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When it comes to fintechs getting bank charters we are entering a golden age. With zero fintech-oriented bank applications approved in the Biden administration we already have several fintechs with shiny new bank charters just a few months into the new administration. So, if you are a fintech and are thinking about bank charters now is the time.
To break all this down, I was delighted to chat recently with Michele Alt, Co-Founder and Managing Director at Klaros Group. She was last on the show in 2021 and certainly a lot has changed since then. Michele takes us through the different types of charters and explains the different options for fintech companies seeking charters.
On this podcast you will learn:
- The fundamental change in attitude for bank charters with the new administration in DC.
- The two paths that fintechs can take to get a bank charter.
- The pros and cons for each of these paths.
- Michele’s thoughts on the SmartBiz acquisition of Centrust Bank.
- Why she thinks the timelines for bank acquisitions will be shorter from now on.
- The difference between an ILC charter and a regular bank charter.
- Why most ILC banks are located in Utah.
- Why some of the big names in fintech are applying for the MALPB charter in Georgia.
- Why Wyoming created the SPDI charter.
- How the Federal Reserve is reacting to this change in the new bank formation environment.
- Why some of the crypto companies are looking for federal bank charters now.
- Michele’s perspective on the big tech companies getting bank charters.
- What she would say if Amazon came calling looking to explore an ILC charter.
- What the fintech banking landscape might look like at the end of the Trump administration.
Read a transcription of our conversation below.
FINTECH ONE-ON-ONE PODCAST NO. 534 MICHELE ALT
Michele Alt: There is no difference in approvability. That is the most important thing I want listeners to understand. The regulators will look just as hard at an acquisition as a de novo application, full stop. The timing is different. And 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 is 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 is reviewed, and when it is approved, you have an operating bank. So, think about the comparison is really with the de novo, there’s probably more work at the back end. With an acquisition, there’s more work at the front end.
Peter Renton: This is the Fintech One-on-One Podcast, the show for fintech enthusiasts looking to better understand the leaders shaping fintech and banking today. My name is Peter Renton and since 2013, I’ve been conducting in-depth interviews with fintech founders and banking executives. Today on the show, we are talking bank charters with one of fintech’s leading experts on the topic. I’m delighted to welcome back to the podcast Michele Alt, the co-founder and managing director at the Klaros Group. Michele spent more than 22 years working at the OCC, so she knows the bank chartering process intimately. And with the new administration, there is renewed interest in bank charters as the attitude in Washington has changed dramatically. If you have questions about bank charters, Michele has answers. Now let’s get on with the show.
PR: Welcome back to the podcast, Michele.
MA: Thanks, Peter, I’m delighted to be here.
PR: All right. Well, it’s great to have you. I was just looking; it’s been three and a half years since I last had you on the show, and I’ll link to that in the show notes, the previous interview we did, but I would say a lot has changed in the last three and a half years. And so maybe we can start off by talking about what has changed with the new administration, and particularly when it comes to the different paths fintechs can take to get a bank charter.
MA: Well, what hasn’t changed is a shorter subject than what has changed. I’m happy to say that when it comes to new bank formation and bank acquisitions, we are 180 degrees from where we were during the Biden administration. During the Biden administration, not a single fintech-oriented application was approved.
PR: Yeah, that’s staggering when you think about four years.
MA: Four years, and those were long years. And Peter, I’m curious if you link to our earlier discussion, I may have been talking about my hopes for Figure’s bank application.
PR: Yes, you talked at length about Figure.
MA: Yeah. Well, those applications, which were begun in Trump’s first term, Trump 1.0, really ran into some serious regulatory headwinds when the Biden administration took over. And what is abundantly clear in my recent visits to Washington and my many conversations with regulators is that the welcome mat has been rolled back out. And there’s profound interest in new bank formation.
PR: Right. That is good news. So there are really, I guess, two main paths, right, for a fintech. And it seems to be one path has become more popular than the other. The first path is acquiring a bank, which several fintechs have done. And I know you’ve been involved in one. We will get to that in a minute. The other path obviously is a de novo bank charter, which Varo Money famously did and spent a fortune on and has not actually been followed up with others. When you look at the two paths, is one better than the other?
MA: No, one is not better than the other. I’m glad you asked me that. I spent a lot of time dispelling the assumption that an acquisition is somehow better, more easily approved, faster. Let me explain, they are different. It’s the difference between getting a bespoke suit or buying off the rack and having it tailored. There are appropriate occasions for either suit. Sometimes it’s overkill to go bespoke. Sometimes, you would do better having something custom-made for your measurements. What I mean by that is that the good thing about acquiring a bank, I often tell my clients, is that it comes with existing management operations and systems. And the bad thing about acquiring a bank is it comes with existing management operations and systems. And that marriage can be a painful one for some fintechs and some banks. There is no difference in approvability. That is the most important thing I want listeners to understand. The regulators will look just as hard at an acquisition as a de novo application, full stop. The timing is different. And 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 is 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 a target, an acquisition target. Once you do that, you apply to acquire the bank, you submit the application, it is reviewed, and when it is approved, you have an operating bank. So, the comparison is really with the de novo, there’s probably more work at the back end. Within an acquisition, there’s more work at the front end.
PR: That’s good to know. So, let’s talk about one deal I know you were involved with because I saw it on LinkedIn, and that was SmartBiz. they went down the acquisition route and acquired Centust Bank to form SmartBiz Bank. Now I’ve had Evan on the show, the CEO of SmartBiz, a couple of times. But I’d love to get your perspective on what took place there and why they went down the route they did.
MA: SmartBiz was very fortunate. It was very deliberate in its search for the ideal target for its business. It found in Centrust that ideal target. In Centrust, there were many synergies in business focus, a focus on small business lending, in particular. They had simpatico management teams, a board at the bank that was highly supportive of the change in control and the benefits to the bank, its shareholders, and its customers of being acquired by SmartBiz. So that was a very happy marriage, I would say.
PR: That must have started, because it happened fairly recently, only, as we’re recording this, we’re just over three months into the Trump administration. So, I imagine this must have begun under the Biden administration.
MA: It did.
PR: Did you deliberately delay the timing of trying to make that happen?
MA: No, we did not delay the timing. We worked according to SmartBiz and Centrust timing. And credit where credit is due, you were correct that most of the work was conducted during the Biden administration and the regulators are to be commended that they gave SmartBiz a thorough objective look. I think that they would have been approved by the Biden administration agency’s leadership eventually, but their groundwork laid the path for the OCC under the acting comptroller’s leadership to quickly approve SmartBiz.
PR: So what was the timeline there? From the time they decided they wanted to acquire a bank to the time they got approved, what sort of timeline are we talking?
MA: You know, Evan Singer, the CEO of SmartBiz, will, I hope, correct me if I’m wrong. I think that the idea and the exploration of the acquisition began three years ago. The actual application was filed more than a year before it was approved.
PR: Okay. Do you expect that timeline to be similar going forward?
MA: I expect it to be shorter. I have spoken with the leaders and acting leaders of the banking agencies, and they are committed to processing applications more efficiently than has been the case in the past.
PR: That is good news. Another recent deal that got done is OakNorth. Now, a lot of listeners might not know OakNorth well because they’re a UK company. I’ve known them for a long, long time because we’ve had the CEO speak at our London events in the past. I’ve interviewed Rishi, the CEO on my podcast, and they’ve made it very clear for a long time that the US was a major target for them. They’re another small business lender doing larger loans than what SmartBiz does, but they acquired Community Unity Bank, an interesting name. Not easy to say fast. Not easy to say fast. So, what can you tell us about that acquisition?
MA: Well, I think that that acquisition is just further proof that the regulators are open for business. Again, I don’t think that the takeaway should be the way to go is acquisition. That is an analysis each applicant should do according to its own strategy and timing and the pool of potential acquisition targets available.
PR: Right, right. Okay. So, I want to move on to a new application, not an acquisition. And it’s not for, I don’t know what you call it, a regular bank charter. It’s for an ILC. And it’s from OneMain. And OneMain, you know, I don’t think they’re really a fintech. They’ve been a brick-and-mortar lender, short-term consumer lender for decades. I think it goes back many decades. But anyway, they have recently applied for an ILC charter. Maybe you can start by just reminding us what’s the difference between the ILC charter and the regular bank charter.
MA: Yes. An ILC is a real bank. It can engage in a full range of banking services, but it is not a bank that subjects its parent under the Bank Holding Company Act to supervision by the Fed. For that reason, it is the ideal charter for a company that is not limited in its activities to those that are permissible for a bank or financial in nature. So, ILC stands for Industrial Loan Company. They 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. Making cars 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.
PR: Even though like, obviously Stellantis, General Motors, they make cars, they have nothing necessarily to do directly with finance, although they have massive financing operations. Whereas, OneMain, their business is finance. OneMain could have gone down the regular bank charter route, but they decided not to. What do you think? Is it just because of the Federal Reserve oversight?
MA: That is my assumption. I don’t know that directly from that, but that’s my assumption. That’s the primary benefit to pursuing an ILC.
PR: And why are most ILCs, and I don’t think, not all, but most, are located in Utah?
MA: They are, and I think that’s historical artifact. Utah has the most, there are only six states that offer ILC charters to start with. Utah is the predominant provider of ILCs, and they have a little bit the benefit of not being the first in the space, the most dominant in the space. And as a result, the Utah DFI is very familiar with ILCs, and Utah itself has an unusual pool of talent that is ILC-experienced. Utah’s success breeds more success. But one of the things when I talk to potential applicants, I encourage them to consider other states as well. One issue that I’m sure we’ll get to in a moment more broadly is that with the pent-up demand for applications, we are going to see a relative flood, relative compared to the absolute little drip, drip, drip over the last few years of applications. And the regulators will not necessarily have the staff available to handle all of them all at once. And so one thing to consider is that Utah may have less capacity to review applications than another state. I’m not saying that they do, it’s just a potential. So that’s one reason to consider other states.
PR: Okay. Interesting. So I want to talk about some of the other unusual bank charters. I mean, I’m sure you’re all fully aware of this. I had never heard of the Merchant Acquirer Limited Purpose Bank Charter, M-A-L-P-B that Stripe applied for with Georgia. And a lot of people made a big deal out of this. My God, Stripe’s become a bank. But from my reading of it, this is a, as the name says, a limited purpose. Tell us a little bit about what that charter really means.
MA: Yes, the MALPB, the MALP, it’s a real mouthful. It is indeed 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 have resulted from that legislation. But it’s interesting, in the last year, Fiserv applied, Stripe applied to big players, and you can assume they wouldn’t be pursuing a charter unless they thought it would be very useful to them. To put this in context, the state alternative charters are really 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. What, often, fintechs need is, they need a Master Account. They need 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. No one was applying for the Georgia, MALPB or some of the other alternative charters because of the uncertainty of getting accepted into the card networks or getting a Fed Master Account. The thing to read it when you’re reading the tea leaves here is if Fiserv and Stripe have decided to pursue that, they are pretty confident about their ability to gain a Master Account and or card network membership. So that is a big development.
PR: Right. But obviously, Stripe is not looking to take deposits. They’re looking at this from, know, they’re a payments business, and they want to acquire merchants directly, I guess.
MA: Right. Yeah. Right.
PR: Okay. So another interesting, I think you even called this yesterday, Speedy.
MA: Speedy.
PR: S-P-D-I. And I don’t actually remember what that stands for, but Wyoming has the SPDI Charter and there’s been some crypto firms that have received that charter. Maybe tell us a little bit about what that does.
A SPDI stands for Special Purpose Depository Institution. And Wyoming created the SPDI charter, gosh, maybe not 10 years ago, but it’s getting to be a while. And the idea really there is to provide a limited-purpose bank charter for crypto companies for the most part. It can be used for other purposes, but this was definitely, they had in mind crypto. Caitlin Long from Custodia Bank was very involved in the drafting of that legislation. She’s a brilliant woman, very interesting to talk to on this subject. She wound up locked in a battle with the Fed, has been in a battle with the Fed, over Master Account access for her bank, Custodia Bank. And that particular problem has, for the most part, I would say, 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? So that uncertainty has put a question mark around all of the state limited purpose banks, although with the noted caveat that something seems to be brewing that’s gotten filings for the Georgia MALPB and the Connecticut uninsured bank, which I believe Fnality has applied for. So there are developments there. I think if Congress takes up the call for a payments charter, to create a payments charter, that we will see a lot of activity there, rather than through these state alternative charters. And the regulators are now, again, a 180-degree turn from crypto choke point to crypto receptivity. So I think we’re gonna see a lot of action on the crypto side at the federal agencies.
PR: But Custodia Bank still doesn’t have their Fed Master Account, right? Is that litigation ongoing?
MA: I believe, Peter, I haven’t checked the status lately. But yeah, that’s been a saga.
PR: Well, I imagine if the Federal Reserve ends up changing its mind, and mind you, the Federal Reserve is not a political organization where we know that there’s not going to be a new head of the Fed until next year. As we’re recording this, Trump has just said that he’s not going to fire Jay Powell, we’ll see if he keeps his word, you just never know. And what’s your reading on the Federal Reserve, as the bank regulators have moved 180 degrees, the Federal Reserve doesn’t necessarily move with them. So, do you think that there’s going to be any pressure on them to change their tune with some of this?
MA: There is pressure on the Fed. I also think that Governor Miki Bowman is very keen on encouraging new bank formation. She has a background as a community banker. She believes firmly in the importance of new and innovative bank formation. I think she will be advocating for the lessening of restrictions that are impediments to new bank formation. I don’t know if that includes some softening on the approach to the tiered approach to Master Accounts that the Fed takes. I think you’re right, the Fed is less political generally, and they are slow to turn, like turning around a freighter in the ocean. But it is the space I’m watching with great interest.
PR: And then before we go on, I want to talk about crypto because, this was in the news this week, that Circle and BitGo, the Wall Street Journal reported this, are supposedly applying for a bank charter. The rumors are that Coinbase and Paxos are also looking at it. I mean, this is a very crypto-friendly administration. What’s your expectation when it comes to those kinds of banks? They’re not going to the Wyoming Charter; they’re going to the Federal Charter. What’s your reading on that?
MA: My reading is certainly that the crypto companies are seeing a window of opportunity. I think they’re correct to perceive that that window is open at the federal level. Jonathan Gould has been nominated and had his Senate confirmation hearing a week ago, nominated to be the Comptroller of the Currency. As you’ll probably recall, he was the Chief Counsel under Brian Brooks during Trump 1.0, a very crypto-friendly regulator. And I think that the crypto companies are very excited to come in and explore their options under Comptroller Gould.
PR: Yeah, and he may well be confirmed by the time this is published.
MA: That would be my expectation.
PR: Yes. Okay. So then what about big tech? Google did some things a few years ago, and you know, Amazon obviously has the resources. I mean, they could apply for an ILC potentially. They’re obviously not in the business of finance, but are we going to see bank charters with tech companies anytime soon? Do you think?
MA: Get out the popcorn. It’s pretty interesting here. So let’s talk about Big Tech. Let’s talk about ILC. So let’s put it in context here for what we’re really watching. Let me get the popcorn out. As I said, an ILC is a very rare bird. The intention is to allow companies that are not limited to the business of banking to provide banking services to their customers and employees. So, there are applicants that can only become a bank with an ILC charter, like General Motors, making cars is not in the business of banking, for example. Google is a tech company. It is not limited to the business of banking. Amazon sells stuff. It is not a bank. So if they wanted to enter banking, within the current licensing scheme, it would have to be through an ILC. That scares the bejesus out of the incumbent banks. It is one thing for, say a small industrial company with a limited product set and a limited footprint to operate a bank. That’s not going to create a competitive disadvantage for Chase or any of the big banks, let alone the community banks. So ILCs were the sleepy little space until Walmart applied for an ILC in 2006 and set off an absolute firestorm. Because what is more convenient than Walmart?
PR: Right.
MA: They’re everywhere. They have an absolutely loyal customer base that exists throughout the country. They visit the stores weekly, if not more often. They know how to deliver a standardized experience that their customers like. That was very frightening to the industry, to the banking industry. And there was an all-out push against Walmart to the point where Walmart was pressured to withdraw its application. And there, the story sort of ended. You know, no one else tried it. If Google or one of these big companies made the attempt, we can expect an all-out political war. And it’d be really interesting to watch because Google and Big Tech are very powerful. They had a big influence, Big Tech had a big influence, in terms of campaign contributions to Trump. We saw the Big Tech leaders sitting on the dais at the inauguration.
PR: In the front row, I think.
MA: In the front row. I am very interested to see how those political battles result. You have big players on both sides lining up. If that happens, buy the popcorn.
PR: Yeah, it’s going to be super, super interesting. So, if you were to advise, say Amazon came to Klaros group and said, “We want to hire you because we’re exploring an ILC.” What would you advise them right off the bat? Say it’s, this is worth it, or this is worth pursuing, or, is it, you know, is it really too difficult?
MA: Peter, what I think I’d first say if Amazon came calling, would be, where’s that package? But after that, I would say, let’s try it. And here’s why I would say, let’s try it. I don’t believe that our regulatory system should serve only the interests of the incumbents. I think it should serve the interests of the people, call me an idealist. But if someone can come along and provide services, financial services, that people want in a convenient, accessible, inexpensive, and compliant way, they should by all means be allowed to do so through existing statutory limits. So I would say, as long as there is such a creature as an ILC, then let’s try it, but be prepared for a fight.
PR: Right. Okay. So then, in closing, let’s fast forward to almost four years at the end of the Trump administration. What do you think the fintech landscape is going to look like, particularly when it pertains to bank charters at that time?
MA: I am confident that we’ll see many more fintechs become banks, become or acquire banks. I think we will see some really beginning to scale. Typically, these are not big. When it comes to banking, big is a whole different beast, right? It takes a while to build a many-multi-billion dollar bank. I think we will see some bigger fintechs starting to scale their banking business. And I think we will see a number of smaller fintechs having entered the business and operating smaller banks and getting the hang of being regulated as banks. It’ll be an interesting time.
PR: Right. Well, we’ll have to leave it there, Michele. It’s always great to chat with you. I always learn a lot when we chat, and I did today.
MA: And look, color coordinated.
PR: Yes, we are. Okay. Well, thanks again for coming on the show, Michele. Appreciate it.
MA: Anytime. Thank you so much, Peter.
PR: Okay. See you.
Okay, so I don’t like to get political on my show, but when you are talking bank regulation, politics can have a real impact. The reality is that there has never been a better time for fintech companies to obtain a bank charter. And as Michele said, we are going to see many new fintech banks in the next four years. Even if we move back to an administration run by Democrats in four years, the fintech landscape will have been irreversibly changed. And I think that’s a good thing. Anyway, that’s it for today’s show. If you enjoy these episodes, please go ahead and subscribe, tell a friend, or leave a review. And thanks so much for listening.