The US economy added 157k jobs in July and the unemployment rate dropped to 3.9%. Wage growth came in strong at 2.7%, potentially fueling inflation down the road and keeping the Fed on its stated rate hike path. The Fed kept rates on hold and noted that economic activity had been “rising at a strong rate,” and unemployment “has stayed low”. The Fed also repeated its guidance for “further gradual increases”, increasing expectations for a September rate hike.
The US Treasury released a report on Fintech – the last in a series of recommended policies stemming from the Trump Administration’s Executive Order on Core Principles for Regulating the Financial System. (Previous reports included Banks and Credit Unions, Capital Markets, Asset Management and Insurance.)
Hours after the release of the UST report, the OCC released a statement indicating that they would begin accepting applications from FinTech companies. The news has generated sharp reactions across the spectrum. Notably, the recommendation for the charter is bipartisan as the charter builds on the recommendation of the OCC under the Thomas Curry from the Obama administration.
There are many questions to sort through and PeerIQ will be hosting a webinar to address these on this Wednesday, 8/8, at 1 p.m. EDT. Click here to register and to add the invitation to your calendar.
Webinar: OCC’s New FinTech Charter – What Does it Mean for Lenders and Investors?
In this newsletter, we summarize the Treasury’s recently released study on FinTech. We then dig into the OCC’s new proposed FinTech charter.
Summary of Treasury’s FinTech Report
The Treasury released a report on “Non-bank financials, Fintech and Innovation”. The main recommendations of the report are:
- Work with federal and state regulators to establish a “regulatory sandbox” to invite innovations from new and existing market participants
- Encourage regulators across the country to harmonize rules to create a clear and consistent environment for innovators and existing financial institutions
- Update rules to accommodate technological advances such as facilitating service partnerships between banks and nonbank firms and further digitize the mortgage experience
- Facilitate a faster retail (same-day settlement) payments system
- Congress to codify “valid-when-made” doctrine and the role of the bank as “true lender” of the loans it makes
- The CFPB to rescind the Payday rule as the rule would further restrict access to credit
- Provide regulatory clarity for the use of data and algorithms in underwriting
- The IRS should enable lenders to underwrite using tax reporting data
Also, the US Treasury encourages the OCC to further develop its a Special Purpose National Banking (SPNB) Charter introduced in December 2016 (summarized here in our prior newsletter).
OCC Asserts its Authority and is Open to Accepting SPNB Charters
Immediately following the report, Joseph Otting, Comptroller of the Currency, announced that the OCC would start accepting applications from “fintech companies that are engaged in the business of banking but do not take deposits.” The OCC, whose authority has been challenged by NYS Department of Financial Services, cited the National Bank Act as the source of its powers to grant charters. (Early applicants for the charter should be prepared for the possibility of litigation from State AGs.)
The OCC implicitly made the argument that they are the appropriate regulator for FinTechs to ensure an even playing field and “consistency in the application of laws and regulations across the country and ensure that consumers are treated fairly.”
An SPNB can engage in a limited range of banking or fiduciary activities like credit card operations, taking deposits, paying checks, lending money, community development, or cash management activities. The policy is a significant development as companies with the Fintech charter would be able to perform banking activities like lending and payment processing nationally. Fintech companies can avoid myriad state and local regulations, experiment to provide new financial products, and compete and serve as national banks.
Who are the Likely Winners and Losers?
The long-term winner of the charter is the US consumer who will benefit from greater competition, innovation, and access to credit. Payments companies that seek to compete with Visa/Mastercard also stand to benefit. Lenders that qualify for the charter may also have a competitive advantage. Payments arms of firms like Google, Apple, Amazon and PayPal would fit the profile, as well as large non-bank lenders that can demonstrate sustainable profitability de-risked their business models. Fintechs that have liquidity, funding, or going-concern risks will struggle to obtain charters.
The “safety and soundness” standards are at the same level as for other national banks, and our view is that technology firms that can satisfy their liquidity needs from operations or sale of marketable securities (under various market conditions), and have credible access to the capital markets would be likely beneficiaries.
Technology firms may also choose to avoid the charter to maintain a culture of growth and innovation. Partner funding banks such as Web Bank and Cross River Bank will continue to play an important role.
I am a Lender – How do I Qualify for The FinTech Charter?
Below we summarize three buckets capturing the standards for the FinTech Charter: Management and Governance, Capital & Liquidity, Risk Management. We also highlight specific areas where PeerIQ’s analytics can help.
Management and Governance Requirements
Robust, well-developed business plan
|A detailed 3-year business plan with economic forecasting and risk assessments. Key areas:
· Market Definition / Customer Base
· Economic conditions
· Competitive Landscape
· Risk Assessment (including related to regulatory BSA/AML, etc.)
· Experience of management and board
· Initial and Future capital contributions
· “Plans for serving the community”
|· FinTechs will need to ensure that they have a well-documented business plan that can survive stressed market environments
|Governance Structure||· Management teams must have expertise, financial acumen, and risk management framework
· ‘Hands-on’ Board (e.g., guide risk management framework, provide credible challenge, exercise independent judgement)
· Structure should be commensurate with risk and complexity of products
|· Expect less VCs on boards and board tilted to former regulators and bank execs
· Already in motion at several platforms (e.g., SoFi, Lending Club, Avant)
Risk Management Requirements
Partner with PeerIQ
|Risk Management and Compliance||· Top-down, enterprise-wide culture of compliance
· Systems (e.g. policies and procedures, practices, training, internal controls, and audit)
· Compliance programs to implement BSA, AML, OFAC, and other related obligations
|· Growth vs. Compliance culture trade-off||PeerIQ’s class-leading risk management platform can help measure and monitor risks, and stay in compliance with regulations|
|Financial Inclusion||· Must demonstrate a commitment to financial inclusion that supports fair access and fair treatment
· Explanation of how products would provide access to under-served consumers and small business
|· The Treasury report emphasizes financial inclusion from fintech lending and lenders must be able to demonstrate it effectively||Benchmark your under-served borrowers to those in the broader market using PeerIQ’s TransUnion dataset|
|Formal Plan for Failure||· Articulate specific financial or risk triggers to address best-case or worst-case scenarios
· Comprehensive framework for evaluating effects of severe stress
· Triggers alerting the entity to the risk of potential stress, and notification procedures
· Credible options to restore financial strength
· ‘May require’ a clear exit strategy
|· “Living Wills” have become the norm post-crisis for financial institutions.
· This is a potentially onerous regulatory requirement.
|PeerIQ’s stress-testing tools help develop worst-case loss estimates under various scenarios|
Capital and Liquidity Requirements
Partner with PeerIQ
|Capital||· Qualitative factors (e.g. quality of management, operating procedures and controls, asset quality, risk diversification, etc.)
· On and off-balance sheet composition
· Credit risk
· Concentration Risk
· Market Risk
· Capital should be commensurate with risk and complexity of products
|· Capital requirements not specified
· Off-balance sheet financing would include securitization programs
|PeerIQ’s Credit Facility Management Suite helps optimize capital required|
|Liquidity||· Access to funds, and cost of funding
· Projected funding sources, needs, and costs
· Net cashflow and liquid asset positions
· Projected borrowing capacity
· Highly liquid and collateral positions (including marketability of such assets)
· Various interest rates scenarios, time horizons, and market condition stress tests
|· Likely to be the most challenging area
· Securitization and other distribution mechanisms required for improving marketability of assets
· Data & analytics required for liability management, stress testing, and improving transparency on collateral pools
|PeerIQ’s stress-testing tools help develop worst-case loss estimates under various scenarios, and set aside the appropriate amount of capital|
FinTechs that can demonstrate “safety and soundness” and exhibit robust 3rd party risk management analytics have a competitive advantage. Reach out to PeerIQ to learn more!
- PeerIQ Releases Q2 2018 Marketplace Lending Securitization Tracker (Lend Academy, 8/2/18)
- PeerIQ is hosting a webinar on “OCC’s New FinTech Charter – What Does it Mean for Lenders and Investors?” on Wednesday 8/8 at 1 pm EDT. Click here to register and to add the invitation to your calendar.
- PeerIQ’s CEO, Ram Ahluwalia, will speak on the Tomorrowland is Here Today: What Will the Structured Finance Market Look Like in 2025 panel at 11 am on Monday, September 24th 2018 at ABS East in Miami.
- PeerIQ’s CCO, Kevin Walsh, will speak on The Innovation Institute: Technological Solutions for Improving Market Transparency panel at 4 pm on Monday, September 24th 2018 at ABS East in Miami.
- PeerIQ’s CEO, Ram Ahluwalia, will speak on The CEO’s Roundtable: Expanding Your Business Model panel at 10 am on Friday, November 2nd 2018 at the Investor’s Conference on Online Lending in New York.
- Payrolls Rise 157,000 While Annual Wage Gains Hold at 2.7% (Bloomberg, 8/3/18) The US economy added 157k jobs in July and the unemployment rate dropped to 3.9%. Wage growth came in strong at 2.7% keeping the Fed on its stated rate hike path.
- Fed Leaves Key Rate Unchanged with Economy Growing at ‘Strong Rate’ (Bloomberg, 8/1/18) The Fed kept rates on hold, as expected, this week, and noted that economic activity had been “rising at a strong rate,” and unemployment “has stayed low,”, providing guidance for a rate hike in September.
- Trump Administration Embraces Fintech Startups (WSJ, 7/31/18) The Treasury report on FinTech startups has paved the way for the OCC to approve Special Purpose National Banking charters. Join our webinar to learn more!
- Increasing number of consumers have obtained their credit scores and know much more about credit scores than others (VantageScore.com, June 2018) 57% of consumers obtained their credit score in 2018, up from 49% YoY, as consumers get more knowledgeable about their credit options.
- Credit-Card Backlash Mounts as Kroger Weighs Expanding Visa Ban (Bloomberg, 7/30/18) Fees that issuers can charge on credit cards are coming under increasing pressure as Krogers drops Visa and Walmart moves its partnership from Synchrony to Capital One.
- Moody’s assigns definitive ratings to CommonBond Student Loan Trust 2018-B-GS (Moody’s, 8/2/18) Moody’s has rated the senior tranches on Commonbond’s largest securitization AAA.
- Happy Money Announces Three Strategic Credit Union Alliances (BusinessWire, 7/31/18) In continuing fintech-credit union partnerships, Happy Money, a fintech lender, has teamed up with Alliant, First Tech and Technology Credit Unions to provide financing for its PayOff product that consolidates credit card debt.
- PACE Consumer Protections Set Standard for Home Improvement Financing (Business Insider, 8/2/18) Ygrene has become the first Clean PACE certified partner in Florida by providing customer-friendly home improvement financing.
- Best Practices of Influential Credit Risk Managers (Sandeep Bhandari, CRO at Affirm on LinkedIn, 7/23/18) Sandeep Bhandari lays out the principles of his credit philosophy that enable risk managers to focus on resilient business growth.
- In Second Act, a Silicon Valley CEO Opens Up About Affairs (WSJ, 7/27/18) Cagney’s new startup Figure made its first home-equity loan this week, as he moves on from the scandals that plagued him at SoFi.
- An AI-driven robot hand spent a hundred years teaching itself to rotate a cube (MIT Tech Review, 7/30/18) A self-learning algorithm that allows robots to practice real-world skills in virtual reality is giving them great dexterity.