Fintechs must weigh a number of puts and takes when deciding whether to build a bank, buy a bank, or stay bound to another bank's charter.
A growing number of fintech companies are seeking bank charters through de novo applications and bank buys, seeking to gain control over their own compliance, funding and product decisions amid the more permissive regulatory environment.
With a bank charter, fintechs "control the whole customer experience, they control every aspect of service delivery," TabaPay Inc. co-founder, CEO and President Rodney Robinson said in an interview with S&P Global Market Intelligence. "Having a bank, I think, is going to be fundamental to keep on growing in the business."
However, in becoming a bank, fintechs also inherit the bank's business model, regulatory scrutiny and community obligations.
"It's not just about buying and getting the charter. You have to operate the bank," PwC US Banking and Capital Markets Deals Leader Michael Oliveri said in an interview. "And that is a completely new ZIP code for a lot of these fintechs in terms of owning an enterprise where you have to worry about capital, risk and regulatory matters, all of the things that go along with owning a bank that are very controlled, very regimented. There's not a lot of flexibility in terms of how you approach that."
Buying in
In recent months, several fintech companies have announced bank acquisitions, including Chime Financial Inc.'s acquisition of Stride Bank NA; TabaPayTabaPay Inc.s announced purchase of Transact Bank NA in early September; and OppFi Inc.'s announced acquisition of BNCCORP Inc. in late April.
In gaining a bank charter, fintechs can become "future-proof" by moving away from banking-as-a-service (BaaS) models and gaining complete control over their operations, Klaros Group co-founder and Managing Partner Michele Alt said in an interview.
In a BaaS model, regulators can impose negative consequences and direct pressure on partner banks, even ordering them to compromise partnerships with fintechs in various ways. At the same time, banks are often legally prohibited from sharing what regulators are telling them with fintech partners, given rules surrounding the sharing of confidential supervisory information, she said.
"So that's why I say future-proof — everything is great in a BaaS model until it isn't for a fintech partner," Alt said.
In the years leading up to its decision to buy a bank, TabaPay's partner banks were subject to consent orders, which prevented the company from onboarding new customers or launching new programs despite not being under a consent order itself, Robinson said.
"If you look at these banks that sponsor fintechs, a lot of them were in different business lines. And one business line may get a consent order with nothing to do with us, but it impacted our business. And so we wanted a bank that focused on our business because we know we can run a clean business that is free of any sticky issues with the Fed," he said.
Buying, rather than applying for a charter, can be particularly attractive for fintechs because it can be a faster route, which is of particular relevance as the clock ticks on the currently fintech-friendlier administration, Alt said.
OppFi had been prepared to apply for a de novo charter application, but the time saved in building out banking infrastructure and acquiring deposits enticed the company to seek an acquisition, Chairman and CEO Todd Schwartz said in an interview with Market Intelligence.
For that reason, Alt expects the tide to shift to M&A announcements from charter applications.
"I'm already seeing a shift to acquisition instead of a de novo bank," she said, and ballparked a year for the time spent searching for a banking partner, doing due diligence, and gaining approval, compared to 18 months of applying for a charter and building a bank from scratch. "There's still plenty of time to do that during the Trump administration."
Build, buy or BaaS
Buying a bank, while faster than applying for a charter, comes with its own set of challenges: namely, that seller banks already have their own operations that must be retrofitted to suit a fintech's business, which takes time to integrate, Alt said. It also oftentimes requires fintechs to step from operating often in just lending or deposits to handling both.
"It's like the difference between a bespoke suit and tailoring something off the rack," Alt said.
The reasons many fintech companies chose not to become banks in the first place also remain concerns for those looking to make the switch, including tighter regulation, growth constraints and cultural mismatch, Alt said.
"What most fintechs really don't understand is the level of regulatory scrutiny that a bank goes through. It's kind of the Wild, Wild West in fintech. They're out growing and gunning and just signing up new people, creating all these really neat consumer interfaces and they're just opening up accounts left and right," First Internet Bank Chairman and CEO David Becker said in an interview.
When opening a bank from scratch through a charter, a fintech needs to build out the regulatory aspects of being a bank, "and so there's a ton of maturity that has to happen within the organization from a controls perspective, all the technology, all the different things. There's a huge culture shift that also happens in tandem with that," Oliveri said.
Given the potential risk factors, some fintech companies would be better off without a charter, Alt said.
"A BaaS model allows [a fintech] to just be what they are and concentrate on what they do best. So for a lot of fintechs, and I would say the majority of them, the right move is going to be to continue to operate through their bank partner," she said.
Regulatory hurdles
On the regulatory side, the Durbin amendment and Community Reinvestment Act (CRA) provide particularly thorny puzzles. The Durbin amendment caps the amount of interchange fees institutions with over $10 billion in assets can collect, and for fintechs operating on an interchange-based model, it can drastically impact profitability, sources said.
For fintechs with interchange-heavy models, they will likely target banks with less than $10 billion in assets and aim to stay below that threshold, Alt said.
The CRA requires institutions invest in the communities where they take deposits, often bounded by a specific geography; however, many fintechs operate nationwide, branch-light strategies.
"It's like the square peg, round hole," Alt said. "So quite often, the [bank's] CRA program has to be rethought."
The largest regulatory impediment used to be the odds of getting the deal approved, both Alt and KBW Managing Director Sanjay Sakhrani said.
"Now the needle's moving from 'hell no' to 'yes, probably.' Many fintechs who were sort of like, 'never' are now saying, 'well, we probably really should,'" Alt said.
Not so fast
Still, getting a bank charter is not guaranteed, as Enova International Inc.'s attempted acquisition of Grasshopper Bancorp Inc. was called off, announced Sept. 14 and terminated Oct. 16. Similarly, Wise Group PLC's application for a national trust bank charter was denied by the OCC in August.
Enova was a subprime lender, which involves higher capital requirements, tougher consumer protection rules and tighter lending restrictions, Sakhrani said, and faced political pressure to cancel its deal.
"They started getting pushback from external groups that were saying, 'Hey, this this might be fair lending issues. It might be all kinds of stuff.' So not only were they catching heat and answering a lot of questions to the regulators, they were getting a consumer pushback," Becker said. "The fintechs just aren't built to handle that kind of scrutiny."
The cancellation of Enova's acquisition of Grasshopper is not necessarily a one-off, and fintechs should tread cautiously going into a bank deal, Sakhrani said.
"We take comfort that there's still rigor. I think it's very easy to say based on all the announcements that have been made that it's just very easy to get a banking license in this administration under the current regulatory regimes. And I think these few instances demonstrate that there is still some rigor involved," Sakhrani said. "Be careful what you wish for, because in a different administration where the regulatory regimes are different, that could lead to more oversight and more regulation being a bank. And that's something that needs to be considered when deciding to get a bank license today."
