



There was once a time when getting financing for a business – particularly small businesses – was a challenge. Banks ruled the world and if a business owner had no financial history, assets or other collateral, he or she was typically out of luck. But times have changed. Less than 10 years on from the last recession, there has been a substantial increase in the availability of capital as well as financing options for small companies.

One of those options is online lending. Companies in this industry such as Kabbage, Lending Club and BlueVine have grown significantly over the past few years by offering financing to many small businesses that otherwise would not be able to get loans. Their deals are quick to approve, rarely require collateral and are usually tied in to a customer’s financial systems for close monitoring.

The financing isn’t cheap. Some of these lenders charge significantly more than even a credit card advance. But when these deals make business sense – a deposit for a real estate lease, a purchase of equipment, a quick inventory buy – even the added costs of these loans are still much less than the benefits received, so much so that the alternative lending industry has grown to more than $35bn according to a 2017 research report.

Up until recently, the regulation of these lenders was left up to the states, which sometimes contributed to confusion and the overlapping of rules. But now, the federal government has stepped in.

Last month, the Office of the Comptroller of the Currency announced that it was moving ahead with its plan to allow online lenders to apply for banking charters. When recognized as a bank, those types of financiers would no longer have to comply with state laws and would instead be subject to federal banking regulations. “Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank,” Joseph Otting, the comptroller of the currency, one of the country’s top financial regulators, told the Los Angeles Times.

The move was made after a treasury report found that offering federal charters to more online lenders would “provide a more efficient, and at least a more standardized, regulatory regime, than the current state-based regime in which they operate”. State regulators argue that the move is illegal and vow to file lawsuits opposing the ruling once national charters are granted.

Fintech lenders, however, are pleased.

“The recent treasury report and OCC’s subsequent call for fintech companies to apply for a national bank charter are both tremendous steps forward for this industry and small businesses seeking a new way to access financial services,” Sam Taussig, the head of global policy at online lender Kabbage, told me (Kabbage is a client of my firm, The Marks Group PC, but I have received no compensation from them for this column). “Instead of the obstacle course that comes from state, federal and industry regulations and policies, the industry will have a single source of truth to refer to, on which to build a company and participate in the greater financial services ecosystem.”

All of this translates into a better and more reliable system for small businesses seeking loans. With a federal charter, there is now a clearer definition of the framework in which fintech companies like Kabbage and its competitors can operate.

By opening up the federal charter application process to more online lenders and fintech companies the government is further legitimizing the space. That, I believe, will attract more entrepreneurs and innovators to develop innovative financing products and make more capital available. It’s a good thing both for fintech companies and their customers.