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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Global Equity Investors Should Be Prepared for a Market Pullback

Global Equity Investors Should Be Prepared for a Market Pullback

Written by: Paul Quinsee, Global Head of Equities, J.P. Morgan Asset Management

Themes and implications from the Global Equities Investors Quarterly
 

In brief

  • We expect the trend of increasing global corporate profits that began in mid-2016 to persist throughout 2018, with economic growth stronger, interest rates still low and capital discipline evident in most industries. Our analysts’ forecasts of double-digit earnings for 2017 and 2018 look to be on course.
  • Fundamentally, this remains a good environment for equity investing, but our optimism is tempered. Higher equity valuations—and the absence of a significant market correction for quite some time—make us more cautious now.
  • We still see more upside in emerging markets, Europe and Japan than in the U.S. After strong gains from growth stocks, we identify incremental opportunity in value stocks again. Across global markets, many financials still look promising, and the surprising extent of capacity reductions in many basic industrial businesses is intriguing to our investors.
  • Among the potential risks we are monitoring: the unwinding of quantitative easing (QE) and its impact on capital markets; the traps of investor complacency and excessive risk-taking.
     

TAKING STOCK


For more than a year now, a stronger, broader global growth environment has driven an acceleration in corporate profits around the world. As we approach the end of 2017, our estimates for a continued synchronized earnings recovery sustain what we would describe as our tempered optimism. We think this recovery will continue for a good while yet and are not expecting a recession (even for the now late-cycle U.S. economy) over the next couple of years. Our analysts’ forecasts of double-digit earnings for 2017 and 2018 look to be very much on course, having been supported by a wide range of positive second-quarter corporate results. As bottom-up stock pickers, we are finding ample opportunities, especially in Europe, Japan and emerging markets.

But our optimism is restrained. Higher equity valuations—and the absence of a significant market correction for quite some time—make us more cautious now. Our investors now expect average, not outsize, gains over the next 18 to 24 months. The eventual unwinding of global central bank balance sheet expansion, slated to begin with the Federal Reserve (Fed) in October, will surely present challenges. And after a strong run for global equity markets, we must guard against the trap of investor complacency and excessive risk taking.

In the following pages of our quarterly Global Equity Views, we present our investment outlook, discuss market trends and spotlight opportunities and potential risks.

TRENDS


Economic growth and corporate earnings

The breadth of global growth has encouraged once-skeptical investors who worried that the growth was too U.S.-centric. We now see synchronized growth and rising growth expectations across both developed and emerging markets. Purchasing Managers’ Index (PMI) readings show continued healthy levels, and in emerging markets the pace of GDP growth and the breadth of industrial production growth are increasing. Some have taken to comparing this to the old cliché of a “Goldilocks” environment. It can’t last forever, of course, but we think the not too hot, not too cold environment should prevail through 2018.

Earnings are driving markets higher (EXHIBIT 1), and we are forecasting double-digit EPS growth globally in 2017 and 2018. In the U.S., a combination of steady revenue growth, improved margins and heavy share buybacks has boosted earnings growth for several years, and we expect this to continue. However, higher debt levels will eventually constrain buybacks. In Europe, corporate profits are growing for the first time in six years, although we do acknowledge further euro strength as a potential headwind. Strong operating leverage for Japanese corporations should help propel earnings gains this year and next. In emerging markets, we project high double-digit profit growth in 2017.

Internet stocks

So far this year, equity markets have been led by growth stocks, especially a small group of Internet companies with the market monikers BAT (Baidu, Alibaba and Tencent) and FANG (Facebook, Amazon, Netflix and Google). Some investors see a bubble forming here, drawing parallels with the extreme prices of many technology stocks in 1999. But on balance we are less concerned, given that these companies boast massive user bases, impressive growth rates and in many cases strong profitability as well. The recent rally has made them less attractive, but their valuations do not seem unreasonably high just yet. Potential regulation is the biggest risk.

Earnings growth has driven this year’s rally

EXHIBIT 1: COMPOSITION OF TOTAL RETURNS THROUGH SEPTEMBER 30, 2017


Source: FactSet, MSCI, J.P. Morgan Asset Management. Returns shown are for MSCI gross return indices except for U.S., which represents the S&P 500 index return. Past performance is not necessarily a reliable indicator for current and future performance. Data as of September 30, 2017.


OPPORTUNITIES


Regions

From a regional perspective, we still see more upside potential in emerging markets and developed markets ex-U.S. In emerging markets, earnings are growing and valuations are still reasonable—we have only seen half the multiple expansion that we see in a typical emerging market up cycle. In international markets, our investors continue to acknowledge new themes; for example, activism in Europe is a new reality, and the number of European companies subject to activist campaigns has tripled over the past five years (while the number of U.S.-targeted companies has dropped). It is evident that there is plenty of opportunity for European companies to improve profitability and allocate capital in more shareholder-friendly ways. Greater capital discipline is also evident in Japan, where stocks look more reasonably priced than we have seen for many years.

Sectors

From a style perspective, growth has outperformed value this year. Our investors see more opportunity in value stocks, but a major style rotation from growth to value seems unlikely in the near term. Within value and across global markets, many financials still look promising. Not only do they stand to benefit from higher interest rates, but their valuations are still relatively attractive, and many management teams are beginning to return more capital to shareholders. Some of our value investors are also finding opportunities in deeply out-of-favor retailers, believing that the fear of Amazon is perhaps overdone in some cases. And across investment styles, we are finding opportunities in relatively wide spreads between sectors (for example, “bond proxies” vs. cyclicals) vs. relatively narrow spreads within sectors.

Surprises are always interesting, and the surprising extent of capacity reductions in many basic industrial businesses is intriguing to our investors. A large number of the capacity cuts have occurred in China, where the government has incentivized politicians to close down capacity in their region (often for environmental reasons), a trend that began with coal and continued with steel and aluminum. Capital deployment trends are also positive for many industrial companies, although the U.S. energy sector remains an exception.

RISKS


Reduced monetary stimulus

The slowdown in the expansion of central bank balance sheets—which ballooned from $4 trillion pre-financial crisis to $17 trillion today—presents a clear challenge to investors. The slowdown, already underway, is set to enter a new phase with the Fed’s first post-QE reduction in its balance sheet.

How might the unwinding of quantitative easing impact capital markets? It is the subject of intense debate. Some forecasters expect a very gradual rise in interest rates, while others fear a more abrupt dislocation as the tide of liquidity begins to retreat. We take some comfort from the still relatively attractive valuations of stocks vs. bonds.

Complacency

Over the near term, our investors worry about complacency, especially after such a strong run in equity markets. In this context, some point to the CBOE Volatility Index (VIX) nearing 30-year lows. However, we note that many of the usual warning signs of a looming market downturn are not yet visible. Retail investors still seem cautious, and IPO activity continues to be moderate. Most important, valuations

Related: 2017 Q4 Global Asset Allocation Views

CONCLUSION


It’s been a great year for equity markets around the world. We see enough opportunity to keep investors engaged, but our optimism is tempered by higher valuations and the potential for increased risk appetite to eventually lead to excessive risk-taking. We advise investors to stay diversified and look for opportunities in value stocks and international markets. However, some higher equity valuations, especially in the U.S. and in some bond equivalent sectors, do warrant close attention, with an eye toward the possibility of a short-term correction. Equity investors should be prepared for a market pullback but not yet positioned for the more substantial downside that usually comes with recessions.


Source: J.P. Morgan Asset Management. Views are as of September 30, 2017.


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Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met

Important information: The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.
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