The Office of the Comptroller of the Currency is pushing ahead on its plan to get charters into the hands of fintechs. The House Financial Committee’s Fintech Task Force met last week to discuss the OCC’s proposed payments charter, a pared-down version of the OCC’s fintech charter blocked by a federal court in New York last year.

“The planned payment charter is expected to face similar legal challenges,” said U.S. Rep. Stephen Lynch, a Democrat from Massachusetts and chairman of the task force, during the virtual hearing. “Both the charters and the [industrial loan company] approvals raise questions about the traditional separation of banking and commerce, and the entry of technology firms with their move-fast-and-break-things approach into the financial services arena.”

The OCC’s new charter would allow payment fintechs to operate nationally without needing state-by-state licensing, a move banks argue would create an environment of flimsy regulation for tech companies. As technology continues to drive payments innovation, however, experts view the current licensing system as archaic.

State-by-state licensing can be costly for payment fintechs. Firms spend money on lawyers and partner banks to launch their services nationwide, a burden not shared by national banks. According to Brian Knight, director of innovation and governance at the Mercatus Center at George Mason University, the current system gives banks an unfair competitive advantage that could hinder innovation in financial services and harm consumers. 

“There’s at least an acknowledgment among some of the members of Congress that there’s a real problem this is trying to solve,” Knight said. Whether the payments charter is the ideal solution is debatable, he added, but it still doesn’t negate the underlying problem.

The payments charter also brings up issues around states’ rights and whether the OCC is better suited than individual states to regulate payments companies operating nationally. Plus other markets, such as Europe, already offer fintech charters. “The world does not stop turning on its axis if you allow for passporting or communitywide operation of these businesses,” said Thomas Brown, a partner with the Paul Hastings law firm focused on antitrust and competition and global banking and payments system practices.

Banks and credit unions view specialty charters as a way for fintechs to enjoy all the advantages of being a bank without meeting the same regulatory standards. In a letter to the House task force last week, the Credit Union National Association argued the OCC hasn’t fostered a transparent process in pushing the payments charter forward. The Independent Community Bankers of America, meanwhile, said in its statement before the hearing that specialty charters create a dangerous blend of banking and commerce.  

The payments charter also raises questions around what regulations fintechs must obey. The Community Reinvestment Act, for example, requires banks to lend to low- and moderate-income households and businesses in areas where banks operate, an important regulation the ICBA says fintechs shouldn’t be able to neglect. 

“The special payments charter raises many of the same concerns raised by the fintech charter,” the ICBA wrote. “It could be used to access the Federal Reserve payment system and avoid state consumer protection laws.” 

There’s debate around whether the light regulation argument holds up. Julie Hill, a professor of law at the University of Alabama and regulation expert, said banks put this argument forward to mask their real concern about allowing competition to gain charters. Along similar lines, state regulators often attack the lack of control under the OCC’s vision, but the loss of regulatory fees weighs heavily on their minds. 

Experts also point out that the regulations designed to protect consumers from deposit-taking institutions with FDIC insurance shouldn’t apply to payments firms. Consumers are generally unharmed when a payments company fails, according to Brown.

“A business that holds reserves on a one-to-one basis doesn’t really raise those safety and soundness issues,” Brown said. “Pointing to this sort of boogeyman shouldn’t pass muster at this point.”

The charter issue has blurred traditional party lines. OCC Comptroller Brian Brooks is championing both the original fintech charter and the payments charter. But the fintech charter was first introduced in 2016 by then-Comptroller and Obama appointee Thomas Curry. The original fintech charter included both payments and lending fintechs. The proposed payments charter has ditched the lending clause to create a more focused charter option, and the OCC is ready to accept applications.

See also: 2020 election: What’s at stake for bank charters

Experts agree the payments charter, even though it’s pared down, will meet the same challenges in court as the fintech charter, with Knight adding the two charters stand and fall together. Although the upcoming election makes the future unclear, the consensus is that the OCC is prepared to take the issue all the way to the Supreme Court, a fight Brown said the OCC should win, given its authority to grant charters.

Regardless of the future of the payments charter, many view the current regulatory landscape as unsustainable.

“The fintechs are here to stay. I think there has to be a more streamlined way to regulate them. I just don’t think the current situation is useful, and I don’t think people will tolerate it long-term,” Hill said. “If we look down the road in 10 years, we don’t see this fragmented system of regulation that we have now because it’s really not good for anyone.”

The 2020 Banking Automation Summit Virtual Experience, taking place November 9-10, is a new event that will provide a platform for industry professionals to share fresh insights, tools, trends and strategies. The Summit will focus on how automation will transform banking, especially with regard to back-office operations, risk management, data science and utilization, customer experience and more. Register here.