Proposed Bank Charter Processes and Bureaucracy Draw Criticism

FinTechs are being effectively shut out of the process through which they can become players and introduce innovation within the traditional banking system — and regulatory headwinds are to blame.

A de novo bank (so named for the Latin term for “from the beginning”) holds the promise of a slew of digital offerings, advanced technologies and forward-thinking nonbank providers bringing competition to the market.

In part, that’s a function of taking in deposits, so that deposits can help give the financial fuel and firepower that would underpin those innovations, including virtual cards and personalized financial planning and wellness options.

However, the process to get there can be long and winding. As some observers charge, the path is littered with obstacles that don’t need to be there.

The process itself, and the payoffs, were illustrated in a presentation from the Federal Deposit Insurance Corp., which said de novo banks formed at the state level are subject to orders from the regulator. The FDIC orders for deposit insurance remain in place for seven years; state agency orders may contain provisions that are “similar” to FDIC directives.

National banks are formed through the Office of the Comptroller of the Currency.

A letter released Monday (Jan. 27) by several lawyers and the Klaros Group, a financial services advisory and investment firm, addressed to “the incoming banking agency leadership,” expressed the sentiment that “FinTechs that do not operate through banks mostly operate outside the direct supervisory purview of the FDIC, OCC and Federal Reserve (agencies), and data shows the agencies have been reluctant to grant bank charters to FinTech applicants. This represents a missed opportunity for the agencies to foster innovative financial services through the approval and supervision of new traditional and innovative banks (new banks) and to keep this activity within the regulatory perimeter.”

The letter said many FinTechs deliver their services to customers through partnerships with existing banks. The PYMNTS Intelligence report “The FinTech-Bank Relationship Shifts Toward Collaboration” found that roughly two-thirds of banks and credit unions have struck partnerships with FinTechs; 76% of banks view those partnerships as essential to their own tech-driven initiatives.

“Although many FinTechs may decide that offering their services with a bank partner makes the most sense, they also should have the option of pursuing their own bank charter if their business satisfies the statutory criteria for approval,” the Monday letter said. “Yet FinTechs have been largely unsuccessful in obtaining bank charters.”

“Between 2000 and 2007, the agencies approved an average of 144 bank charter applications each year,” the letter said. “Between 2010 and 2023, however, the agencies approved only 71 applications in the aggregate, or an average of 5 new banks per year.”

The application process can take more than a year between the initial charter application filing, the FDIC application for deposit insurance and the eventual approval to open the de novo bank itself, per the letter.

Hurdles exist due to “a lack of clear guidance for pre-opening examinations” and “bureaucratic inefficiencies” giving rise to “a nearly impenetrable barrier to entry into the banking market, negatively impacting the competitive landscape,” the letter said.

The letter recommended that the agencies “elevate” the priority of new charters in each agency, update guidelines and harmonize the application processes across the agencies themselves. It also said the agencies “should publish an interagency application review checklist and commit to a 120-day review period for all applications that include the information identified in the checklist” to streamline processes.

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