Locke Lord QuickStudy: Payments Charter 1.0

Readers will recall that in our previous articles (here and here) concerning the latest developments in money transmittal laws, we noted state regulators’ increasing tendency to enforce their state money transmittal laws on out-of-state companies, even if companies do not have a physical presence in the state. The result of this trend has forced most money transmitters to navigate an increasingly complex, patchwork regime of state and federal money transmittal laws. At the time, we noted that this trend has caused some tension between state regulators and the OCC regarding enforcement, and our conclusion was any uniformity among the various state jurisdictions was not likely to happen any time soon. Since that time, new developments have occurred that may prove a boon to money transmitters.

On June 25, 2020, Brian Brooks, Acting Comptroller of the Office of the Comptroller of the Currency (the OCC), revealed on the American Bankers Association’s podcast that the OCC plans to implement a new national payments charter program, dubbed “Payments Charter 1.0”, in the fall of 2020. The purpose of this Payments Charter 1.0 is to eliminate the need for a money transmitter to obtain a separate license from each state to conduct business. Brooks noted that Payments Charter 1.0 would accomplish this by giving a money transmitter a federal money transmitter license, which would preempt the need for the transmitter to get a license in each state separately. Brooks went on to state that if Payments Charter 1.0 is a success, then eighteen months after the roll out of Payments Charter 1.0, the OCC will release “Payments Charter 2.0,” which is intended to give money transmitter companies direct access to the Federal Reserve payment system. 

In arguing for Payments Charter 1.0 and 2.0, Brooks reiterated the OCC’s legal position that the definition of a “bank” includes any entity that conducts any of the following activities—lending, taking deposits, or money payments. Brooks noted that while historically traditional banks have conducted all three of these activities for consumers, with the rise of FinTech and other technologies, consumer preference has shifted such that consumers are now using different entities to engage in each of these activities separately, leading to an increasingly segmented market. The result of this segmentation means that the OCC finds itself regulating not just traditional banks but other boutique financial institutions, including more technologically oriented FinTech money transmitters, who while not engaging in lending or taking deposits, do operate on a global scale in the money payment space. Brooks explained that such global companies should not have to navigate the complexity of 50 different state regimes, but instead should just be subject to one regime at the federal level, under the OCC’s watch.

While Payments Charter 1.0 is expected to be released this Fall (an “ambitious but realistic goal” according to Brooks), it remains to be seen how smoothly the roll out of Payments Charter 1.0 will go following its release. While FinTech companies and strictly money transmitting companies would be advantaged by Payments Charter 1.0, we anticipate that there will be challenges to the proposed implementation of Payments Charter 1.0 from several different groups, including state regulators and traditional banks. For example, the New York Department of Financial Services (NYDFS) has already opposed and brought a suit against the OCC for its previously announced FinTech charter, with the NYDFS arguing that the FinTech Charter was outside the scope of the OCC’s authority. The United States District Court ruled in favor of the NYDFS, and the decision is currently on appeal with the Second Circuit. State regulators may try to bring a similar claim against Payments Charter 1.0 if the OCC were to implement Payments Charter 1.0. Likewise, some traditional banks may feel compelled to speak out against Payments Charter 1.0 since it will effectively lower the barriers to entry to companies that may not otherwise be subject to the same rules and regulations as traditional banks, such as being subject to the Community Reinvestment Act requirements. Brooks noted that the OCC is working through these issues and that there would likely be some kind of expectation that money transmitters would be subject to the CRA at some level. 

Companies seeking to enter into, or expand in, the money transmittal industry are clearly facing problems in effectuating an effective business plan. The lack of guidance in many states as to the requirements for compliance with state law is an issue. However, the burden of determining compliance with the money transmittal laws of all 50 states may well soon be in the past. A choice of a national charter which would preempt these states laws would be highly desirable as a solution to the liability and expense of multi-state compliance.