The launch of bank products from several financial technology companies in 2019 could shake up the hunt for deposits, even though fintechs are no longer viewed as disruptors that will upend the system.
Traditional banks have long dominated the financial landscape, but the market is starting to demand innovation. In 2018, many banks took note of increasing competition from fintechs and partnered with them or started their own digital initiatives. This year, several fintechs came right to the banks' doorsteps by seeking a banking charter or launching a banking product. And next year, the industry will see how fintechs fare in the substantially more regulated banking environment, where they will compete with the country's most well-established financial institutions.
Many fintechs have started to launch into new verticals. In 2019, small-business lender Kabbage Inc. jumped into payments, while payments processor Stripe Inc. launched into small-business lending and corporate credit cards. Square Inc. and Social Finance Inc. each started a brokerage platform, and Green Dot Corp. launched a high-yield savings account. Several investment-focused fintechs also launched cash management accounts this year.
Cash management accounts are a good "first-step product" on the consumer side, On Deck Capital Inc. CEO Noah Breslow said in an interview. Breslow called 2020 "a reality year and an implementation year" as these fintechs try to bring their latest products to market and learn the ropes.
In 2020, Jim Brusstar, co-founder and president of banking technology startup Treasury Prime Inc., expects to see more startups build out these banking products. To some extent, a simple checking and savings product "won't be enough anymore," he said in an interview.
Although 2019 will conclude without a fintech securing approval for a bank charter, there were some developments on that front throughout the year.
Varo Money Inc., which received preliminary approval in August 2018 from the Office of the Comptroller of the Currency for its bank charter application, remains the closest to securing a charter. The banking technology startup, which is affiliated with Varo Bank NA, refiled its application for deposit insurance with the Federal Deposit Insurance Corp. in July.
While Brusstar said the "clear path" to deposit products right now is to partner with a bank, many of the more established fintechs have pursued or are considering steps to secure their own charter.
Robinhood Markets Inc. both applied for and withdrew its application for a full-service bank charter with the OCC. The Menlo Park, Calif.-based startup launched a cash management account and fractional-share trading this year. Tokyo-based online retail company Rakuten Inc. and online broker Interactive Brokers Group Inc. both applied for industrial loan company, or ILC, charters with the FDIC in the second half of the year.
LendingClub Corp. indicated that it might seek a bank charter as well, though CEO Scott Sanborn called it "a significant undertaking" on an earnings call in May. And OnDeck's Breslow said this year that his company will pursue a charter. Whether it does so through its own charter application or through M&A is still under consideration, Breslow said.
In addition to small-business lending, OnDeck provides its software as a service to bank partners through its ODX platform. The chief executive said that partner-based business model would not change if OnDeck receives its own bank charter. In effect, an OnDeck bank would become another partner with ODX, Breslow said.
These fintechs join a growing list of companies waiting for a decision from regulators. Although the FDIC has signaled that it is open to reviewing ILC applications, it has not approved an industrial bank in more than a decade. And although the OCC approved its fintech charter in 2018, that option has been tied up in court.
The ILC charter allows a commercial parent to do banking activities without oversight by the Federal Reserve. Industrial banks are regulated by the FDIC and the state banking regulator for the state where they are headquartered. The fintech charter, if found legal by the Second Circuit Court of Appeals, would allow a company to become a bank without taking deposits.
Although the traditional banking industry has been a staunch opponent to both charters, the Independent Community Bankers of America, an industry trade group, acknowledged that increased collaboration between fintechs and traditional banks is improving both sectors.
"The fintech charter and the ILCs — we view those as loopholes to try to skirt the rules," said Kevin Tweddle, COO for ICBA's services network, in an interview. "We have no problem with fintechs that just want to come in and compete on a level playing field with a standard U.S. banking charter."