Tom Curry
Earlier this month, the FDIC released a supplement to its deposit insurance application manual, which provides guidelines for fintechs and other institutions the FDIC considers non-traditional and who are seeking federal deposit insurance in connection with bank charter applications.
The release coincided with the FDIC’s first approval for deposit insurance to a fintech seeking its own full-service national bank charter.
These developments highlight the FDIC’s support of financial innovation given the embrace of innovation by other federal regulators like the OCC, CFPB and Federal Reserve, and lay the groundwork for increased regulatory cooperation among the major federal financial regulators.
First Fintech Application Approval
Jason J. Cabral
On Feb. 7, all-mobile banking services startup Varo Money Inc. received the FDIC’s approval of its federal deposit insurance application. The FDIC’s approval positions Varo to become the first fintech to obtain a full-service, FDIC-insured national bank charter.
The FDIC’s approval is the outcome of a three-year process beginning in 2017 when Varo first submitted an application for federal deposit insurance. In September 2018, Varo received the OCC’s preliminary conditional approval of its application for a full-service national bank charter. The OCC conditioned its final approval, in part, on Varo obtaining federal deposit insurance, which has now been approved.
The approval is significant as Varo seeks to become the first mobile-only company to become a full-service, FDIC-insured national bank. Until now Varo, like other fintechs, has partnered with incumbent banks to get access to the financial system.
The approval should also be viewed positively from a financial inclusion standpoint as the technology delivers an FDIC-insured banking platform on a nationwide basis to any consumer with a mobile phone.
Dan Hartman
Varo Subject to Higher Capital Requirements
In parallel with the FDIC’s approval of Varo’s federal deposit insurance application, the FDIC released its deposit insurance application manual supplement for fintechs and non-traditional banks.
The supplement establishes guidelines for agency staff evaluating federal deposit insurance applications from non-traditional banks and offers recommendations to applicants. More specifically, the FDIC supplement encourages agency case managers to fully appreciate the complexities of each non-traditional applicant. The supplement encourages applicants to engage with regulators as early as possible and submit detailed descriptions of their business plans. Regarding capital adequacy, the supplement explicitly provides that the FDIC may impose a Tier 1 leverage ratio of over 8 percent on institutions with “higher risk profiles.”
Accordingly, while the FDIC’s approval of Varo provides meaningful momentum for fintechs pursuing full-service national bank charters, the increased capitalization requirements in the supplement show regulators recognize the risk of approving non-traditional applicants and may serve as a barrier to entry for potential applicants.
Blake C. Tyler
The FDIC will require Varo to maintain a Tier 1 leverage ratio of at least 10 percent for its first three years of operation. This exceeds the 8 percent required for the first three years of operation for organizers of traditional community.
Significant Shift from Post-Crisis Stance
The FDIC supplement is important because it signals that applications for deposit insurance from non-traditional business models are welcome. This is a shift from the FDIC’s post-crisis informal policy of favoring the traditional community bank model over niche or non-traditional business models. Nevertheless, the FDIC supplement is not as flexible with respect to business plans and minimum regulatory requirements as the OCC’s manual concerning considering charter applications from fintechs.
The FDIC’s approval also raises questions about if and how it will proceed with pending industrial loan company (ILC) charters.
The FDIC supplement does not make any distinction between charter types. While Varo sought a national bank charter, the FDIC supplement equally applies to deposit insurance applications from any state-chartered bank in formation, including an ILC charter.
Currently, Japanese e-commerce company Rakuten Inc. has an ILC federal deposit insurance application pending before the FDIC. Rakuten’s ILC application will test the FDIC’s openness to approving ILC federal deposit insurance applications from BigTechs engaged in commerce.
Historically, mixing banking and commerce has elicited strong reactions from policy makers and traditional banks – both large and small. Rakuten’s application has drawn the expected attention from a variety of stakeholders. It remains to be seen whether the FDIC’s new handbook is a possible path forward for Rakuten and other commercially owned entities seeking ILC charters given the precedent it would set.
Implications for Fintechs
The FDIC’s approval of Varo’s application for federal deposit insurance alongside the release of supplemental information applicable to fintech applicants provides some clarity for fintechs seeking to operate as independent banks.
Given the ongoing uncertainty surrounding the OCC’s special purpose fintech charter and the FDIC’s willingness to insure ILCs, Varo’s choice of a full-service, FDIC-insured national bank is currently the most viable path for fintechs to get a bank charter.
Other fintechs will need to choose whether to follow in Varo’s footsteps and meet the increased rigorous requirements of both the OCC and the FDIC, wait for a judicial resolution of the OCC fintech charter, or pursue other charter or licensing options.
Thomas J. Curry and Jason J. Cabral are partners in Nutter’s corporate and transactions department. Daniel W. Hartman is an associate in Nutter’s litigation department. Blake C. Tyler is an associate 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.
