Last month, a Silicon Valley start-up called Varo Money achieved something it had worked three years to accomplish: it started accepting federally insured customer deposits.
It was a watershed moment for the industry — coming only weeks after Varo had become the first consumer fintech company to be granted a national banking charter.
The approval by regulators at the Office of the Comptroller of the Currency has opened an avenue for start-ups to compete with banks on a level playing field, as they vie for a slice of the nearly $16tn in deposits and $100tn in annual payments in the US banking system.
But the milestone also raised questions in the industry about why it had taken so long for the US to bring fintechs into its regulatory regime, when other countries, from the UK to China, have been faster and more flexible.
The answer, banking experts say, involves longstanding turf wars between regulators as well as fears that tech heavyweights such as Amazon and Facebook might move into financial services.
Fintech executives point to another issue: hard lobbying by established banks that have long enjoyed the exclusive right to hold deposits insured by the Federal Deposit Insurance Corporation and lend money nationally.
“We see it as anti-competition,” said Lee Carter, chief executive of the US banking arm of Japanese ecommerce company Rakuten, which is seeking a banking license and has faced opposition from banking industry groups. “The regulators want innovation in banking and they want competition, and we are willing to come in the front door and be regulated.”
Outside of the US, challenger banks such as Revolut in the UK and Tencent-backed WeBank in China face lower regulatory hurdles, operating with specialised licences that allow them to directly accept deposits, process payments, or lend.
Meanwhile in the US, start-ups such as Chime have circumvented direct regulation by partnering with federally insured banks, which demand fees in return.
By seeking out a national bank charter, Varo is betting that looking more like a traditional bank will pay off in the long term.
“It’s really the only long-term sustainable route if you want to be around 50 to 100 years from now,” said Colin Walsh, chief executive of Varo. “If you want to just be bought, that’s another story.”
Other fintech companies are following Varo’s lead. Online lender SoFi received preliminary approval from the OCC last month for a national bank charter. Listed rival LendingClub is also in the process of becoming a national bank, after announcing the acquisition of Radius Bank in February.
Their applications will be received by an increasingly tech-friendly OCC led by Brian Brooks, a former executive at the cryptocurrency exchange Coinbase who was appointed as the regulator’s acting head in May.
Mr Brooks has also championed an easier path for a variety of fintechs to become licensed. But the so-called fintech charter has met strong resistance from the banking industry. Greg Baer, chief executive of the Bank Policy Institute, an industry association, said companies that handle customer funds should not be treated to a light-touch version of banking regulation.
Mr Baer also said the fintech charter had “no limiting principle”, potentially allowing big tech companies such as Amazon and Google to get a banking licence by the back door.
So far, however, no fintech companies have applied for the special charter. The most powerful of the state regulators, the New York Department of Financial Services, has also sued to stop the OCC from issuing the charters.
Others pushed back against these concerns, arguing the fintech charter would bring more start-ups under regulatory supervision.
“The whole regulatory framework around payments needs to be rethought, needs to be federal and, in real-time payments, needs to truly think about consumer protection,” said Meg Tahyar, co-head of the financial institutions group at the law firm Davis Polk.
Mr Carter’s Rakuten Bank America has tried to take a different regulatory path: the industrial loan company charter, which allows for a chartered bank to be owned by a non-financial corporation.
After consultation with the FDIC, Rakuten withdrew its application earlier this year. It said it planned to re-file after making amendments.
The FDIC, which backstops bank deposits, is viewed as more conservative than the OCC. Its chair, Jelena McWilliams, has expressed caution about “allowing firms that are not traditional banks” into the system.
Fintech investors and executives said the federal agency, which was required to approve Varo for deposit insurance, had little incentive to bring potentially risky tech companies into the fold.
Only a few challengers have broken through the system. In March, Jack Dorsey’s payments company Square became one of the rare fintechs to receive conditional approval for the ILC charter, putting it on track to debut Square Bank in 2021.
The push for bank charters comes as an increasing number of Americans turn to online-only financial services during the coronavirus pandemic, boosting the fortunes of Varo and other digital financial companies.
“We’re seeing an across the board adoption,” said Lowell Putnam, head of partnerships at Plaid, whose software is used by fintechs. While challenger banks still control a tiny slice of US checking accounts, almost 60 per cent of Americans downloaded new apps to manage their finances during the pandemic, according to a survey by The Harris Poll and Plaid.
By pursuing national charters, fintech companies have signalled the pay-off from offering a wider range of banking services could offset the costs of regulatory oversight.
Mr Walsh said Varo, which counts more than 2m customer accounts, spent almost $100m over three years to secure its charter from the OCC. He said the bank expects to be profitable on a cash flow basis at about mid-year 2021.
“It’s not an easy process,” said Scott Sanborn, chief executive of LendingClub. “[But] we have 3m borrowers who want more from us.”
For the latest news and views on fintech from the FT’s network of correspondents around the world, sign up to our weekly newsletter #fintechFT