Does a national bank have to take deposits in order to be a national bank?
That question is at the center of a federal lawsuit filed April 26 against the Office of the Comptroller of the Currency (OCC) by the Conference of State Bank Supervisors (CSBS), the nationwide organization of state financial regulators. The action, filed in U.S. District Court for the District of Columbia, aims to block the OCC’s ability to offer its proposed national bank charter for non-deposit-taking financial technology (“fintech”) companies. CSBS alleges, among other things, that the OCC’s statutory authority allows it to charter only banks that engage in the traditional banking activity of taking deposits, and that any authority to charter non-deposit-taking national banks is limited to such banks specifically authorized by Congress.
The outcome of this case will impact any fintech firm considering applying for the charter.
It is possible, but not inevitable, that the courts could agree with CSBS. The OCC’s primary source of authority is the National Bank Act (NBA), a federal statute that permits the OCC to charter national banks “for carrying on the business of banking.” As CSBS acknowledges, “the business of banking” is not expressly defined in the NBA. However, CSBS states that the NBA’s legislative history “shows that its principal author and other legislators identified the power to engage in receiving deposits as an essential function of the banking business at the time of the NBA’s adoption.”
It is true that much of the language of banking law is premised on the notion that banks will take deposits. For instance, “depository institution” is a term commonly used throughout federal banking law to refer to banks. Existing OCC regulations do authorize a “special purpose national bank” that engages in at least one of the following three core banking functions: receiving deposits; paying checks; or lending money. But this is authority that the OCC has declared for itself by regulation, through its own interpretation of its statutory authority. By contrast, Congress has specifically authorized certain special-purpose national banks by statute, including non-depository trust banks authorized by the Competitive Equality Banking Act of 1987 (CEBA).
For state-chartered banks, the legal landscape is different. In contrast to the NBA, there is no single, central law giving states the authority to charter banks and define that authority. This means that states are freer to define what it means to be a bank and what activities trigger the need for licensure. A state could choose, for instance, to provide charters to banks that do not accept deposits (or, relatedly, could allow a bank to accept deposits without being insured). Only one state, Georgia, currently allows a version of this, having created a new “Georgia merchant acquirer limited purpose bank” (MALPB) charter. This charter was designed to allow non-depository companies involved in payments to participate directly in the payment card networks such as Visa and MasterCard, whose rules limit membership to specific entities including banks. A holder of the MALPB charter thus, theoretically, could be a member of the card networks without having to partner with a deposit-taking bank. (Georgia has approved one MALPB charter, but that bank, Credorax Bank, has not yet begun operations. It is unclear whether the networks will actually allow the same type of participation permitted to other banks.)
So if the national bank charter is not available to a fintech company that does not take deposits, what are the options for fintech companies?
A state could create a bank charter that would allow an entity to be a bank without taking deposits. State laws often exempt licensed banks, whether state or national, from certain requirements, such as those requiring licensing for money transmission and small-dollar lending. But a state charter would not guarantee fintech companies the same broad federal preemption powers given to national banks.
Another option is for a fintech company to choose to take deposits. It is important to note that if the fintech banks were to take deposits, there would be no need for this new charter in the first place. A fintech company planning to take deposits could simply apply for a (national or state) bank charter today, under existing law. Such an applicant would likely propose in its business plan to conduct business in a specifically focused manner, such as centering on small-dollar lending or payments services, rather than providing a traditional full-service banking experience. That is not to say the charter application would be approved; banks that focus on a narrow slice of activities rather than a diverse business plan are considered riskier, and thus face greater scrutiny from regulators and greater challenges in obtaining approval. However, such a plan could be approved under the framework that exists today. This would necessitate obtaining approval from the FDIC, as deposit insurer, for the charter as well.
Fintech companies will want to watch this federal case as it unfolds. How the OCC responds may be impacted, in part, by leadership changes at the agency. A new Comptroller, whether permanent or acting, could choose to hold the course the agency has taken so far on the fintech charter, or change it radically. All in all, the outcome of this case could determine whether a non-deposit-taking national bank charter is in or out of reach for fintech companies.