Tom Curry

This past year brought significant developments in the realm of fintech corporate structure and regulatory oversight.  

An increasing number of fintechs either acquired existing banks or applied for de novo bank charters in 2020, ranging from Federal Deposit Insurance Corp.-insured national banks, to state-chartered industrial loan companies, to new charter forms such as the Office of the Comptroller of the Currency’s uninsured national bank charter.  

Although motivations vary, the need to streamline operations, eliminate myriad state licenses or find a hospitable platform for cryptocurrency activities drive these decisions.  

One of the most significant developments in 2020 was the willingness of state regulators and the OCC to grant bank charters to fintechs after prolonged application review processes.  

Kate Henry

Full-Service Fintechs 

Varo Bank, N.A. became the first consumer fintech company to receive a full–service, FDIC-insured national bank charter from the OCC. In a press release following the announcement, the OCC stated that the opening of Varo Bank represents “a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.”  

Earlier in the year, Varo received approval from the FDIC for deposit insurance, which approval was conditioned upon receipt of their banking charter. Varo became the first fully digital bank that operates without a brick-and-mortar branch distribution system. 

Subsequently, SoFi Bank, N.A. received conditional approval for a national bank charter through the OCC after its application was submitted by parent corporation Social Finance Inc. The OCC’s approval was conditioned upon several requirements, including Federal Reserve membership and FDIC deposit insurance.  

Following in Varo’s and SoFi’s footsteps, Oportun Financial Corp. submitted a national bank charter application to establish Oportun Bank, N.A. Unlike Varo, Oportun maintains hundreds of brick–and–mortar locations throughout the United States, and approval of its national charter application would streamline its current state-by-state regulatory burden. 

Armand J. Santaniello

Acquisitions, ILCs and Uninsured Charters 

Some fintechs chose to acquire control of an existing bank as a means of directly entering banking. Notable examples include LendingClub’s acquisition of a digitally focused national bank in Massachusetts, which recently received conditional OCC approval, and the payments-focused fintech Jiko, which acquired a small community bank in Minnesota. The advantage of acquiring an existing bank franchise is that it avoids the operational and other startup challenges of chartering a de novo bank. 

The advantage of acquiring an existing bank franchise is that it avoids the operational and other startup challenges of chartering a de novo bank.  

The last year also brought the revival of the industrial loan company (ILC) charter.  

The FDIC recently adopted regulations governing ILCs and their corporate parents that codify the agency’s past standard conditions that were individually applied in the past.  

This action provides a standard framework for fintechs seeking federal deposit insurance and ILC charters. It also may open the door for commercially owned fintechs and large technology firms to gain banking powers.  

Another fintech sought an uninsured charter.  

Figure Bank, N.A. applied to the OCC for a national bank charter; however, its proposed model would only accept uninsured deposits. By utilizing this proposed model, Figure Bank’s parent company, blockchain-based Figure Technologies Inc. would avoid regulation as a bank holding company and eliminate dependence on state licensing – thus streamlining its regulatory oversight.  

Several bank and credit union trade associations quickly submitted a joint letter to the OCC opposing Figure Bank’s charter application and asserting that approval is unlawful and could have severe consequences for the banking system.  

A Wyoming SPDI 

Finally, Kraken Financial, a wholly owned subsidiary of cryptocurrency exchange Kraken, was granted a Wyoming special-purpose depository institution (SPDI) charter. This makes it the first chartered bank to provide deposit-taking, custody and fiduciary services for digital assets.  

This charter comes in the wake of the Wyoming state legislature’s 2019 authorization of SPDIs and the OCC’s 2020 announcement that federally regulated banks could provide cryptocurrency services and custody.  

The charter in turn will help Kraken gain independence from third-party financial institutions and may provide the flexibility for Kraken to venture into other states if permitted by those states’ laws.  

Although the above fintech companies have found moderate success in applying for some form of bank charter, the fact remains that these companies are not traditional applicants. To the extent fintechs engage in bank activities, they ought to be subject to the same prudential and consumer protection requirements.  

While a bank charter may not be a perfect fit, for now it ensures a level playing field and serves to preserve financial stability. Ideally, Congress should establish a dual chartering option for fintechs that protects consumers and more effectively addresses the unique risks inherent in fintech companies. 

Thomas J. Curry is a partner in Nutter’s corporate and transactions department. Kate Henry and Armand J. Santaniello are associates in Nutter’s corporate and transactions department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group.