During a recent Senate confirmation hearing, Paul Atkins, founder and CEO of Patomak Global Partners LLC, and Jonathan Gould, comptroller of the currency nominee, discussed important shifts in the regulatory landscape affecting the financial technology (fintech) sector. Their potential confirmations could herald significant changes in how fintech companies operate and interact with traditional banks.
Historically, the concept of fintech firms obtaining a national bank charter seemed more like a theoretical exercise than a tangible goal. Initial applicants such as Varo and SoFi were seen as experimental entities, attempting to prove that technology-centric firms could navigate the same rigorous capital and compliance requirements as conventional banks. However, as time passed, regulatory advancements slowed, leading to uncertainty. The Office of the Comptroller of the Currency’s (OCC) ambition for a fintech charter faced impediments from legal challenges and a general lack of interest from the Federal Deposit Insurance Corporation (FDIC) in insuring these new entities.
In the interim, many fintechs sought partnerships with established banks, giving rise to a banking-as-a-service model that revolutionized the industry by facilitating innovations in digital lending and embedded payments. However, as these fintechs grew in importance, regulators became increasingly wary of the associated risks. By 2023, enforcement actions against partner banks prompted fintechs to reconsider their strategies, recognizing the value of establishing themselves as full-fledged banks rather than relying on partnerships.
The paradigm shifted this spring when the OCC conditionally approved SmartBiz Bank, enabling it to acquire CenTrust Bank and integrate its operations nationwide. This marked a significant milestone, signaling that well-established fintechs can receive full-service charters. Subsequently, Erebor Bank became the first de novo national bank approved under the OCC’s revised framework, set to offer digital payment services and custody solutions.
Regulatory attitudes are now evolving, with the OCC signaling a renewed openness to granting nontraditional charters to firms meeting bank-like standards for risk management. Comptroller Jonathan Gould envisions a more dynamic federal banking system that is inclusive of diverse entities. The agency’s enhanced focus on the licensing process shows a shift away from a restrictive stance toward one that embraces innovation amid rigorous compliance.
The latest developments have led to a surge in charter applications, with over two dozen submitted this year from nontraditional firms. Recent approvals, such as SmartBiz and Erebor, exemplify an expedited process, diverging from the lengthy timelines experienced by earlier applicants. Other fintech players, including Revolut and Circle, are also moving toward federal trust charters, while states like Georgia and Connecticut are establishing frameworks to attract new entrants.
Timing is crucial for fintechs seeking charters, as current approvals are likely to remain valid despite potential political fluctuations. This creates a narrow window for fintechs to solidify their regulatory status before shifting political priorities might alter the landscape once again.
The evolution from banking-as-a-service to seeking charters represents a maturation of the fintech space. The sector’s largest firms are increasingly focused on achieving operational stability through direct supervision, which in turn enhances their credibility among regulators and consumers alike.
Additionally, the move toward charters is altering the talent landscape. Fintech firms are increasingly recruiting compliance officers and former regulators to navigate the complexities of operating under direct oversight, while established banking leaders find appeal in joining agile, regulated fintechs.
The transformation of the definition of “bank” is notable, as a range of charter models now exists, allowing fintechs to choose the most suitable structure for their business. Full-service national banks, national trust banks, industrial loan companies, and limited-purpose banks all offer varying degrees of regulatory oversight and operational flexibility.
For fintechs, securing a charter solidifies a direct relationship with regulators, reduces reliance on third-party banks, and enhances consumer confidence. In turn, traditional banks now face competition from fully licensed fintech institutions leveraging modern technology, ultimately blurring the lines between incumbents and innovators in the financial space.
This burgeoning charter movement indicates a period of maturation for fintech, as compliance and credibility become integral components of growth rather than restrictions. The current regulatory opening provides a crucial opportunity for fintechs to establish themselves within the formal financial system, with the potential to redefine the future of finance. However, such opportunities are transient, and those that act swiftly will likely play a significant role in shaping the evolution of the modern financial landscape.
