A recent report by Moody’s highlights the growing interest in acquiring a federal bank charter. For years, few firms sought to obtain a bank charter, but the transition to digital finance and the desire to offer bank services directly have compelled more entities to apply for one.
While a very rigorous process that takes a good amount of time, the report explains that having a bank charter provides an opportunity to improve their funding bases by gaining access to stable, lower-cost deposits, which would be credit-positive. Bank deposits can reduce a firm’s lending costs, thereby improving profitability.
Stricter regulatory oversight and the time and money it takes to comply are the other side of the equation.
For years, establishment banks have complained that Fintechs were providing the same or similar services without the regulatory burden, but now they are getting what they asked for: more competition.
Some Fintechs are becoming federally chartered banks by acquiring an already chartered bank, while others are undergoing the approval process. SoFi and LendingClub are two good examples of Fintechs that acquired an already-approved bank.
Other Fintechs with applications pending include PayPal, Affirm, Upstart, and Revolut.
There are established financial services firms, not necessarily a full-stack bank operator, that have been approved or are in the process of gaining approval.
The winners should be consumers and smaller businesses, who should receive more options for holding, moving, and earning money. For Fintechs that tend not to have vast physical locations, it could also be a strategic advantage. And then, of course, there are the digital asset/crypto firms – much maligned by old banks. With the CLARITY ACT on deck and poised to become law, competition for deposits and banking services will intensify, not moderate.
Moody’s declares:
“Rapid technological innovation and shifting regulatory policies are driving more convergence within the financial services industry.”