A lawsuit brought by New York banking regulators could have a significant impact on fintech development amid efforts by federal authorities to drive innovation.

The fintech industry may be facing a new level of regulatory uncertainty after a federal court upheld a lawsuit by New York regulators who sued to block the Office of the Comptroller of the Currency from granting special purpose bank charters to growing companies in the space.

The New York State Department of Financial Regulators, regulates approximately 230 state and international banks and regulates another 600 non-bank financial services companies, supervising a total of about $7 trillion assets, according to court filings by the department.

The OCC, which has been mulling a national regulatory effort since 2016, announced last summer that it would consider special purpose charters for fintechs, sparking an immediate backlash from New York and other state regulators who not only saw a threat to their own regulatory authority, but also perceived potential risks to consumers and traditional banks in their states.

DFS Secretary Linda Lacewell last week called the ruling a "resounding victory" for consumers and the regulated banking industry in New York and across the country.

"The court has recognized the expertise of DFS and other state banking regulators and the significant role we play in generating nonbank financial services, promoting innovative fintech products, helping to achieve a level playing field for regulated banking institutions, and most importantly, protecting consumers," she said in a statement issued after the ruling. "DFS, which was created in response to the financial crisis, will continue to lead and fill any and all voids that misguided federal policy decisions create."

"State financial regulators are pleased by the decision today made by U.S. District Court for the Southern District of New York ruling that the New York Department of Financial Services case against the OCC is ripe for consideration and should proceed, rejecting the OCC's claims to the contrary," John Ryan, president and CEO of the Conference of Bank State Supervisors said in a statement released after the ruling was announced last week.

Regarding similar litigation involving the Conference of Bank State Supervisors and the OCC, Ryan said in the statement, "[W]e continue to believe that the OCC has acted outside its congressional mandate in seeking to grant national bank charters to non bank entities."

He cited a statement by the court that "receiving deposits is an indispensable part of the business of banking."

Federal regulators had been working on a plan to offer special purpose charters that would allow fintechs to operate in a more uniform regulatory environment, rather than having to navigate through a patchwork of state regulations.

In some states, for example, usury laws ban not only high interest payday lenders, but also fintechs that provide loan advances against a weekly paycheck or, in other cases, peer-to-peer lending.

DFS officials saw the effort to create special charters as an attack on state regulatory authority that would put consumers at risk of operating in a quasi-regulated banking environment. This would weaken the level of protection and recourse against some of the past practices used to collect outstanding balances or charge hidden fees, DFS determined.

The OCC is now considering legal options, spokesman Bryan Hubbard told Mobile Payments Today via email. "We are reviewing the decision to determine next steps and continue to litigate the matter in a related case," he said.

The case is Maria T. Vullo vs. Office of Comptroller of the Currency and Joseph M. Otting, United States District Court Southern District of New York, Civil Action No. 18-cv-8377