When the Office of the Comptroller of the Currency (OCC) announced in July that it would begin accepting proposals from fintech companies for special purpose national bank charters (SPNBC), it set off a wave of nervous reaction. That has been fueled by trade articles warning of an epic wave of competitors, unburdened by legacy infrastructures, advancing financial services. They posit that major market disruption and disintermediation will result.
While disintermediation is a real risk, the greatest risk facing financial institutions is the increasing pace of change in the industry. To keep up, financial institutions must prepare for the new ways in which financial services will be delivered and then look for the new opportunities.
The basics of the SPNBC
In essence, a fintech SPNBC could be available to fintech companies engaged in lending activities (without taking deposits) as well as companies engaged in payments, broadly defined as including electronic payments. This would allow them to operate as standalone financial institutions, no longer needing banking partners to sponsor or distribute their technologies.
Although this opens the gate for fintech companies, meeting charter application requirements around capital, liquidity reserves, financial stress test plans and financial inclusion represent high hurdles for most. Stringent OCC requirements will limit the number of fintech companies that will “go it alone” without an established banking partner.
The risk of irrelevancy
Think about how educational systems are changing to match the future: Rote memorization has given way to learning how and where to access information, and graduation no longer signals the end of learning.
Likewise, financial institutions must prepare for changes in the landscape at an ever-quickening pace in order to maintain relevancy as consumer expectations increase. Preparing for SPNBC and future market disruptions requires knowing how and where to access appropriate solutions. It’s not about creating them.
How to prepare for SPNBC
The best way to prepare is to play to your strengths and minimize your weaknesses:
- Competitive strengths: Financial institutions already have the trust of their customers and know how to operate in a heavily regulated industry. Most fintech companies will find regulatory hurdles to be a non-starter.
- Achilles’ heels: Many financial institutions need to shore up perceived speed and convenience gaps in current solutions through partnerships with stable and secure fintech companies.
Financial institutions can prepare for SPNBC by taking three actions:
- Modernize platforms to enable the creative innovations that will enhance consumers’ banking and payment experiences, and meet their expectations.
- Engage a partner with the scale, agility and commitment to bring new solutions to market rapidly. Look for partners that will shorten the launch cycle to enable your institution to benefit from opportunities and defend against challengers.
- Be mindful of third-party risks. It’s critical to conduct due diligence to ensure partner trust and stability, including reviewing current partnerships. Be sure to ask what happens if your partner is granted an SPNBC.
Social messaging advances into fintech territory
Both Hike, backed by China’s Tencent, and WhatsApp, owned by Facebook, messenger services have added payment capabilities on their platforms in India. Payment services include both P2P payments that don’t require bank accounts, and bank-to-bank payments using the Unified Payments Interface (UPI) platform – India’s real-time payments system. Their entries into payments puts them squarely in competition with P2P payment provider Tez, owned by Google, and One97’s Paytm, which is now rolling out messaging to combat advances into their territory. Note the powerful partners that all of these players bring to the party.