as issues at some point in the future. In the meantime, companies like Figure Technologies and its FinTech peers will choose to seek deposit insurance or perhaps not pursue chartering at all, eyeing regulatory hurdles (and the specter of more litigation to come) .