The Next Evolution of FinTech: A Chartered Future.
Demystifying Fintech roadblocks — or lack thereof.
January 30, 2022
What do The Facebook Papers, TikTok’s controversial algorithms, and the new third-party payment tax have in common? They reveal an alarming truth: time and time again, emerging technologies outpace government’s ability to regulate it. As the FinTech industry has long remained unfettered by government regulation, many experts are questioning how regulators will respond to the industry’s explosive growth. Should a firm that delivers banking services –lending, saving, payments– through non-traditional channels be considered a bank? And should these firms therefore be regulated as a bank or as unique “FinTech” entities? As seen in Wall Street: Fight or Flight, FinTechs often partner with banks in order to prioritize user experience and company growth without strict regulatory oversight. But this line between “bank” and “FinTech” is blurrier than ever– so recently, many FinTechs have ventured into the harsh regulatory environment that traditional banks reside in.
In July 2020, Varo Money, Inc. became the first FinTech venture to obtain a national bank charter from the U.S. Treasury’s Office of the Comptroller of the Currency (the OCC). One year later, Varo more than tripled its valuation from $700 million to $2.5 billion. “We’ve effectively eliminated the intermediaries.” Colin Walsh, Varo founder and CEO, said, “Those are real costs that we’ve cut out that we can now use to create more value for our customers and for our shareholders.” This national bank charter benefitted Varo for a number of reasons. First, the national bank charter allows Varo to take deposits and lend those deposits to users. However, the Federal Deposit Insurance Act requires that these deposits are insured in the event of a bank failure. With a national bank charter, Varo can purchase lower-cost, government-backed deposit insurance. With lending being a major component of Varo’s revenue stream, direct access to deposit insurance is an important perk of the national bank charter. Secondly, Varo can operate its bank across state boundaries under one charter, as opposed to operating based on state-specific licensing laws. Varo’s nationally chartered bank also improves the company’s credibility in the eyes of investors and consumers.
The incentives to obtain a bank charter are vast, so why haven’t more FinTechs obtained a bank charter? The process of applying for and obtaining a national bank charter is onerous, costly, and invokes extensive regulation and federal oversight– a combination of challenges that select FinTechs can afford to confront. This is why FinTechs partner with banks to improve user experience and efficiency in their revenue model. With recent changes in regulation, FinTechs capable of operating independently can now provide banking services without relying on a third-party bank.
With increasingly more FinTechs (SoFi, Block, Robinhood, Affirm, PayPal, Revolut, Monzo) acquiring a bank charter, the FinTech and banking industries are merging faster than ever. Just five years ago, FinTech companies could only provide the technical infrastructure on which traditional banks could operate. Now that the OCC is granting bank charters to FinTechs, more and more FinTech ventures will become ubiquitous with modern life. Ask yourself: How often do you use Venmo instead of giving a friend cash? At check-out, how often are you using a Square register? And how often do you use Buy Now Pay Later services like Afterpay? In other segments of the FinTech industry, like InsurTech, Crypto, Personal Finance, or PayTech, a bank charter opens different doors for business expansion. For Crypto, 17 states have authorized exchanges like Binance and Coinbase to offer Bitcoin-backed loans, but without a bank charter permitting direct lending services, they must continue to rely on a partnership with a traditional bank. Kraken, another major exchange, was recently approved for a digital-asset debit card in Wyoming.
In the Home Finance sector, Figure Technologies, which uses blockchain to power home equity loans, is currently applying for a national bank charter. For Figure, a national bank charter would allow Figure to provide these loans, alongside other products like mortgage financing and asset management, under one federal license, rather than complying with 96 licenses across 49 states.
Although different segments of the industry benefit from a national bank charter in different ways, the industry as a whole is undergoing an important transition into the next evolution of FinTech– one where FinTechs are recognized as legitimate banks, and, as a result, no longer need to rely on traditional banks.
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Written by: Noah Weinstein
Noah Weinstein is a First Year Student at Northeastern University majoring in Mathematics and Computer Science.