A new Payments Charter could enable entities to engage in payments-related activities on a nationwide basis, rather than by state.

By Alan W. Avery, Todd Beauchamp, Pia Naib, Loyal T. Horsley, and Charles Weinstein

The US Office of the Comptroller of the Currency’s (OCC) newly appointed Acting Comptroller, Brian P. Brooks, is already advancing the agency’s fintech-focused modernization initiatives and taking steps to fulfill his promise to support technological innovation in the banking industry. On June 25, 2020, while speaking on the American Bankers Association’s podcast, Brooks announced that the OCC will introduce a new Payments Charter 1.0 (Payments Charter) this fall that will serve as a federal alternative to obtaining state money transmitter licenses. That announcement came less than a month after the OCC issued an advance notice of proposed rulemaking (ANPR) requesting public comment regarding the OCC’s regulations relating to “digital activities” of national banks and federal savings associations (FSAs). The ANPR was issued in an effort to ensure that such regulations continue to evolve with industry developments. Comments in response to the ANPR are due August 3, 2020.

Payments Charter May Preempt State Money Transmitter Process

According to Brooks, the Payments Charter initiative will be launched in two phases: “1.0”, which will ostensibly be a relatively straightforward federal money transmitter license, and “2.0,” which will provide those holding a Payments Charter with direct access to the Federal Reserve payment system. Phase 2.0 will be introduced 18 months after the introduction of Phase 1.0, assuming 1.0 is a success (i.e., if entities apply for a license).

While the OCC has not yet issued a formal announcement on the Payments Charter, and thus information is still relatively limited, the Payments Charter could effectively preempt state money transmitter regulatory regimes, including the associated licensing requirements. By doing so, the Payments Charter could enable entities to engage in payments-related activities on a nationwide basis without needing to obtain and hold a license in each state in which they operate. Brooks noted that for international payments companies attempting to enter the US market, navigating the state licensing process and obligations can be overwhelming. The Conference of State Bank Supervisors (CSBS), a nationwide organization of financial regulators for US states and territories, has worked with state regulators to streamline the application and examination process for money transmitters. Almost all states now accept money transmitter license applications via the Nationwide Multistate Licensing System (NMLS). However, obtaining individual state licenses can still be a costly and time-consuming process. Whether obtaining a single federal Payments Charter will require less in terms of time and/or expense is unclear. Regardless, the lure of federal preemption could prove strong for some entities seeking a streamlined process. For example, some of the larger state licensed money transmitters could decide to obtain a federal Payments Charter and surrender their licenses in order to have direct access to the Federal Reserve payments system.

Nonetheless, any proposed Payments Charter will likely be subject to opposition and lawsuits from state regulators and industry groups (e.g., the CSBS) that argue this charter falls outside the scope of the OCC’s regulatory authority, like the OCC’s previously proposed fintech charter.. For background, in 2016, then-Comptroller Thomas Curry announced the agency’s intention to grant special purpose national bank charters, or fintech charters, to qualifying fintech companies. This created an uproar among state regulators and spawned several lawsuits that called into question the OCC’s regulatory authority to grant fintech charters to nondepository institutions, such as fintech companies. Although the Payments Charter will be more tailored with its central focus on payments, it could be viewed as a more direct attack on state regulatory authority that would create a “dual payments system,” similar to the current dual banking system in the US.

ANPR Shows Commitment to Digital Banking Services

The ANPR is an example of the OCC’s attempts to be flexible, accommodating, and open to change with respect to innovation in financial services. In the ANPR, the OCC notes that it’s been almost 20 years since the regulations related to digital activities were implemented and more than 10 years since the last material update in 2008. This ANPR will thus likely be well-received by industry participants, as technology has advanced significantly and the integration of digital banking products and services has proliferated (including cryptocurrency activities, which are not contemplated by existing regulations).

By way of background, the existing OCC regulations related to digital banking activities address:

  • Electronic activities that are part of or incidental to the business of banking
  • Furnishing products and services by electronic means and facilities
  • Engaging in an electronic activity that includes several component activities
  • The sale of excess electronic capacity and by-products
  • Acting as digital certification authority
  • Data processing and correspondent services
  • The location of a national bank conducting electronic services
  • The location under 12. U.S.C. § 85 (related to rate of interest on loans) of national banks operating exclusively through the internet
  • Shared electronic space

Separate OCC regulations address the use of electronic means and facilities by FSAs generally, as well as requirements for FSAs using electronic means and facilities. Furthermore, the OCC has approved, on a case-by-case basis, industry requests to engage in particular innovative, technology-driven activities.

The OCC has sought to better understand the role of innovation in banking and established the Office of Innovation as a dedicated central point of contact for interested parties regarding innovation-related matters (several other regulators have since created similar offices). The ANPR will evaluate whether existing regulations effectively take into account the digital and technological advancements in banking and financial services. To this end, the ANPR invites the public (especially financial services and technology sector stakeholders) to provide comments and suggestions on issues related to banks’ digital activities, technology, and/or innovation. The ANPR also seeks comment on 11 specific issues, including, but not limited to:

  • Outstanding issues. Are there digital banking activities or issues related to digital banking activities that the OCC does not currently address and should?
  • Crypto-related activities. What types of activities related to cryptocurrencies or cryptoassets are financial services companies or bank customers engaged in? To what extent does customer engagement in crypto-related activities impact banks and the banking industry?
  • Distributed ledger technology. How is distributed ledger technology used, or potentially used, in banking activities, and are there any specific matters on this topic that should be clarified in regulatory guidance?
  • What new payments technology and processes should the OCC be aware of, and what are the potential implications of these technologies and processes for the banking industry?
  • “Regtech.” What new or innovative tools do financial services companies use to comply with applicable regulations and supervisory expectations?
  • COVID-19. Are there issues the OCC should consider in light of changes in the banking system that have occurred in response to the COVID-19 pandemic (e.g., social distancing)?

It will likely be several months before the OCC provides additional insight on its findings or issues a formal notice of proposed rulemaking with more specific proposed steps. However, the issuance of the ANPR is an encouraging sign that the OCC’s Office of Innovation is planning to take steps to promote responsible innovation using feedback from the financial services industry.

Taken together, the Payments Charter and the ANPR indicate that the OCC is listening to those who have been pushing for innovation in the banking industry, and that under Brooks’ helm, the agency is not afraid to shake things up.