Non-U.S. fintechs in key countries may branch into the U.S. as foreign banks and do practically everything a national bank can do, other than accept insured deposits. That’s a powerful option that U.S. fintechs cannot use.
The federal banking agencies under a second Trump Administration are expected to be more receptive to industry proposals geared toward growth. We’ve previously explored national trust banks to streamline state licensing. Another option is for foreign banks to enter the U.S. market by establishing U.S. branches.
Because some countries have modernized their banking systems in ways that currently outpace the United States, certain non-U.S. fintechs may constitute foreign banks and be able to branch into the United States. This option allows them to do more activities more efficiently than U.S. fintechs are able to under the current U.S. framework.
Key Takeaways
- Non-U.S. fintechs that engage in banking in home countries that the Federal Reserve has determined are subject to “Comprehensive Consolidated Supervision” (CCS) can branch into the United States with the approval of the Federal Reserve and a state regulator or the Office of the Comptroller of the Currency (OCC).
- Assuming a non-U.S. fintech obtains a federal branch license from the OCC, it can engage in practically every activity a national bank can, other than accepting FDIC-insured deposits. Many fintech lenders don’t want to do that anyway. And it doesn’t stop them from accepting uninsured deposits (i.e., those above $250,000).
- Establishing a federal branch avoids the legal uncertainty involved with the OCC’s “special purpose national bank charter” as well as 50+ state money transmission, consumer lending, and other licenses. It also avoids the chartering/acquisition and FDIC deposit insurance application process that can be subject to delays. One non-U.S. payments company has already taken advantage of this option.
- U.S. fintechs cannot take advantage of this process or the legal clarity it provides. They are instead mired in an impasse between the states and the OCC about what national banks can do. The unequal treatment of non-U.S. versus U.S. fintechs is at odds with the principle national treatment for foreign banks.
Fintechs as “Foreign Banks”
Under the International Banking Act of 1978 (IBA) and the Federal Reserve’s regulations, a foreign bank is any organization that is organized under the laws of a foreign country and that engages directly in banking activities usual in connection with the business of banking in the country where it is organized or operating (outside the United States).
The definition is broad and malleable enough to cover different kinds of financial institutions around the world. For instance, German and Japanese commercial banks, as well as groups of Canadian credit unions/cooperatives are considered foreign banks under this definition and have been able to branch into the United States.
Simply put—if the entity or organization is a foreign bank, it can seek to establish a U.S. branch.
Choice of State or OCC License, Plus Federal Reserve Approval
To establish a U.S. branch, a non-U.S. fintech (that is a foreign bank) may choose between a state license (for instance, New York or California) or a federal license from the OCC. The OCC will review:
- the financial and managerial resources and future prospects of the applicant foreign bank and the proposed federal branch
- whether the foreign bank has provided the OCC with information to adequately assess the application and assurances that all information will be made available to the OCC on the operations and activities of the foreign bank and any of its affiliates the OCC deems necessary to enforce compliance with the IBA and other applicable federal banking statutes
- whether the foreign bank and its U.S. affiliates are in compliance with applicable U.S. laws
- the convenience and needs of the community to be served, including the record of the participating institutions’ termination of individual customer accounts or categories of customer accounts or otherwise electing not to provide a person or category of persons with a financial service without assessing the risks posed by individual customers on a case-by-case basis
- the effect of the proposed branch on competition in U.S. domestic and foreign commerce
- whether the foreign bank is subject to CCS by its home country supervisor (or is working actively toward CCS)
- whether the foreign bank’s home country supervisor approved or consented to the establishment of the federal branch
- whether adequate controls for the detection of money laundering are in place at the foreign bank
Whichever license the non-U.S. fintech pursues, it must also obtain the approval of the Federal Reserve to establish a U.S. branch. The Federal Reserve will generally review for similar issues as the OCC, as well as:
- whether the home country is participating in multilateral efforts to combat money laundering
- whether the appropriate supervisors in the home country may share information on the bank’s operations with the Federal Reserve
In the case that a foreign bank presents a risk to the U.S. financial stability, the Federal Reserve also may consider whether the home country of the foreign bank has adopted, or is making demonstrable progress toward adopting, an appropriate system of financial regulation for the financial system of the home country to mitigate this risk.
Comprehensive Consolidated Supervision
Under the IBA, the Federal Reserve may only approve the establishment of a U.S. branch if it determines the foreign bank is subject to CCS, meaning the foreign bank is supervised or regulated such that its home country supervisor receives sufficient information on the worldwide operations of the foreign bank (including the relationships of the bank to any affiliate) to assess the foreign bank’s overall financial condition and compliance with laws and regulations.
The Federal Reserve typically considers (among other things) the extent to which the home country supervisor:
- ensures that the foreign bank has adequate procedures for monitoring and controlling its activities worldwide
- obtains information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit reports, or otherwise
- obtains information on the dealings and relationships between the bank and its affiliates, both foreign and domestic
- receives from the bank financial reports that are consolidated on a worldwide basis, or comparable information that permits analysis of the bank’s financial condition on a worldwide consolidated basis
- evaluates prudential standards, such as capital adequacy and risk asset exposure, on a worldwide basis
Practically speaking, non-U.S. fintechs from countries that have previously received CCS determinations have the best chances of branching into the United States.
*In certain cases, includes supervision under the Single Supervisory Mechanism.
The Fed maintains a list of the banks, branches, and other U.S. offices of non-U.S. banks.
Branching Into the United States
Establishing a U.S. branch is a substantial undertaking like chartering or acquiring a U.S. bank. A foreign bank that establishes a U.S. branch will generally—but with some notable exceptions—be treated as a bank holding company that is subject to Federal Reserve restrictions and requirements, even if the foreign bank does not own or control a U.S. bank. In addition, the U.S. branch and the foreign bank’s U.S. operations will be subject to U.S. supervision and regulation.
And while U.S. branches are not subject to separate capital requirements—unlike a U.S. bank— federal branches must maintain a capital equivalency deposit (CED). Subject to certain requirements and approvals, a federal branch must establish and maintain a CED account with an eligible U.S. bank in an amount equal to at least 5% of the total liabilities of the federal branch. The OCC may require a higher amount.
These costs come with notable benefits. A federal branch can practically do everything a national bank can do, other than accept insured deposits.
*Federal branches do not ordinarily lend to consumers, but they are not expressly prohibited from doing so.
National Treatment Considerations
Since at least the enactment of the IBA in 1978, U.S. banking policy has sought to uphold the principle of national treatment. Under this principle, non-U.S. banks should largely be able to participate in the U.S. market to the same extent that U.S. banks can. Today, some non-U.S. fintechs arguably are more favored than U.S. fintechs because U.S. fintechs do not have any options akin to establishing a U.S. branch of a foreign bank. That’s a big advantage for non-U.S. fintechs, particularly for those from countries for which the Fed has previously made a CCS determination.
We also note that some foreign banks are ahead of the U.S. in adopting digital asset tools and technologies. That could mean that once the U.S. regulatory hostility to digital assets dampens—which could likely happen in a second Trump Administration—foreign banks and their U.S. branches may be better positioned (at least for a time) to penetrate the U.S. markets in digital assets and blockchain because they are already using them in their home countries.
Congress and the OCC should work to rectify this disparity. In the meantime—and particularly under a new administration in 2025—non-U.S. fintechs might consider expansion into the United States via branching as an alternative to owning or controlling a U.S. bank or obtaining 50+ state licenses as a non-bank lender, money transmitter, or other financial services provider
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