Bank dreams? 3 ways to become a bank

Fintech news has been abuzz with recent moves by Varo Money, Lending Club, and Square to become banks. With a banking charter in hand, these companies can expand into more financial activities (such as accepting deposits) and get larger access to the US financial system.


As trailblazers, they’re showing viable paths for other US fintechs to follow into the mainstream banking system.


Here’s a short list of these paths:


1. Buy a bank charter through acquisition a la Lending Club

The personal loan fintech announced its intention to buy Radius Bank for $185M. This would reduce its funding costs through access to bank deposits. Radius Bank is also a strategic play - it’s set of APIs and banking-as-a-service technology gives Lending Club a leg up in pursuing both consumer banking and B2B offerings.


2. Apply for a charter from the OCC and/or FDIC a la Varo Money

The checking and savings fintech, Varo Money, announced its application has proceeded to the final stages at the FDIC. With final approval, Varo Money would gain access to FDIC deposit insurance. This is on the heels of it’s preliminary approval from the OCC in September 2018.


This path is not for the faint of heart - considering the company launched in summer 2017 it has been a 3-year journey to reach this milestone.


3. Apply for special industrial loan license a la Square

Square, meanwhile, is pursuing a different path. It has applied for a special industrial loan license from the FDIC and Utah’s Department of Financial Service. Meanwhile, RobinHood has applied with the OCC to receive a national charter.



What’s the Alternative to a Bank Charter? Partnerships.

Understandably, many fintechs don’t want to be the trailblazing first-mover on the issue of getting a banking license. Instead, most fintechs have focused on banking partnerships.


Typically, the fintech focuses on customer acquisition and the user interface, while the bank brings capital, compliance, and other risk controls. Such partnerships include:

  • Apple & Goldman partner on the ‘Apple Card’

  • Chime & Bancorp Bank partner on Chime’s checking account


(Disclosure: the fintech I work for partners with a community bank in the Midwest)


Expect the lines between fintech and bank to continue to blur

With Lending Club and Varo Money demonstrating that access to a bank charter is within reach for fintechs, expect more fintechs to apply for charters themselves or to get one through acquisition.


Ultimately, this trend represents a continued blurring between what constitutes a ‘fintech’ vs. a ‘bank.’ Fintechs are becoming banks; and, banks are launching their own fintech offerings.


#fintech #banking

 
 

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