3 Questions for Patrick Haggerty, who focuses his practice on bank strategy and design, regulation, enforcement action remediation, and fintech
Andreessen Horowitz famously predicted that every company would become a fintech company. Now it seems every fintech wants to become a bank. Should every large fintech eventually get a charter?
The short answer is no. That said, the question highlights a distinction in “fintech” that sometimes gets missed. Many fintechs describe themselves as technology platforms, but if you look closely at how they make money, they are really in the business of selling financial products and services. Better technology can greatly improve those products and services, but it doesn’t change the nature of the business. If you’ve found product-market fit and the business you’re running is fundamentally about selling banking products (e.g., loans, deposit accounts, payment services, custody or fiduciary services), a long hard look in the mirror will more often than not reveal a compelling case for a bank charter. However, if your business is fundamentally something else (i.e., banking services enrich or support, rather than define, your business model), the decision requires much more careful thought.
Either way, a charter is not for the faint of heart. Owning a bank can be enormously powerful, and it can simplify and de-risk a business in critically important ways, but it comes at a steep cost (both upfront and ongoing). That cost has to be understood and honestly factored into any ROI analysis.
In practice, we try to meet clients where they are. Sometimes when a client tells us they want a bank, it’s glaringly obvious that’s the right move. More often, though, the answer is less clear, and some of our most valuable work happens before a client commits serious time and money to pursuing a charter. We help clients pressure-test their assumptions by focusing on designing the bank first: what problems it would actually solve, which charter fits (and what limitations come with it), how it would sit within the broader organization, and whether the economics really pencil out. Sometimes the honest answer at the end of that exercise is that a charter isn’t the right fit, and the better path is to solve the underlying pain points some other way. That’s a perfectly fine outcome (and far cheaper than discovering it halfway through an application).
So in short, no, not every large fintech should own a bank. However, I suspect a few more of them should than currently realize it.
Enforcement actions are scarce these days, and regulators are steering examiners toward material financial risks and away from issuing findings on immaterial issues. Is that a gift for banks, or a trap?
My advice to bankers is not to look a gift horse in the mouth, but also not to overreact. The proliferation of supervisory findings tied to immaterial issues creates real burdens and pulls time and money away from innovation and growth initiatives, so the shift in tone is a welcome one. That said, banking is the business of taking (and managing) risk, and risk management doesn’t become any less important just because examiners are less prescriptive about how it must be done. A well-designed risk management program is a competitive weapon, not a regulatory compliance exercise.
The relief does have limits though. Process failures that amount to legal violations will still quickly lead to regulatory problems. Just last week, the OCC assessed the largest civil money penalty in its history against a large bank for breakdowns in its BSA/AML compliance processes. Examiners are more likely to ease up on processes that are not legally mandated on their own, and on criticism of how banks implement supervisory guidance (e.g., when the guidance prescribes one way to manage risk but there are perfectly reasonable alternatives that could reach the same end). Departing from guidance and coloring outside the lines is less likely to draw an MRA or enforcement action these days and in many cases, that’s a good thing. But regulatory guidance typically reflects hard-earned supervisory experience, and the risks it addresses are real, so taking your eye off the ball will eventually lead to losses. And when the losses materialize, the framework gets judged in hindsight, often by people far less forgiving than your examiners. SVB is the textbook example. If history is any guide, the seeds of the next crisis are being sown right now.
So rather than waiting for regulators (or worse, the market) to expose flaws, I’d encourage banks to get ahead of them. To the extent banks are spending less time remediating immaterial findings, they have a good opportunity to take a first-principles look at their risk frameworks and build processes tailored to their own business and risk profile (instead of rigidly adhering to guidance written for the industry at large). Regulators have said for years that guidance is only guidance, and bankers can finally take them at their word. When done well, tailoring can produce leaner, more effective processes than many banks have today. Bankers should enjoy the breathing room, but put it to good use. (And yes, Klaros can help with that.)
In the wake of the GENIUS Act, should banks see stablecoins as a threat to their deposits, or an opportunity?
A bit of both, but banks shouldn’t chase stablecoins as a shiny object. If a bank hasn’t identified real customer or market demand, a vague theory of the case shouldn’t justify a homespun program, particularly with several industry consortia already building shared infrastructure and other real-time payment options available (e.g., FedNow and RTP).
Stablecoins will likely keep winning market share internationally and in cross-border payments. Domestically, the threat to bank deposit franchises will depend significantly on how far exchanges and distributors are permitted to pay rewards that issuers themselves cannot. For U.S. banks, a more compelling play may be tokenized deposits, which stay on the balance sheet and provide funding, carry deposit insurance, and, unlike payment stablecoins, can pay interest.
A particularly intriguing variant is a “deposit token” that trades freely on exchanges and on public distributed ledgers, much like the bank notes and other bearer instruments of old. VersaBank just announced something along these lines. For a community or midsize bank, deposit tokens could provide a national deposit channel with no branches and relatively low overhead. It’s not yet clear how FinCEN will treat secondary-market transactions, but assuming it follows its proposed approach for payment stablecoins under GENIUS, the compliance burdens for the issuer should be on the lighter side.
The funding quality of deposit tokens also remains uncertain, but the deposits underlying the tokens could be quite sticky, since holders can pay a third party without the funds ever leaving the bank. However, gaining distribution will require incentives, which could result in deposit tokens being rate-sensitive or subject to intermediary risk. Brokered deposit treatment will also need to be thought through.
Still, with roughly $18 trillion in U.S. deposits, even a sliver of that market could be transformative for any one bank. Banks that move early, for the right reasons, and with sufficient forethought, could find a lot of value here.
