2020: The Year of FinTech Bank Approvals
With the focus of 2020 being on COVID-19 and most recently the US presidential election, it’s difficult to see through the headlines the critical developments in regulation of FinTech companies. There are numerous milestones in application approvals led by Varo Bank receiving its bank charter approval in July. Throughout the year other companies (from payments, cryptocurrency, and broad financial services) have had gains in regulatory approvals towards licenses that allow for operations independent of bank partners. These established fintechs would be able to create new business models, become more cost-effective, and launch new services at a faster rate.
Here are 3 FinTech firms that have made headlines this year with regulatory approvals.
SOFI
SoFi (Social Finance), initially known for taking on student loans after the Financial Crisis and expanding to other financial services, is the most recent fintech to make the list for 2020. Per Reuters, the company received conditional approval from the U.S. Office of the Comptroller of the Currency (OCC) towards a national bank charter at the end of October. As part of the full approval, the FDIC (Federal Deposit Insurance Corporation) and Federal Reserve both need to perform an upcoming review of SoFi.
This FinTech giant does currently provide banking solutions of deposits and loans, but does so through its bank partner. In banking partnerships, banks have the final word when it comes to compliance and program approval as any misstep could result in regulatory complaints and penalties. The review and decision process of banks can take months — fintechs with bank charters can minimize this lag time.
SoFi had previously applied for a banking license in 2017 with its past leadership, but the process was cancelled after the former CEO departed. Updates and decisioning on their application should take place in early 2021, with an expected full approval by the end of Q2.
SQUARE
Square, the well-known mobile payments processing company, gained conditional FDIC approval this past March (per Business Insider). This industry leader would be able to create a bank based in Utah once complete approval from all regulators goes through. Square will need to keep higher capital requirements than other banks, but the move adds a clear path forward of new revenue streams.
The regulatory journey for Square was different than SoFi or Varo — their first step had been filing an ILC (industrial loan company) bank charter application three years ago (in Sept. 2017). This was met with criticism and scrutiny from groups such as the ICBA (Independent Community Bankers of America), who believe newly approved companies would be given leeway to avoid regulatory oversight. Square modified its approach — direct communication with regulators bridged the gap in revising its application for a better outcome. With the revisions submitted at the end of 2018 and this conditional approval, launching Square Financial Services in early 2021 seems realistic.
The fintech is likely to focus on direct lending to existing merchants (based on monthly processing income) and then develop deposit relationships soon after. Square Capital already exists as a growing revenue segment (about 100K loans issued for over $650M in Q4 2019). Bank approval would provide better unit economics for the company. The improvement in margins can enable more working capital and business lending to boost a customer’s annual growth.
Similar to SoFi, bank approval provides the firm an independent way to offer all banking services. As other payment companies increase their offerings beyond lending to banking, Square needs to be strongly positioned in delivering full financial services solutions. The vision is for long-term success by deepening the wallet share from existing clients, and acquiring new customers from other platforms with less services. For merchants that trust in Square during this pandemic, buying additional banking products can be an automatic ‘yes’.
KRAKEN
Kraken, a US-based crypto exchange launched in 2011, received its own approval from regulators in September of this year (per Forbes). Instead of a bank charter, the fintech received a SPDI (special purpose depository solution) charter from Wyoming. This is an alternative regulatory track for non-money transmitters that have complex payments flows, but don’t need state-by-state licenses. SPDI charter is the initial part of a broader process towards state supervision of a compliance path for cryptocurrency companies. Kraken would then be able to directly service large enterprises and its existing retail customers.
In the US, the state of Wyoming has set itself apart with expertise in cryptocurrency, which has helped regulators design frameworks that allow for innovation but also prevent financial crime. The state’s industry guidelines in addition to Kraken’s extensive compliance programs combine to enable tracking of transaction activity and an open network. The potential to extend services internationally also exists as this process enables cross-border transfers in multiple currencies globally, which is critical for exchanges that are industry leaders.
This is the most historic milestone for the cryptocurrency sector of FinTech and regulation in the US, to date. As crypto becomes a stable component within financial services, providing proper regulatory governance can propel mainstream adoption from consumers and businesses of all sizes.
Regulation Continues to Open up in the US
This new decade is ushering a future in which US regulators embrace innovation in financial services. Instead of keeping emerging FinTech companies and their products outside of regulatory vigilance, granting license and bank charter approvals provides the ability for monitoring. The new director of the OCC believes this open vision is ultimately what’s best for oversight and consumer protection in the industry, not only with banking but towards cryptocurrency being in custody of banks. Other jurisdictions globally have approved open banking frameworks and regulatory sandboxes in the last 5 years — this is a chance for the US to catch up and attract new companies and market opportunities. //
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