This article was originally published in Credit Union Times
The Office of the Comptroller of the Currency (“OCC”) recently announced that it would consider applications by Fintech companies to organize a national bank to conduct their activities. This should be a wake-up call for many institutions, but particularly credit unions and community banks. This action taken by the OCC was inevitable in light of recent developments in the financial services industry. The decision makes good economic sense since electronic banking is cost effective and can reach consumers any time day or night. The OCC clearly has emerged as a leader and an enthusiast of wedding technology to the bank charter. The OCC noted that such banks, as should be the case, will be subject to the same safety and soundness standards, albeit with some modification due to the nature of their business.
The credit union industry has already suffered a well-known adverse effect of technology due to the impact of Uber on the taxi industry and medallion lenders in the New York City metropolitan area. Like many competitive threats, the impact was not recognized until it was too late. The Uber effect has taken some time to take hold and now it is in full force. In fact, the word Uber is now being used as a verb as a credit union client of mine recently told me that he did not want to be “Uberized”!
Nationally chartered Fintech banks would have the ability to provide lending, deposit, or payment system services individually or a combination thereof. Most likely Fintech banks will focus on payment systems and therefore will not need to be federally insured. These banks will also carry the power of federal preemption. There are many questions that remain to be answered in this national bank development and the OCC is seeking public comment. State chartered Fintech banks are also a possibility depending upon state law.
Credit unions, unlike banks, do not carry many of the tools to compete with the potential competitive threat. They cannot raise equity capital for investment other than through earnings, they are limited in the scope of customers they can serve, their commercial lending authority is limited, and their corporate structure is more constrained. Thus, the NCUA’s recent board meeting at which secondary capital was a topic takes on more significance. Further exacerbating the situation is the recent bankers’ challenge to the new FOM and MBL rules.
Unlike the days of old when credit union members were more easily recruited through their employer, credit unions now must do battle in the community with other financial service providers, many of which are larger with more resources. Their competitors probably also have greater ability to buy a Fintech company or invest in technology. Many young people do not have an affinity for the message of credit unions or traditional banks since there are so many alternatives in the marketplace. Pricing differential is not necessarily going to drive the consumer’s choice and electronic delivery is very attractive, particularly when it is mobile and at the customer’s finger tips.
The electronic competitor is a growing disruptive force to the traditional banking delivery channels. It is unburdened by the many costs that a typical institution must carry such as brick and mortar, credit risk, a multitude of compliance costs, and CRA in the case of banks. It remains to be seen, however, what financial inclusion standards the OCC may impose on a Fintech bank in the form of a CRA-light obligation, for example.
There are lessons that should be learned quickly from the taxi medallion episode. The next technological development may be upon us without much advance warning and all institutions need to be prepared for the coming events. Conducting a SWOT analysis at the next strategic planning session is probably a good idea. Take heed, the future is here. Survive or be “Uberized”.
Richard Garabedian is based in Womble Carlyle’s Washington, D.C. office where he represents financial industry clients in mergers and acquisitions, as well as regulatory matters. He also advises clients on bank and credit union charter changes, new products and services, de novo bank formations, government assisted acquisitions of failing financial institutions, enforcement matters, corporate governance, stock and mutual holding company formations and mutual-to-stock conversions. Garabedian is also a member of the firm’s Fintech Leadership Team and the Impact Economy Team.