Fitch Ratings says Fintechs and other non-bank financial institutions (NBFIs) are being blocked from receiving bank charters by public officials, adding that these digital firms are at a competitive disadvantage because of this reality.
Fitch notes that no industrial loan company (ILC) charters have been approved since 2020. Fitch adds that federal bank charters issued by the OCC do not appear to be moving forward either due to the current political environment.
“In the U.S., ILC bank charters can be held by commercial entities, allowing them to avoid becoming bank holding companies and subject to Federal Reserve oversight. Rather, the FDIC and each state’s respective banking agency are the ILC’s primary regulators.
FinTechs and other NBFIs have thus far been largely unsuccessful in obtaining ILC charters from the FDIC, with applications either withdrawn or not approved since 2020, when the FDIC granted charters to Square and Nelnet. These approvals came during a brief period after the regulatory agency finalized a rule for supervision of ILC parent companies.”
Fitch adds that as interest rates rise, holding deposits can be a big advantage as it can provide inexpensive access to funding for loans. Digital firms with ILC charters can better compete with traditional banks.
While Fintechs like SoFi and LendingClub have received approval to acquire chartered banks, future approvals may “prove more challenging under the current administration given recent regulatory commentary.”
At the same time, Fitch points to recent statements emanating out of the OCC, foreshadowing more challenges for Fintechs that partner with chartered banks to provide services.
To quote Fitch:
“Tighter regulatory policies surrounding ILCs and BAAS [banking as a service] could reduce access to lower-cost funding for non-banks, which is particularly important for earnings stability in low-margin businesses such as dealer floorplan lending. Wealth managers may miss out on the full economics of deposit sweeps or securities-based lending, which are particularly attractive in rising rate environments if they need to partner with third-party banks to fund these activities. It is understandable why bank regulators would aim to protect the safety and soundness of the U.S. banking system by establishing and enforcing more restrictive policies for non-banks to gain access to deposit funding and intertwine their services with banks through BAAS relationships. By engaging with non-banks, as the OCC had attempted several years ago by establishing a Fintech charter option, regulators may reduce the risk of the shadow banking system continuing to grow outside of the purview of regulatory oversight, which could exacerbate future systemic risks if left unregulated.”