Will Apple Bank Be the First New American #Fintech Bank?

Will Apple Bank Be the First New American #Fintech Bank?

On Wednesday the American Office of the Comptroller of the Currency (OCC)* followed up on its promise last December to introduce a national bank charter for Fintech bank startups by issuing a white paper on how to apply for a licence, the evaluation process and what will be involved.  It’s a massive move towards allowing Fintech firms like Square, Stripe and Simple to become full banks in the USA, if they want to be, plus any other firm who fancies a shot like Apple, Wal*Mart and even Ant Financial (although I doubt Trump would allow the last one through).  It doesn’t mean they’ll get a license, but it does mean they can apply for one through one agency rather than having to deal with 200.

Interestingly the process also reflects the spirit of the previous administration’s advisory paper that recommended the spirit of how the government should see Fintech, as blogged about in January.  For example, there is a major meme in the OCC’s paper about financial inclusion, and the White House paper’s clear objective for financial services included the line: “strengthen financial inclusion and health in the United States and abroad”.

“Providing a path for fintech companies to become national banks can make the financial system stronger by promoting growth, modernization, and competition.”

Anyway, here are a few key statements that attracted my attention in the OCC’s application process:

What is the background to this?

The OCC made this determination based on its work assessing the role of innovation in banking. In March 2016, the OCC published a paper to provide its perspective on responsible innovation in the financial services industry, outline principles guiding its approach to financial innovation, and solicit feedback on nine questions and other topics presented in the paper. See Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. On June 23, 2016, the OCC held a forum to discuss issues regarding responsible innovation. The forum included participants from the banking industry, fintech companies, academia, and community and consumer groups. On October 26, 2016, the OCC announced the decision to establish an Office of Innovation and implement a framework supporting responsible innovation. See OCC Issues Responsible Innovation Framework. Then, on December 2, 2016, the OCC announced that fintech companies may qualify for SPNB charters under certain circumstances. The OCC published a paper discussing issues related to chartering special purpose national banks and solicited public comment to help inform its path forward. See Exploring Special Purpose National Bank Charters for Fintech Companies. In developing this Comptroller’s Licensing Manual Supplement, the OCC has carefully considered the comments it received.

What does the OCC hope to achieve?

The Office of the Comptroller of the Currency (OCC) has determined that it is in the public interest to consider applications for a special purpose national bank (SPNB) charter from financial technology (fintech) companies that engage in banking activities and that meet the OCC’s chartering standards. The OCC has reached this decision for a number of reasons.

First, in the modern economy, where technology companies already are delivering key financial services to millions of Americans, an SPNB charter provides a framework of uniform standards and supervision for companies that qualify. Applying this framework to fintech companies will help ensure that these companies, like other banks that operate under federal charters, conduct business in a safe and sound manner while effectively serving the needs of consumers, businesses, and communities.

Second, an SPNB charter supports the dual banking system by providing fintech companies the option of offering banking products and services under a federal charter and operating under federal law, while ensuring essential consumer protections. This is the same choice available to companies that deliver banking products and services in traditional ways.

Third, providing a path for fintech companies to become national banks can make the financial system stronger by promoting growth, modernization, and competition. Moreover, the OCC’s supervision of fintech companies will deepen the expertise the OCC already has acquired in emerging technologies for banking services—through, for example, its supervision of technology service providers. This enhanced “window” into developing technologies and financial innovations positions the OCC to better evaluate and respond to the risks that accompany the delivery of those technologies. Finally, the chartering process will enable the OCC to encourage fintech companies to use innovative ways to promote financial inclusion.

Fintech firms must have a Financial Inclusion Plan “that has an appropriate description of the proposed goals, approach, activities, and milestones for serving the relevant market and community”.

Is this Special Purpose National Bank charter the same as a full banking licence?

While the term “special purpose national bank” is used elsewhere in the OCC’s rules and policies to refer to a number of types of special purpose national banks, “SPNB” means a national bank that engages in a limited range of banking activities, including core banking functions, but does not take deposits within the meaning of the Federal Deposit Insurance Act (FDIA) and therefore is not insured by the Federal Deposit Insurance Corporation (FDIC).

The OCC recognizes that fintech companies that want to operate in the regulated space will choose different ways of doing so, and the SPNB charter is one option of many. Some may operate under state bank or state trust bank charters in states that offer those options. Some may apply for, or seek to acquire, full-service national bank charters; others may qualify to be another type of special purpose national bank. Still others may wish to continue, or initiate, partnerships with banks by providing technology-related services and expertise. This Supplement is not intended to discourage these other ways of conducting business but rather to clarify the OCC’s expectations for a particular segment of financial service providers— that is, fintech companies seeking an SPNB charter.

The OCC anticipates that the activities of fintech companies interested in a national bank charter may vary significantly. As noted above, national bank charters are varied and include full-service charters and other special purpose national bank charters, such as trust charters. National bank charter applicants are held to the same chartering standards and procedures whether seeking to become a full-service national bank, a national trust bank, or an SPNB. Moreover, while references to “full-service bank,” “trust bank,” and “SPNB” are convenient ways to distinguish among national banks based on their business models, these designations do not signify a difference in the character of the national bank charter. In each of these cases, an applicant that receives OCC approval for a charter becomes a national bank subject to the laws, regulations, and federal supervision that apply to all national banks.

How do I apply to get a SPNB charter?

Fintech companies seeking an SPNB charter should make an initial inquiry concerning a charter application through the OCC’s Office of Innovation, innovation@occ.treas.gov. The Office of Innovation (Office) is the primary point of contact within the OCC for all inquiries by fintech companies, including questions and preliminary inquiries related to chartering. If a fintech company is interested in further discussions regarding an SPNB charter, the Office will schedule an exploratory meeting with the appropriate OCC staff, including the OCC Licensing Division (OCC Licensing). The meeting will include a discussion of the company’s business model, this Supplement, and the OCC’s expectations.

Applying for a national bank charter is an iterative process, and the OCC finds it mutually beneficial for the applicant and the OCC to maintain an open dialogue throughout the process. After the exploratory meeting, the OCC will begin to identify aspects of the proposed charter that present novel or complex issues.

An OCC Licensing contact will be assigned. This contact will assemble other appropriate staff—including examiners, subject matter experts, legal staff, and staff from the Office—to informally discuss with the organizers the proposal, the chartering process, and the requirements that accompany a national bank charter.

The prefiling stage may include one or more formal prefiling meetings with OCC Licensing and other appropriate staff. The number and frequency of meetings will depend on the novelty and complexity of the applicant’s proposal.

Before the initial formal prefiling meeting, organizers should provide the OCC with an overview of the fintech charter proposal, including a discussion of the business plan and the relevant market, as well as any novel policy or legal issues and any unique aspects of the proposal. Applicants should also include information about the qualifications of the organizers and proposed senior management. In addition, the OCC will request informational submissions for review in advance of the submission of an application, such as a draft business plan.

“It may be important for one or more of the directors of a proposed bank with novel technology-based products or services to have experience with those activities.”  

What will the OCC specifically look for in my application?

The OCC will evaluate an application from a fintech company for an SPNB charter to determine whether it meets the standards and policy considerations noted above. In evaluating whether these are met, the OCC will consider, among other things, whether the proposed bank

has organizers and management with appropriate skills and experience.

has adequate capital to support the projected volume and type of business and proposed risk profile.

has a business plan that articulates a clear path and a timeline to profitability.

includes in its business plan, if applicable, an FIP [Financial Inclusion Plan] that has an appropriate description of the proposed goals, approach, activities, and milestones for serving the relevant market and community

You mention having the appropriate skills and experience in the management team.  Can you clarify?

As with all banks, organizers, managers, and directors are critical to the success of an SPNB. The OCC expects them to be well qualified, with diverse experience in relevant areas. Although the OCC would expect some members of the organizing group, the proposed board of directors, and management to have experience in regulated financial services, other relevant experience will depend on the specific products or services offered by the proposed SPNB. For example, it may be important for one or more of the organizers, managers, or directors of a proposed bank with novel technology-based products or services to have experience with those activities.

And what do you mean by “Financial Inclusion”?

The OCC’s chartering standards require consideration of whether the applicant will provide fair access to financial services and promote fair treatment of customers consistent with the safe and sound operations of the bank. OCC regulations require that applicants include in their business plans an indication of the organizing group’s knowledge of and plans to serve the community. The OCC expects an applicant for an SPNB charter whose business plan includes lending or providing financial services to consumers or small businesses to demonstrate a commitment to financial inclusion.

Applicants engaged in such activities should include in the business plan an FIP that describes the proposed goals, approach, activities, and milestones for serving the relevant market and community. The nature and scope of an FIP developed by an applicant for an SPNB charter will vary depending on the SPNB’s business model and the products or services it intends to provide to consumers or small businesses.

The OCC expects that the commitment to meet financial inclusion objectives that support fair access to financial services and fair treatment of customers will be ongoing, and accordingly, the OCC will expect the SPNB to update its FIP as appropriate.

What does the Financial Inclusion Plan (FIP) need to include?

An FIP should describe:

  • The products or services the SPNB intends to offer, including any financial products or services that will foster financial inclusion, whether defined by income, geography, or other criteria such as unserved or underserved populations.
  • Identification of, and method for defining, the SPNB’s relevant market and community, including underserved populations or geographies, which may include, for example, low- and moderate-income individuals.
  • Identification of, and method for defining, the financial services needs of the relevant market and community and how some of those needs could be met by the SPNB’s products and services.
  • Identification of milestones, including measurable goals, for the accomplishment of the SPNB’s financial inclusion objectives and description of a reasonable approach for meeting those goals.
  • Identification of terms and conditions under which the SPNB will provide lending or financial products and services to consumers or small businesses

What happens after I submit the application for a licence?

The OCC grants approval of a charter application in two steps: preliminary conditional approval and final approval. The period between the preliminary conditional approval and final approval is referred to as the organization phase.

Preliminary Conditional Approval  

Following review of the application, the OCC determines whether to grant preliminary conditional approval or deny the application. A preliminary conditional approval determination indicates the OCC’s permission to proceed with the organization of the bank according to the plan set forth in the application and specifies standard requirements and enforceable supervisory conditions. The OCC will include in a preliminary conditional approval of any SPNB charter with a business plan that includes lending or providing financial services to consumers or small businesses an enforceable condition that will require the SPNB to implement its FIP.

A preliminary conditional approval decision is not an assurance that the OCC will grant final approval for a new bank charter. Granting preliminary conditional approval provides the organizers of the bank with assurances that the application has passed the first phase of OCC review before the organizers expend additional funds to raise capital, hire officers and employees, and fully develop policies and procedures, including those relating to financial inclusion. A national bank must generally open for business within 18 months of the OCC’s preliminary conditional approval, unless the OCC grants an extension.

A preliminary conditional approval decision is not an assurance that the OCC will grant final approval for a new bank charter. Granting preliminary conditional approval provides the organizers of the bank with assurances that the application has passed the first phase of OCC review before the organizers expend additional funds to raise capital, hire officers and employees, and fully develop policies and procedures, including those relating to financial inclusion. A national bank must generally open for business within 18 months of the OCC’s preliminary conditional approval, unless the OCC grants an extension.

Final Approval  

Receipt of final approval from the OCC means the OCC has issued a charter for the bank, and the bank can begin to conduct banking business. After the OCC issues final approval and the SPNB opens for business, the OCC will supervise the SPNB, as all other national banks, under scheduled supervisory cycles, including on-site examination and periodic offsite monitoring. Any conditions imposed with the granting of a charter (e.g., operating agreement) will remain in place until removed or modified by the OCC and will be reviewed for compliance during the examination process.

This is a significant step towards encouraging Fintech banking competition in the USA and reflects similar moves made in other geographies.  You can read the paper in full and thanks to Finanser follower Dan Hudson for giving me the heads up on this one.

* The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863.  It serves to charter, regulate, and supervise all national banks and thrift institutions and the federal branches and agencies of foreign banks in the United States.

Chris Skinner
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Sizing up Strategic Beta

Sizing up Strategic Beta

Interest in strategic beta ETFs is rising. A few simple guidelines can help investors pick from among the often-bewildering number of options.

The number of strategic beta ETFs has grown at 20% a year, consistently in good markets and bad, since the year 2000.[2] With good reason: Strategic beta ETFs offer a more thoughtful passive option than cap-weighted indexes—and they can do so with a more transparent process and lower fees than actively managed funds.

Bright future, dim past    

All well and good, but how should investors assess any particular strategic beta ETF? Close to 40% of these funds have been in operation for less than three years[2]. This lack of an established track record can make it hard to validate their claims. ETF sponsors may try to make up for that shortcoming with back testing, running simulations of holdings they might have had against actual past market performance, but that has its limitations:

Back testing doesn’t always account for fees, liquidity or transaction costs.

Back tests are “selection biased”—that is, back testers have a tendency (conscious or not) to engineer positive outcomes. Live outcomes are therefore likely to be inferior.

Too great a focus on recent history can lead to “driving in the rearview mirror.” While an index or ETF may solve the problems of yesterday well, an investor’s focus should instead be on solving the potential problems of tomorrow.

Three steps to an informed judgment

Because the indexes tracked by strategic beta ETFs are by design somewhat exotic, effective assessment of them calls for some digging:

  1. Investors first have to understand who the index designer and asset manager are (they may not be the same people). They should have a clearly expressed investment philosophy and the expertise to enact it in practice.
  2. The properties of the portfolio should reflect the investment philosophy. Not only does the transparency of ETFs allows examination of the holdings to ensure that this is the case, it also measures such as active share relative to a cap-weighted benchmark or turnover can indicate whether an ETF is performing as designed.
  3. Performance can also be used to confirm that an index is doing its job. While short-term results shouldn’t be given too much sway, the index designer should be able to explain when and why an index will perform and when it might not.

One key aspect of performance shared with traditional passive management is tracking error. Like earlier cap-weighted index tracking funds, strategic beta ETFs should have minimal tracking error to their own indexes. Beware, though, the tracking error to the benchmark can be large and dynamic, it is by this differentiation that strategic beta adds value.

Made to measure

Strategic beta does not defy analysis, despite its novelty. Indeed, it has a lasting advantage over standard active manager due diligence. Strategic beta, after all, is rules-based. What an investor sees in straightforward, well thought-out index composition rules is what the investor will get. In that sense, strategic beta is relatively immune to the personnel changes, style drift and index hugging that can challenge actively managed mutual funds.

Learn more about ETF due diligence here.


This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns.

J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. J.P. Morgan Exchange-Traded Funds are distributed by SEI Investments Distribution Co, One Freedom Valley Dr., Oaks, PA 19456, which is not affiliated with JPMorgan Chase & Co. or any of its affiliates.

For additional disclosure 

For a longer discussion, please see our recent publication Strategic Beta’s due diligence dilemma (J.P. Morgan, April 2017).

[1] Morningstar.

[2] Morningstar.
J.P. Morgan Asset Management
Empowering Better Decisions
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See how ETFs differ from other investment vehicles, learn how to evaluate them, and discover how ETFs can be used effectively to achieve a diversity of investment strategies. ... Click for full bio