Fintechs Use ILC route to obtain bank license
Uptick in state-chartered banks owned by fintech companies filing for FDIC insurance.
In 2018, the FDIC reported 21 de novo applications had been filed with the FDIC (double of that filed in 2017) and of those only four were approved. There were 7 approvals in 2016 and five in 2017. Square and Nelnet withdrew their FDIC applications (but reports indicate they will refile). Varo Money filed a national bank application through the OCC and pulled their application (and is reported to also be interested in refiling).
Non-depository fintech companies engaged in the business of banking may obtain a state charter, OCC fintech charter or full national bank charter, but if they want their accounts to be insured, they will need the FDIC. Generally, companies with these types of bank charters are referred to as Industrial Loan Companies or Industrial Banks (“ILCs”). They are financial service companies that are state chartered banks, but their parent or holding company is a commercial business. The parent company is exempt from registering as a Bank Holding Company and therefore, would not be regulated by Federal Reserve Board. That exemption allows the ILC’s parent company to engage in activities that a Bank Holding Company (“BHC”) could not due to the requirement that a BHC’s activities must be generally limited to banking and financial activities. Seven states charter ILCs including California, Colorado, Hawaii, Indiana, Minnesota, Nevada, and Utah with Utah being the “Delaware” of ILC charters. Generally, an ILC will not be a BHCA bank as long as it satisfies at least one of the following conditions: (1) the institution does not accept demand deposits (non-depository institution), (2) the institution’s total assets are less than $100,000,000, or (3) control of the institution has not been acquired by any company after August 10, 1987. Check out these videos for more information: https://www.fdic.gov/bank/analytical/fintech/video.html.
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