Methods of entry

Entry into the banking system can be accomplished by organizing as a new, so-called de novo bank or through the acquisition of an existing bank. For simplicity, our analysis will consider a fintech company’s acquisition of an existing bank as a de novo charter formation since the bank regulatory agencies will effectively evaluate the acquisition through that regulatory lens.

At present, there are several charter types for entering the banking system that a fintech company should consider, each having its own distinct advantages and potential drawbacks. These include:

• National bank charter (full service and special purpose 'FinTech charter')
• State charter (Federal Reserve member/State and Federal Reserve non-member and FDIC/State state nonmember)
• Industrial Loan Corporation (ILC charter)
• Thrift or savings and loan charter (federal and state)
• Trust charter

Each chartering authority, whether federal or state has its own application requirements and processes. The federal banking agencies and the Conference of State Bank Supervisors (CSBS) have established a uniform application template for consistency and ability to meet multiple application needs with a single filing.

The content of a charter application and its corollary business plan can be summarized as follows:

• Describes organizers
• Describes the overall governance structure
• Provides for sufficient capital in relation to the proposed business plan
• Demonstrates how the entity can reasonably be expected to achieve and maintain profitability
• Describes how the entity will be operated in a safe and sound manner
• Demonstrates how its business poses an acceptable risk to the FDIC’s Deposit Insurance Fund, if applicable
• Demonstrates that its corporate powers are consistent with applicable federal and state banking laws and regulations

Regulators expect applicants to consider meeting with the relevant federal and state authorities prior to a formal application to provide an overview of their interest and plan in owning and operating a banking organization. In some instances, especially where the proposed business plan is novel or the company is seeking a fintech charter, providing a draft application prior to formal submission can assist with a more efficient and effective path to preliminary and then final approval.

Important considerations for the business plan components include, but are not necessarily limited to:
 

• Risk assessments
• Records, systems, and controls, including risk oversight, compliance risk management, and anti-money laundering program
• Financial management, including financial and capital projections
• Monitoring adherence to the business plan and revising the plan if needed
• Alternative business strategy, including contingency plans and recovery/exit strategies
• Community Reinvestment Act strategy or financial inclusion plan for fintech charters

The regulatory requirements and expectations for access to FDIC-insured deposits and the banking system include robust financial, governance, risk management, and compliance capabilities that mitigate risks to the federal safety net and potential harm to consumers. As part of the bank entry evaluation and preparation, firms should consider conducting a gap analysis against current and future capabilities, evaluating how their current financial resources, risk, and governance approach may fall short of the more formal requirements embedded in bank regulations and guidance.

Focus, in particular, should be on the level of capital and liquidity required to weather cyclical and adverse conditions given the fintech company’s proposed business strategy and risk profile. A specific capability expectation is for roles and responsibilities across what is commonly referred to as the “three lines of defense” (business line, independent risk management, and internal audit) to be adequately defined and supported by qualified staff and infrastructure.

Further, a well-designed governance framework—including the board of directors and committees of senior management, risk, and assurance functions—that provides reasonable checks and balances over the firm’s risk-taking and operations is required. For firms contemplating a FinTech Charter, there is an additional requirement for recovery and resolution planning as well.

All of these capabilities will be tested by examiners potentially prior to approval and through post-approval exams, to verify that the company’s operations are fully aligned with supervisory expectations.