Even with FDIC endorsement, fintechs' path to becoming banks is bumpy
Efforts in the U.S. to create a dedicated pathway for fintechs to acquire bank charters made little progress, until recently.
For years, some fintechs had been exploring alternatives that now seem more viable: seeking industrial loan company (ILC) charters or joining so-called sandboxes established by state regulators — a path once considered the only option for fintechs while a federal bank charter remained in limbo. However, several recent regulatory changes will create a more open, albeit bumpy, road for fintechs to become banks.
In March, the Federal Deposit Insurance Corp. made two key moves. It first proposed a new standard for ILC charter applicants that would require parent companies to provide liquidity and capital support for their ILC subsidiaries, as well as meet new recordkeeping and reporting standards. A day later, the FDIC approved the ILC charter applications for the small-business payments giant Square and Nelnet, a student loan servicer. The action made Square the first fintech to receive federal deposit-insurance approval to form a bank.
If the FDIC’s proposal goes into effect, fintechs could be well positioned to acquire ILC charters so long as they meet the new reporting requirements, provide a rescue plan for injecting liquidity if needed and gain support from state regulators.
However, there are still potential headwinds for fintechs taking this path. Banking trade groups have lobbied Congress to block fintechs from gaining ILC charters, arguing that the century-old provision that established ILCs represents a regulatory loophole. The ILC charter has long been fraught with controversy because it does not require Federal Reserve supervision.
Banking groups are unlikely to cease their fight against ILC charters, especially as some fear that if fintechs gained federal banking-system access, it would allow tech giants like Apple, Google and Amazon to enter as well. Indeed, bank lobbyists may step up their efforts now that the FDIC has signaled a viable, broader path.
Fintechs that would like to attain bank charters should pay attention to how the FDIC’s ILC proposal shapes up, as well as developments with regulatory sandboxes including at the federal level.
The FDIC is nearing the end of taking in public comments, which will greatly influence if and how the rule takes effect. Additionally, federal regulators have sent mixed messages about establishing their own regulatory sandboxes at the national level, something other countries, including the United Kingdom, Canada, Australia and Singapore, have already done.
If the FDIC proposal is finalized, and provides a clear path for ILC charters — and U.S. federal regulators establish sandbox programs to work more closely with fintechs — it could represent a new dawn for the fintech industry across the nation.
The days of fintechs floundering in their efforts to acquire bank charters could well be in the past.