Fintech seeks ILC to be one-stop banking resource for startups

WASHINGTON — A San Francisco fintech that specializes in offering banking services to business startups is seeking a bank charter of its own.

Brex filed an application on Wednesday with the Federal Deposit Insurance Corp. for deposit insurance, according to FDIC records.

To date, Brex has relied on partnerships with third-party institutions such as UMB Financial, Radius Bancorp and Bank of the West to offer a suite of services to startup clients, including cash management, federally insured deposits and credit cards.

With a Utah bank — also known as an industrial loan company — Brex would be able to provide those services, including FDIC insurance, without a middleman.

“Most small, medium-sized businesses, they have to go to multiple places to basically run their finance operations, and they can use anywhere from 10 to 15 different software tools to do that,” said Bruce Wallace, who would become CEO of the proposed Brex Bank. He previously served as chief digital officer of Silicon Valley Bank in Santa Clara, Calif.

Bloomberg News

Wallace said “the primary purpose of pursuing the bank license is to be able to offer financing solutions to” small and midsize business clients.

“Without having a banking license, it is far more challenging to do that,” he said.

Brex, founded in 2017 by Brazilian entrepreneurs Henrique Dubugras and Pedro Franceschi, got its start in Silicon Valley as a corporate credit card lender to fellow startups. It has since expanded its business, seeking to be a comprehensive business management platform for new enterprises.

Having an industrial bank charter would “improve our profitability in the future by being able to provide credit solutions, in addition to what we provide today,” Wallace said.

Doyle Arnold, former vice chairman and chief financial officer of Zions Bancorp. in Salt Lake City, would serve as the bank's chairman, according to the FDIC application. Jean Perschon, former CFO at UBS Bank USA, would have the same role at Brex Bank and will serve on its board.

Ted Lowery, founding CEO of CapitalSource Bank, and Tracey Brophy Warson, a former chairman and CEO of Citi Private Bank North America, will serve on the de novo's board.

Before seeking an ILC, Brex inked deals with partner banks to offer its services. In July, it announced it would partner with Kansas City, Mo.-based UMB to offer checking accounts with FDIC backing. In 2019, the company worked with Radius Bancorp in Boston to offer a corporate credit card tied to a bank account paying 1.6% interest and offering a rewards program for credit card payments, wire transfers and more.

It is not the first or most recognizable fintech serving small-business clients to apply for an industrial bank. Over the objections of banks, the merchant payments company Square was approved for a charter in March, ending a long dry spell for ILC approvals.

The industrial bank charter has been a sore spot for the mainstream banking industry since the early 2000s. The specialized charter gives fintechs — already a competitive threat for traditional financial institutions — a foothold in the banking system while not requiring bank holding company registration or oversight by the Federal Reserve. ILCs also remain one of the last legal bank charters available to nonfinancial firms.

Though the FDIC delayed decisions on pending ILC applications for years, the agency under FDIC Chair Jelena McWilliams has warmed to the charter, making it one of the more viable paths for a fintech firm to access the banking system.

Several fintechs that have pursued an industrial bank charter in recent years had to file numerous applications before getting approved. The Japanese e-commerce giant Rakuten made its third attempt in January.

“Whether or not this is going to be the final application to get us to approval or we're going to have to address things during the field investigation,” Wallace said. “We'll take that as it happens.”