European firm Banking Circle wants to make cross-border payments fast and cheap by connecting clearing systems around the world. It received its banking license in Luxembourg in 2019. Soon after, the founders set their sights on licensure in another region: the United States.
"At the end of the day, we [decided] establishing an independent bank is the best way forward to get access to domestic clearing of dollars in the U.S.," said Kjeld Olson, CEO of Banking Circle US.
The firm zeroed in on a special-purpose charter in the state of Connecticut. It was established in 1999 as an uninsured bank charter; recipients cannot accept retail deposits and will not require federal deposit insurance. But Banking Circle US, a commercial bank that is part of the Banking Circle Group, is the first to use it for wholesale and merchant banking.
The Connecticut Department of Banking has introduced legislation to the state's general assembly to change the name from "uninsured bank charter" to "innovation bank charter" and hopes to see this happen by the time the session ends in May.
This proposed name "aligns more with the industries interested in applying for the charter," said Matt Smith, a spokesperson at the Department of Banking.
Special-purpose charters have largely struggled to take off in the U.S., with efforts by New York,
The technology company's move in Georgia could widen its processing relationships with merchants, but the company insists it won't become a traditional financial institution.
Still, for payments firms in particular, Connecticut's special-purpose charter may be attractive.
A model for payments-oriented businesses to engage in some banking activities exists in other countries, such as the
In the U.S., "state money transmission licenses are currently the closest we have, and those are suboptimal for operating a national, let alone global, business," said Jonah Crane, partner at Klaros Group.
Banking Circle US describes itself as a commercial bank with cloud-based financial infrastructure. Its goal is to support real-time global clearing and settlement for financial institutions, payment service providers, online marketplaces and more. The entity obtained a temporary license from the Connecticut Department of Banking in the middle of 2022 and set up physical space that fall in Stamford. It received its license in July 2023 and officially opened its doors this past February.
"So much payment innovation has happened outside of the banking system," said Crane. "It makes sense to have a framework that is more coherent than our 50-state money transmission license regime and doesn't force people into the same regulatory framework as traditional banks that take deposits and make loans."
This reflects Banking Circle's reasoning for pursuing the Connecticut charter.
"We reviewed possibilities and discovered that this special charter fit our purpose really well because it's an uninsured charter," said Olson. "We're not targeting consumers."
The Connecticut Department of Banking says companies will be exempted from money services laws in "many" other states.
The reputation of the state matters, too.
"It's a counterargument to detractors of a fintech charter that a state banking department like Connecticut's, which is generally seen in the industry as robust and serious, is willing to take this on," said Taylor Tipton, a shareholder at law firm Baker Donelson.
Overall, "The more vanilla your business model, the more likely you are to find a state like Connecticut to take a chance at that business model," said Tipton.
The Connecticut Department of Banking has issued temporary certificates of authority to two other uninsured banks.
Still, firms may be hesitant to jump in until they see the model is widely accepted.
"We have a bunch of conversations with folks who are considering [these types of charters] among their options," said Crane. "The fact we haven't seen them so far successfully deployed is one of the question marks."
Another is whether these charters will pave the way toward a Federal Reserve master account. Banking Circle US has applied for a master account, which is pending review. For now, it is enabling payments through its correspondent banking partner networks.
"One of the attractions of getting your own charter instead of working through correspondent banks or getting money transmission licenses is access to a Fed account," said Crane. "The fact that the Fed rejected two applicants who sought Fed access has probably caused people to think twice and consider other options."
