Author Topic: OCC FinTech Charter  (Read 6011 times)

JoeF

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OCC FinTech Charter
« on: December 02, 2016, 04:52:30 PM »
OCC moving forward with limited purpose charter. Do P2P companies and/or investors care?  Maybe with FDIC insurance, they will become the credit union of the digital age.

https://occ.gov/news-issuances/news-releases/2016/nr-occ-2016-152.html

Fred93

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Re: OCC FinTech Charter
« Reply #1 on: December 02, 2016, 05:02:37 PM »
I believe its a big thing for the P2P companies.  If it works out, they will be able to reduce the complexity of their compliance by avoiding state-by-state licensing and complex relationships with a bank.

For investors I don't think it matters.

rawraw

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Re: OCC FinTech Charter
« Reply #2 on: December 03, 2016, 12:54:31 AM »
I believe its a big thing for the P2P companies.  If it works out, they will be able to reduce the complexity of their compliance by avoiding state-by-state licensing and complex relationships with a bank.

For investors I don't think it matters.
It could matter if self funding takes preferences over crowd funding, given its much cheaper, stable, and easy to make money. I hope this enables hybrids to happen, which can improve platform viability and consistency

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nonattender

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Re: OCC FinTech Charter
« Reply #3 on: December 03, 2016, 02:19:55 AM »
Frankly, sounds like a wonderful way for a bunch of lobbyists on all sides to enrich themselves for the next few years, keep new entrants distracted in regulatory limbo, and allow the already established players to strengthen ties with "real" banks and capture market share - perhaps picking up a "real" bank or two, on the cheap, as their long-term valuations are diminished by the uncertainty of their necessity.

Maybe I'm just being cynical at the use of the term "credit union of the digital age" - it sounds like marketing copy, not a business model.

I am open to being enlightened, however.
A little nonsense now and then is relished by the wisest men.

rawraw

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Re: OCC FinTech Charter
« Reply #4 on: December 03, 2016, 02:23:31 AM »
Frankly, sounds like a wonderful way for a bunch of lobbyists on all sides to enrich themselves for the next few years, keep new entrants distracted in regulatory limbo, and allow the already established players to strengthen ties with "real" banks and capture market share - perhaps picking up a "real" bank or two, on the cheap, as their long-term valuations are diminished by the uncertainty of their necessity.

Maybe I'm just being cynical at the use of the term "credit union of the digital age" - it sounds like marketing copy, not a business model.

I am open to being enlightened, however.
What is the economic reason bank valuations would change?

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nonattender

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Re: OCC FinTech Charter
« Reply #5 on: December 03, 2016, 02:30:43 AM »
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
« Last Edit: December 03, 2016, 02:40:14 AM by nonattender »
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Fred

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Re: OCC FinTech Charter
« Reply #6 on: December 03, 2016, 02:39:13 AM »
The requirements are quite high though:

Quote
Companies that seek a charter are evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity.

I'd say in RL's debacle, LC failed on the second one -- appropriate risk management.

nonattender

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Re: OCC FinTech Charter
« Reply #7 on: December 03, 2016, 02:46:07 AM »
The requirements are quite high though:

Quote
Companies that seek a charter are evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity.

I'd say in RL's debacle, LC failed on the second one -- appropriate risk management.

A CircleBack backed by FDIC (ie, you and me) is not something I'd want to see...
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rawraw

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Re: OCC FinTech Charter
« Reply #8 on: December 03, 2016, 02:59:21 AM »
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
What's the difference between a bank with a charter and your fake bank with a charter? Is bank of the Internet a fake bank? Is usaa? Live oak?  I'm not sure I follow

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nonattender

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Re: OCC FinTech Charter
« Reply #9 on: December 03, 2016, 03:07:13 AM »
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
What's the difference between a bank with a charter and your fake bank with a charter? Is bank of the Internet a fake bank? Is usaa? Live oak?  I'm not sure I follow

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No, I think you follow pretty well...  The question is really, aside from the buzzwords, what's "special" about doing banking functions over the internet - versus at a branch?  Ok, they're "limited" to 1/3 the function - alright, tie 3 "limiteds" together and, voila, a 'bank' - except without the same compliance rigor (unless there's something else 'special' that I'm missing in this equation).  What's special?
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rawraw

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Re: OCC FinTech Charter
« Reply #10 on: December 03, 2016, 03:15:23 AM »
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
What's the difference between a bank with a charter and your fake bank with a charter? Is bank of the Internet a fake bank? Is usaa? Live oak?  I'm not sure I follow

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No, I think you follow pretty well...  The question is really, aside from the buzzwords, what's "special" about doing banking functions over the internet - versus at a branch?  Ok, they're "limited" to 1/3 the function - alright, tie 3 "limiteds" together and, voila, a 'bank' - except without the same compliance rigor (unless there's something else 'special' that I'm missing in this equation).  What's special?
I'm not so sure about they have less rigor due to the charter. If you're only doing one third of banking activities, then lots of regulations do not apply to you because you don't engage in them.   I've always been different from the Fintech guys, but I think this is good for banks long term. I think these things are like the ATM. Structural changes in efficiency of the industry. The problem is if the regulatory barriers to entry get reduced too much, industry leading margins may be less protected. But I currently think the efficiency gains will be more beneficial than the reduction of regulatory moats. But I spend a lot of time trying to figure out where I'm wrong on this

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nonattender

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Re: OCC FinTech Charter
« Reply #11 on: December 03, 2016, 03:56:35 AM »
The problem is if the regulatory barriers to entry get reduced too much, industry leading margins may be less protected. But I currently think the efficiency gains will be more beneficial than the reduction of regulatory moats. But I spend a lot of time trying to figure out where I'm wrong on this

I think you just answered your earlier question to me about why I thought this intro'd economic reasons for bank valuations to change, gonna be big fight, knock down, drag out.

I see DFS/STI/GS acquiring and servicing customers via DM/online, already, current reg paradigm.  They are not doing retail note sales - that because they can't or that because they don't want to do so / don't have to do so?  Their costs of capital are as low as they go. ;)

See why fintech is jealous of that - do not see why fintech so special as to get exemptions;  not likely they pass efficiency to consumer.

Open to being shown error of my thinking on that, which is, currently "banks not charging orig fees are outcompeting fintech capcosts".

My Q:  Is OCC being asked to "level the playing field" or "pick winners and losers"?
« Last Edit: December 03, 2016, 04:09:58 AM by nonattender »
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rawraw

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Re: OCC FinTech Charter
« Reply #12 on: December 03, 2016, 04:40:47 AM »


I think you just answered your earlier question to me about why I thought this intro'd economic reasons for bank valuations to change, gonna be big fight, knock down, drag out.

I see DFS/STI/GS acquiring and servicing customers via DM/online, already, current reg paradigm.  They are not doing retail note sales - that because they can't or that because they don't want to do so / don't have to do so?  Their costs of capital are as low as they go. ;)

See why fintech is jealous of that - do not see why fintech so special as to get exemptions;  not likely they pass efficiency to consumer.

My Q:  Is OCC being asked to "level the playing field" or "pick winners and losers"?

Banking is already fiercely competitive, so that's not a new phenomenon. And unlike most countries, we have thousands of banks competing and not just a handful. I think this meaningfully impacts the competitive environment.

I think that mortgage is a good product through which to think about peer lending, at least starting off. Why do mortgage brokers exist when they rely on bank financing? Why do some banks choose to originate and sell mortgages while others portfolio them? While the 30 year duration is a huge difference, many of these dynamics take form in auto lending as well. I don't view it as a good proxy like mortgage because it's indirect, but both give clues.

So I disagree that efficiency doesn't get passed to consumer, given the number of competitors in the market place. And I think there are current bank examples of how it could look like (auto and mortgage).

Unique charters are nothing new. Savings banks, mutuals, trust banks, mortgage banks, correspondent banks, credit card banks, foreign banking offices, industrial charters all operate under different rules that vary based on their permissible activities and operations. I think OCC is helping add stability to the sector. I'm going to laugh when sofi opens a bank, after their inflated rhetoric on banks lol

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nonattender

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Re: OCC FinTech Charter
« Reply #13 on: December 03, 2016, 02:51:43 PM »
Don't think have to jump to not-yet-extant products like mortgage to see efficiency:  Consumers already benefit from the pressure placed on banks by "fintech" reintroduction of the personal loan.  Just happens that fintech - for a minute - was able to drive the rates down on a big chunk of those, forcing "banks" to meet/compete with those product offerings.  Tide has now turned and the bank response to fintech has been to begin offering personal loans at equal or lower rates *and without origination fees* - which is a huge win for consumers, but wouldn't have happened without the pressure placed on them to stay competitive with the new "fintech" players - who are now behind...

Don't get me wrong... I am willing to hear out both sides.  I just want to make sure some benefit accrues to the consumer from all of this, otherwise, I am (and so will regulators be) disinclined to act on the matter.  The "special" benefit to consumers needs a really good case.

Already, I suspect that if "fintech" gets access to a lower cost of capital, "fintech" will decide to further abandon retail investors - take the newfound spread that they make on capcost arb (to replace orig fee revenue) - and that nothing further changes.  On the flipside, fintech doesn't get access to lower capcosts (somehow), then the pressure on banks to compete at these 'lower' lending rates may dissipate.

So... I'm open... but not sold.  And I'm listening - as always.
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JoeF

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Re: OCC FinTech Charter
« Reply #14 on: December 05, 2016, 10:05:35 AM »

No, I think you follow pretty well...  The question is really, aside from the buzzwords, what's "special" about doing banking functions over the internet - versus at a branch?  Ok, they're "limited" to 1/3 the function - alright, tie 3 "limiteds" together and, voila, a 'bank' - except without the same compliance rigor (unless there's something else 'special' that I'm missing in this equation).  What's special?

The first iteration of this charter will likely be subpar, but I give credit to the OCC for trying to "level the playing field" for fintechs.  Access to become a franchise in our public-private financial system* is currently very costly and laborious process, and as such a high barrier for entry.  Hopefully this is the first step to lowering that barrier. 

That being said, a charter won't be for everyone.  Decision will come down to what type of risk adjusted returns are your equity investors looking for.  Those comfortable with the returns playing at the fringe should not opt for the charter.  Therefore, I envision this charter really benefiting already established large scale tech companies such as Google, Amazon, Paypal, Facebook, etc.



* The Finance Franchise https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820176 see Section VI for analysis of fintech