Recent moves by the Office of the Comptroller of the Currency are forcing Congress to ask a deceptively complex question: What is a bank?
Acting Comptroller of the Currency Brian Brooks previewed plans over the summer to grant bank charters for national money transmitters. The federal charter would allow some payment servicers to get a single, federal operating license, supplanting the need for state licenses wherever they operate and allowing them access to the Federal Reserve’s payments clearing system.
Opponents say the new charter would fragment the supervisory system for banks because payment companies chartered as banks by the OCC wouldn’t necessarily be considered banks by the Fed or the Federal Deposit Insurance Corporation. Such a status would let them evade rules designed to avoid bank bankruptcies.
Proponents say it’ll do just the opposite: ensure that the OCC’s regulators can monitor the firms while promoting innovations that benefit consumers.
Banks are supposed to provide the financial oil that lubricates the economy. To keep things running smoothly, they are supported through cheap loans via the Fed’s discount window, FDIC deposit insurance and access to the interbank payments clearing system. In exchange, they have to follow rules and regulations and generally can’t compete with industrial and commercial companies that make and sell things.
But a lot of fintech companies, like PayPal Holdings Inc., act a lot like banks. They take customers’ money and help them use it in exchange for a fee, which isn’t very different from charging for a checking account.
When Congress wrote the laws establishing the OCC and the national banking system, the telegraph was a relatively new technology — email is older today than telegrams were then. One of those laws, the National Banking Act of 1865, still defines what is and isn’t a bank. A federal court in 2019 relied on it and the 1861 edition of Webster’s American Dictionary of English Language to rule that the OCC did not have the power to award bank charters to nondepository fintech firms.
Undeterred by that court defeat, the OCC proposed a new rule for non-deposit-taking payment processors this year.
“The OCC clearly is doing something they simply have no authority to do,” said Art Wilmarth, a law professor at George Washington University. “The OCC cannot charter a national bank unless it determines that the bank is lawfully authorized to commence the business of banking.”
Wilmarth said the OCC is trying to rely on the law’s definition of a bank branch, which includes facilities that provide payment services, to essentially expand the definition of the “business of banking.” But the statute defines a bank by listing what it does: making loans, exchanging money, circulating cash and “receiving deposits.”
He said the OCC’s effort is ultimately doomed unless Congress updates the statutes to allow it — a move he hopes lawmakers won’t make.
Wilmarth said Congress should instead polish the old definition of a bank to draw a clear line around taking deposits and require any deposit-taking institution to submit to the full range of rules that normal banks need to follow. Anything else presents a slippery slope that makes it hard to exclude companies that are more commercial in nature — and thus gives them an unfair edge on competitors, he said.
“This brings this whole set of nondepositories inside the Fed system. It gives them all sorts of advantages that no other nondepository would have,” he said.
Right now, payment transmitters are regulated state by state. Dealing with just one federal regulator, the OCC, and potentially gaining access to the Fed’s discount window means it’ll be cheaper for new fintech firms to compete against incumbent banks. The Fed hasn’t said whether it would give such firms access to the discount window, but many experts say it would have no choice.
But Thomas Hoenig, a former FDIC vice chairman and Federal Reserve Bank of Kansas City president now at George Mason University’s Mercatus Center, said giving fintech firms bank charters would be good news for consumers.
“The largest banks, they engage in a whole host of activities: trading, underwriting, payments — in fact, they’re trying to establish a monopoly in payments,” he said. “And here you have these new entrants, who are very versed in digital payments, coming into the marketplace. I see nothing but benefit from that if they are chartered as banks, regulated as banks, and have deposit insurance.”
Hoenig accepts that the line between banking and a regular business can be blurry, but he said policymakers should err on the side of allowing more bank charters. Unlike the OCC’s proposal, though, Hoenig emphasizes that fintechs should also be required to take out deposit insurance from the FDIC, even if the funds they hold aren’t traditional deposits. Hoenig noted that a lot of consumers now probably don’t realize that the money in their Venmo or PayPal account isn’t insured, meaning it could disappear if the company went under.