Fintechs and crypto companies seek bank charters for growth
Firms that had been seeking to expand and gain credibility with customers see an opportunity under U.S. President Donald Trump to get licenses that regulators were previously slow or reluctant to approve.
"We have seen a lot more interest. We are working on several applications now," said Alexandra Steinberg Barrage, a partner at law firm Troutman Pepper Locke. "Is it in full swing yet? I don't think so. Our clients are being cautiously optimistic, they're waiting for things to settle," as the administration installs heads of banking agencies.
Discussions and preparations for bank charters have increased significantly, according to two other sources who are working on potential applications. It has yet to be seen how many firms will follow through, they said.
While an institution needs to deal with more regulatory checks if it becomes a bank, its cost of capital and doing business can go down in certain instances. A license can also give more legitimacy to the business in the eyes of customers and allow it to increase business and market opportunities.
This will also allow firms to reduce their borrowing costs by drawing on deposits, another big advantage, said Carleton Goss, partner at law firm Hunton Andrews Kurth who is working on three such applications.
New banks will also boost industry competition and cater to specific customer groups or regions, industry sources and analysts said.
The Office of the Comptroller of the Currency has granted approval to fintech firm SmartBiz to acquire a Chicago-based community bank, Centrust Bank, which gives it a national bank charter, it said in an announcement Monday.
It is the first bank charter approval for a fintech firm since 2021, and industry experts expect this trend to continue.
CHANGE IN ADMINISTRATION
The surge in activity comes after the number of new bank charters granted by U.S. regulators plunged since the financial crisis, reaching a low of only four applications being approved in 2023, according to S&P Global.
"Online companies know that they will be coming under greater regulatory scrutiny," said Goss. "It makes sense for them to get ahead of the curve, and in turn, get more credibility and capital at a lower cost by applying for a charter."
Between 2010 and 2023, an average of only five new bank charter applications were approved annually by regulators, compared with 144 a year between 2000 and 2007, Barrage and other regulatory lawyers wrote in a recent open letter that made suggestions about streamlining the process.
Approvals sometimes took years and in some cases were withdrawn by the applicants, the letter said.
Applications dropped because low interest rates squeezed profits, reducing the appeal of bank status, while burdensome regulations deterred potential applicants.
After the collapse of bank-fintech middleman Synapse Financial Technologies last year, regulators have also proposed strengthening rules for banks working with fintechs.
There are expectations that Trump will usher in a deregulatory regime which is more pro-growth for businesses which could pave the way for some more bank charters in the current administration.
"We haven't seen a flurry of charter applications since the financial crisis period, but we certainly saw more in the first Trump administration," said Nathan Stovall, director of the financial institutions research at S&P Global Market Intelligence.
Trump's newly-installed regulators have indicated that they are focused on innovation and technology, sending positive signals to fintechs, Stovall added.
The administration "is encouraging regulators to adjust risk appetite and take a more pro-growth line," said Nigel Moden, global banking and capital markets leader at EY. "That could lead to an opening up of the market to some more competition."
Earlier, the Federal Deposit Insurance Corporation's (FDIC) acting chair Travis Hill said the agency would encourage more firms to pursue bank charters in the coming months to ensure a healthy pipeline of new entrants in the sector.
Federal Reserve Governor Michelle Bowman, who has been nominated by Trump as vice chair for supervision, has emphasized the need for speedier approval for new banks.
CHALLENGES
Industry experts believe that the high scrutiny on granting bank charters is a necessary step for financial stability, but they believe the turnaround process for these applications could be faster.
Typically, between $20 million and $50 million is required to set up a new bank, two legal sources said. Access to capital and complying with anti-money laundering laws and the Bank Secrecy Act are some of the biggest challenges for firms applying for charters.
Both sources declined to be identified because the discussions are private.
"There are still rigorous licensing processes in place and so time will tell as to how quickly new applications can move through the system," Moden said, adding that charter-related activity was picking up.
The U.S. has more than 4,500 banks. With an expected rebound in mergers and acquisitions among regional lenders, that number is expected to shrink even as some new entrants jump in. (Reporting by Nupur Anand in New York, additional reporting by Saeed Azhar, editing by Lananh Nguyen and Nick Zieminski)
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