Fintech: Strategic advantages and initial costs for entry into banking
So you want to be a bank?
Fintech financial companies have had specific advantages relative to “regular” banks, including a start-up culture, a lack of legacy technology infrastructure, and a regulatory environment that has allowed them more time to focus on product development and customer experience. While those long-term advantages have paid dividends for the fintech financial services industry, there are still numerous advantages to having a bank charter.
To date, success for fintech companies has been accomplished through bank partnerships, nonbank funding models, and a group of licenses at the state level. Fintech firms forged important partnerships and relationships with traditional banks to deliver innovative solutions. But many are still ultimately reliant on traditional banks for many aspects of money movement.
While operating outside of the banking industry has had its advantages, there are numerous advantages to having a bank charter, including:
- Access to stable, lower cost Federal Deposit Insurance Corporation (FDIC)-insured deposits
- Direct payment system access
- Ability to operate across state boundaries under a single regulatory framework through national pre-emption which enhances regulatory certainty
- The imprimatur of approval from licensing authorities
- Emergency borrowing from the Federal Reserve Bank (FRB) discount window
Why become a bank?
Depending on the individual fintech company’s product mix and future strategy, these banking industry advantages may be critical to obtaining sustainable profitability and generating scale in the next phase of their evolution.
Some of the strategic choices that fintech firms face today include:
- Operate and fund independently of the banking system
- Utilize bank partnership model for access to the payments system and credit product funding and/or offering of joint banking or financial products
- Formally enter the banking system with a charter
- Prepare for sale to another entity in the fintech and banking industry