A Bank Charter Primer

As Peter Renton and I discussed recently on the Fintech One on One podcast, the attitude in Washington has changed dramatically with the new administration, and there’s renewed interest in and optimism around bank charters. Here’s a quick run-down on what the options are. 

Build (De Novo) vs. Buy (Acquisition): The important thing is that at this point there’s no difference in approvability: the regulators will look just as hard at an acquisition as at a de novo application. The decision depends on where you are and what you need. Here’s how it differs. If you think about a de novo application, at a very high level, you put together an application for a bank you would like to build. You submit that application; it’s reviewed by the regulators and, hopefully, conditionally approved. And then you build the bank. With an acquisition, the first step is finding and coming to terms with an acquisition target. Once you do that, you apply to acquire the bank; you submit the application; it’s reviewed; and when it is approved, you have an operating bank. With the de novo, there’s probably more work at the back end, whereas with an acquisition, there’s more work at the front end. You might get up and running quicker with an acquisition, which is generally what folks pursuing this path hope, but it’s not guaranteed. You’ve got to do your own analysis according to your own strategy and timing, and the pool of potential acquisition targets available.

Industrial Loan Company (ILC): An ILC is a real bank. It can engage in a full range of banking services, but it does not subject its parent to supervision by the Fed under the Bank Holding Company Act. For that reason, it is the ideal charter for a company whose activities aren’t limited to those that are permissible for a bank or financial in nature. ILCs have been around for more than 100 years, typically to allow non-bank concerns to provide banking services for their customers and employees. When you think industrial, think of the applications pending right now from General Motors and Stellantis. Those companies cannot meet the definition and the requirements for a bank holding company because they make cars, which is not part of the business of banking. So for some companies, an ILC is the only game in town. But an ILC is an exceedingly rare bird. There are only 26 in the United States. And they are kind of the holy grail. They are desired by all sorts of fintechs because they would really prefer not to have their parent regulated as a bank holding company by the Federal Reserve.

Merchant Acquirer Limited Purpose Bank Charter (M-A-L-P-B): The MALPB is a limited-purpose financial institution. A number of states have created alternative charters to those offered at the federal level or state for more traditional bank models. The Georgia MALPB has been on the books for more than 10 years, and until recently, no use cases had resulted from that legislation. The state alternative charters are trying to solve what is a square peg-round hole problem with the existing charters when it comes to fintech. A lot of fintechs have limited business models, more on one side of the balance sheet than the other side. A traditional bank charter really may be overkill for their needs. Often, what fintechs need is a Master Account at the Federal Reserve and membership in the card networks. They don’t necessarily need everything else that comes with a traditional bank. And that’s where these states are trying to step in and fill that gap. 

Special Purpose Depository Institution (SPDI): Wyoming created the SPDI charter with the idea of providing a limited-purpose bank charter for crypto companies. It can be used for other purposes, but crypto was definitely the need they had in mind. Caitlin Long from Custodia Bank has been in a battle with the Fed over Master Account access, and that problem chilled interest in these alternative charters, because what’s the point if you can’t get a Master Account if that’s what you’re seeking? That uncertainty put a question mark around all of the state limited purpose banks.

The important thing is that when it comes to new bank formation and bank acquisitions, we are 180 degrees from where we were a few years ago. During the last administration, not a single fintech-oriented application was approved. In my recent visits to Washington and my many conversations with regulators, it’s clear that the welcome mat has been rolled back out, and there’s profound interest in new bank formation, and the agencies are committed to processing applications more efficiently than has been the case in the past. If you’re serious about getting a charter, there’s no better time, because the application funnels are filling quickly - reach me at hello@klaros.com