Even with FDIC endorsement, fintechs’ path to becoming banks is bumpy
Efforts in the U.S. to create a dedicated pathway for fintechs to acquire bank charters made little progress, until recently.
For years, some fintechs had been exploring alternatives that now seem more viable: seeking industrial loan company (ILC) charters or joining so-called sandboxes established by state regulators — a path once considered the only option for fintechs while a federal bank charter remained in limbo. However, several recent regulatory changes will create a more open, albeit bumpy, road for fintechs to become banks.
In March, the Federal Deposit Insurance Corp. made two key moves. It first proposed a new standard for ILC charter applicants that would require parent companies to provide liquidity and capital support for their ILC subsidiaries, as well as meet new recordkeeping and reporting standards. A day later, the FDIC approved the ILC charter applications for small-business payments giant Square and Nelnet, a student loan servicer. The action made Square the first fintech to receive federal deposit-insurance approval to form a bank.
If the FDIC’s proposal goes into effect, fintechs could be well positioned to acquire ILC charters so long as they meet the new reporting requirements; provide a rescue plan for injecting liquidity if needed; and gain support from state regulators.
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