Bloomberg News — In an era of soaring interest rates and intense competition, fintechs are increasingly deciding they need to become banks to ensure their long-term survival. They're also finding that doing so isn't easy.
Figure Technologies Inc., a blockchain firm started by SoFi Technologies Inc. co-founder Mike Cagney, is the most recent company to withdraw its application for a bank charter, a move made after years of waiting for an answer from U.S. financial regulators. Figure isn't alone: financial-technology firms Oportun Inc., Brex Inc. and Monzo Bank Ltd. and crypto company BitPay Inc. have all pulled their U.S. banking-charter applications, seeing how arduous the path to approval has become.
Gone are the days when being an innovative fintech was more attractive to investors and customers than fusty old banks. The Federal Reserve's aggressive interest-rate hikes have wiped out easy, inexpensive financing for fintechs, and partnering with banks — something necessary for fintechs to offer savings accounts and loans — is becoming costlier as well. The business of being a bank, once considered stable but relatively boring and too heavily regulated, is now more attractive than ever.
While a handful of fintechs successfully became banks during Donald Trump's presidency, not a single one has been granted approval for a de novo bank charter since regulators chosen by Joe Biden took over leadership of federal agencies, with applications languishing for years.
"While I'm answering questions every week from people who want new charters, very few people, if any, will get those charters," said Matthew Bisanz, a partner with law firm Mayer Brown LLP focused on financial regulation.
That doesn't mean the desire to be a bank has gone away. Rather than waiting for an approval from the Office of the Comptroller of the Currency that may never come, some fintechs are instead looking to follow a path cut by fintech pioneers LendingClub Corp. and SoFi: buying an existing bank to secure its charter.
"That's the clear trend," said Jonah Crane, a partner with consulting and investment firm Klaros Group who advises fintechs. "Nonbanks who are seeking to enter the banking system have viewed acquisition as a more viable path."
But that, too, is proving challenging — not as difficult as de novo (Latin for "anew") approval, but not easy either. On a scale of one to 10, a fintech securing a new bank charter is likely an eight, while acquiring an existing one is closer to a five or a six, Bisanz said.
Future Bank
Figure, for one, isn't ruling out becoming a bank in the future — including, potentially, through acquisition — though it has no current plan to do so, according to Chief Operating Officer TJ Milani.
"Anything is possible," he said in an interview.
A representative for Oportun declined to comment, and a spokesperson for Brex said the firm is "excited to partner with existing banks" for its offerings. London-based Monzo said it continues to operate with its bank partner for its U.S. business.
BitPay cited "changes in OCC leadership and policy pronouncements" for withdrawing its application. "It became evident that the time for embracing an innovative approach to chartering a cryptocurrency-payments company has not arrived," Chief Executive Officer Stephen Pair said in an emailed statement.
While they're known for their cutting-edge technology, fintechs tend to lack the solidity that comes with being part of the old-line U.S. financial system. Simply put, being a bank is much easier than being a fintech in a time of higher rates. Nonbank fintechs that advertise perks such as better savings-account rates or quick online mortgage approvals aren't actually supplying those things themselves — they must instead work with a banking partner. That's because only banks can accept deposits from consumers and lend to them. As rates have climbed, so has the cost of those relationships.
Less Financing
At the same time, financing for fintechs has dried up, with overall funding for the companies falling in the second quarter to the lowest level since 2017, according to data compiled by CB Insights.
For deposit-accepting and lending-focused fintechs, being a bank would solve many of those problems. And for crypto firms, a national bank charter is seen as a way to gain legitimacy in an industry facing regulatory scrutiny.
The banking environment today is a far cry from when Trump was president. Two fintechs — Square, now known as Block Inc., and Nelnet Inc. — were granted industrial-loan company charters in 2020, and one crypto firm, Anchorage Digital, obtained a national bank charter a week before Trump left office.
The Biden administration, on the other hand, "makes it really clear" it doesn't think companies should be given bank charters unless they offer a full suite of services, including deposits and lending, according to Brian Brooks, who was acting comptroller of the currency under Trump and is now a partner at Valor Capital Group. That wasn't the Trump administration's view, Brooks said.
'Like Chiclets'
"Democrats believe that the Trump administration was handing out charters like Chiclets, so the Biden administration's regulators have made it clear that the charter drawbridge has been raised," said Isaac Boltansky, director of policy research at brokerage BTIG LLC in Washington.
Regardless of who occupies the White House, the de novo charter process is incredibly arduous — and there's no assurance the work will pay off, said Keith Noreika, a former acting comptroller of the currency and now chairman of the banking supervision and regulation group at Patomak Global Partners.
"It seems interminable," he said. When Jack Dorsey's Square was applying to become a bank, it fielded more than 600 follow-up questions from the Federal Deposit Insurance Corp., which is involved in the approval process and often the source of even more scrutiny than the OCC, he said. "It kept dealing with that type of inflow from the FDIC over three years."
The FDIC declined to comment. The OCC didn't respond to requests for comment.
It's even more challenging for a crypto firm to land a bank charter — or for existing banks to get involved in crypto. Earlier this month, the Fed said it's stepping up scrutiny of banks' involvement in digital assets after the meltdown of several high-profile crypto firms. Paxos Trust Co., which recently entered a stablecoin partnership with PayPal Holdings Inc., saw its bank-charter application expire at the end of March. Paxos is considering reapplying with the OCC, a spokesperson said.
Given the difficulties of landing a de novo charter, the easier path to becoming a bank — if not exactly an easy one — is looking more and more like an acquisition.
"If you've got a bank who wants to sell, and you've got a deal on the table, regulators at least have to give you an answer at some point," said Crane of Klaros Group.
James Stevens, a partner at law firm Troutman Pepper Hamilton Sanders LLP who has worked on fintech deals, said he spent all of last year helping a fintech try to purchase a bank, but the deal fell through. Nine out of 10 nonbanks that contact him wanting to become a bank are focused on takeovers rather than the de novo route.
"Every one that gets done," he said, "makes it a little bit easier."
--With assistance from Max Reyes, Katanga Johnson and Ben Bain.
