|SoFi CEO Anthony Noto
Source: Social Finance Inc.
Legal experts say more financial technology companies will follow Social Finance Inc.'s lead in applying for a bank charter as the regulatory environment in the U.S. becomes friendlier toward fintechs.
San Francisco-based online lender SoFi applied for a national bank charter with the Office of the Comptroller of the Currency on July 8 — one of just 13 bank charter applications in 2020, according to S&P Global Market Intelligence data.
There are multiple types of bank charters. More than 4,000 of the nation's banks have a state charter, according to S&P Global Market Intelligence data. SoFi filed to become an industrial loan company in 2017 — a relatively rare charter that has received regulatory pushback — before eventually withdrawing that application.
But the national bank charter is the "gold standard," said Gregory Rubis, a banking lawyer with Troutman Pepper Hamilton Sanders LLP.
"When you're dealing with a national bank that's regulated by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Reserve Board — you know you're not getting a fly-by-night organization," Rubis said in an interview.
A long road ahead
A SoFi spokesperson declined an interview request, telling S&P Global Market Intelligence: "We've got a long process ahead of us."
Getting a national bank charter is an arduous process, requiring an extremely detailed application, a clear plan for management and even fingerprinting.
But SoFi's relative strength and sophistication position it well for a successful application process, legal experts said. They also pointed to a regulatory environment that has recently become more favorable toward fintechs. The OCC's new leader, Acting Comptroller Brian Brooks, put a major emphasis on encouraging fintech innovation during his first weeks in office. On July 31, the regulator granted its first-ever national bank charter to another San Francisco-based fintech, Varo Bank NA. That approval came nearly two years after Varo Money Inc. received preliminary OCC approval for a national bank charter.
"I think that the OCC recognizes that there are benefits to having more banks, and I think they're trying to encourage charter applications, which is something that hasn't really been the case in the recent past," said Scott Pearson, a partner at law firm Manatt Phelps & Phillips LLP. "More banks means more competition. It means more options for consumers and businesses."
Before joining the OCC in April, Brooks was chief legal officer at Coinbase Inc. and had been a board member at the digital lender Avant LLC. The OCC finalized its version of the "Madden fix" on Brooks' first day at the helm of the OCC, a move aimed at providing more clarity to nonbank lenders that rely on banks to originate their loans. Brooks has also pledged to clarify a related "true lender" doctrine and remove more uncertainty for some bank-fintech partnerships.
"The Acting Comptroller has been making it clear that he thinks that fintechs can help banks and that fintech innovation is good for the banking system," said Arthur Long, a partner at law firm Gibson Dunn & Crutcher LLP who specializes in bank regulation.
"I think some form of bank ownership as opposed to bank partnership is going to be the more viable model," Long said in an interview. "As long as the Comptroller is open to the fintech charter I think that you'll continue to see the model progressing in that way."
Across all charter types, the number of applications to form new banks peaked at more than 300 in 2006 before falling off sharply during the Great Recession. From 2011 to 2015, charter applications were almost nonexistent until the numbers began to slowly creep back up in 2016. There were 26 charter applications filed in 2019, and regulators granted eight charters that year.
The number of applications to form new banks is poised to rise, according to Pearson. "Our law firm represents lots of fintechs and I'm aware of quite a few companies that are pursuing charters," he said in an interview.
A bank charter means access to cheaper funding. With a bank charter SoFi could fund the loans it makes with deposits, which tend to be stickier and are less prone to freezing up when the financial markets become stressed.
"If you take deposits and you're a bank, you can get a much lower cost of capital than as a fintech," said Pearson. "There is a bit more regulatory burden when you're a bank because you are supervised by a number of different regulators. The question is, is it worth the trade-off? And a lot of companies think it is."