Bank Charters , Fintech , And WASHINGTON: AN EXPLAINER Photo

Financial technology companies deliver better financial services at lower costs for consumers, sometimes in partnership with banks and sometimes directly. With the business of financial services changing constantly, Washington should embrace new banking models used by technology-driven innovators to deliver the best outcomes.


Yet, federal regulators have been slow to consider or approve so-called “novel charters” for fintechs, undercutting competition in the marketplace that benefits consumers. That’s why the Financial Technology Association supports bank regulators’ broad chartering authority for new market entrants — like fintechs — seeking the advantages and benefits a bank charter may confer in return for the costs associated with banking supervision.


Read more about the value of fintech-bank partnerships, why some fintechs may pursue their own banking charters, and why regulators must embrace diversity in financial services models that drive positive outcomes for consumers.



Fintech-bank partnerships help smaller banks compete and better serve consumers.


Overall, 65 percent of banks and credit unions partnered with a fintech over the past three years and nearly nine in 10 view fintech partnerships as critical to their businesses. That’s because consumers and small businesses want the personalization, speed, and scaling efficiencies that fintech partnerships provide, enabled by the consumer-permissioned data sharing of open finance. Nearly 90 percent of Americans now use fintech to manage their finances and 76 percent of Americans say the ability to connect their accounts to apps and services is a top priority when selecting a bank. Of the top finance apps, the majority are fintechs, showing how consumers favor the ease of use, transparency, and accessibility of fintech.


Partnering with fintechs helps small, mid-size, and community banks compete against large banks and better serve consumers and small businesses. Bank consolidation is at a high watermark — the top 15 banks hold over 56 percent of total deposits — making these partnerships crucial for the success of many smaller financial institutions. During the pandemic, fintechs partnered with banks of all sizes to help small businesses struggling to stay open, accounting for the third-largest source of PPP funding, and extending capital to a significantly higher rate of Black-owned businesses than traditional banks.


But, bank partnerships are not always enough.


In the current regulatory environment, fintechs navigate a maze of regulations at the state and federal levels, sometimes maintaining hundreds of state licenses. And while fintech-bank partnerships are well regulated, chartering provides streamlined oversight over fintech activities. Fintechs that pursue their own charter may benefit from greater consumer trust resulting from federal regulatory supervision and other banking privileges.


While many fintechs serve consumers effectively through a partnership with a bank, other fintechs can better serve consumers by pursuing a bank charter. With their own bank charter, fintechs have more room to innovate and incorporate the best technology and user experience, avoiding friction and lowering costs for consumers.


Regulators should embrace diverse financial services models to drive competition and consumer choice.


Unfortunately, federal banking regulators have recently expressed skepticism about issuing so-called “novel charters” to fintech firms, despite the strong precedent for granting charters to banking entities that don’t fit the mold of a traditional, brick-and-mortar depository institution.


In the past, the Office of the Comptroller of the Currency used its authority to grant charters to non-traditional entities like credit card banks and community development banks. But, Only a handful of new Federal Deposit Insurance Corporation-insured bank charters have been approved since 2011. That’s because regulators are currently disfavoring limited or special purpose charters, despite having the broad authority to issue or recognize new bank charters for a range of entities, including fintechs.


It’s time to embrace diversity in financial services models and work with new market entrants that are driving positive consumer outcomes. Rather than forcing fintechs to fit models of legacy banks, regulators should tailor chartering requirements to the risks posed by different banking models. Modernizing these chartering frameworks will drive innovation and foster competition and consumer choice.


Want to know more? Read FTA’s Just the Facts: Bank Charters for Fintechs.