When Should Fintechs Become Banks?

Earlier this month, Accion Opportunity Fund responded to the Office of the Comptroller of the Currency’s (OCC) request for comments on their proposal to offer a national special purpose charter to non-bank institutions. This initiative comes in light of the rapidly expanding field of online technology finance lenders (fintechs for short), a field into which Accion Opportunity Fund has newly ventured through our partnership with Lending Club. Through this partnership we are expanding our lending operations online, serving clients that would not otherwise be able to secure responsible, fairly priced capital.

We see the potential for online lending to increase affordable access to capital and spread fair and transparent financial practices in the small business lending field. Therefore, Accion Opportunity Fund supports the development of a special purpose nonbank charter as long as all new chartered entities meet certain high standards around consumer protection, data transparency, and financial inclusion. We support the charter only being granted to fintechs offering products at lower than 36% APR equivalent.

Below are the highlights of our comments:

Streamlined Expansion. A special-purpose national bank charter may be a more streamlined way for responsible lenders like Opportunity Fund, the lending arm for Accion Opportunity Fund, to expand to other states by creating efficiencies in licensing and reporting requirements and allowing for standardization of product offerings, all of which could translate into serving more business owners at a lower cost.

Facilitation of Responsible and Transparent Lending. As our past research has indicated, many online offerings for small businesses are neither transparent nor responsible. We believe the charter should contain strong requirements for disclosures and responsible lending, as outlined in the Small Business Borrower’s Bill of Rights.

Require Underwriting. The OCC should place extra scrutiny on lenders that receive daily payment directly from a business owner’s checking or merchant account and should require underwriting to ensure these loans are sustainable for business owners.

Inclusion of a 36% APR Cap. A charter should only be granted to providers offering products below 36% APR, whether they be for consumer or business use.

Evaluate All Activities. Under no circumstances should a charter be granted to a lending company that simultaneously holds a separate company offering unregulated products (such as merchant cash advances).

Consistent Data on Small Business Loans and Outcomes. The OCC should work in close contact with the Consumer Financial Protections Bureau (CFPB) to determine the key small business lending data points to collect in order to assess the performance of special purpose charter grantees in meeting community credit needs.

Community Oversight. The OCC should develop an efficient, transparent method for accepting complaints from consumers and community groups about both borrower protection and financial inclusion violations.

Prioritize Meaningful Investment in Financial Inclusion. Fintechs should be required to serve a meaningful proportion of low and moderate income( LMI) customers in all geographies in which they provide services and make particular efforts to reach minority communities. They can do this directly or through partnerships, investments and/or philanthropy.

The inclusion of these tenets in a special purpose national charter offered by the OCC would set a national standard of fair financial practices, transparency, and community investment. As Accion Opportunity Fund has shown, innovation and financial inclusion don’t have to be mutually exclusive.