Fintechs Increasingly Partner With Small Banks Instead of Pursuing Charters
As of September 2019, no fintech company had successfully obtained a banking charter in the United States, prompting a strategic pivot toward partnerships with existing banks. Square had applied for an Industrial Loan Charter in fall 2017 with no approval in sight, while Social Finance Inc. (SoFi) withdrew its ILC application altogether. Federal Reserve members expressed concerns about fintech risk management capabilities, and state regulators filed lawsuits to block certain charter grants.
Varo Money was the furthest along, having received preliminary national bank charter approval in September 2018, but was still awaiting FDIC deposit insurance approval. The regulatory headwinds led many fintechs to conclude that partnering with small community and regional banks was a faster, more viable path to market. This dynamic effectively accelerated the banking-as-a-service model, with incumbent banks providing the regulated infrastructure and fintechs delivering the customer-facing technology.
Industry observers noted that government concern over digital financial services had grown, making the charter path increasingly difficult.
- Regulatory barriers to fintech charters validated the BaaS partnership model as the dominant go-to-market strategy
- Small community and regional banks gained strategic relevance as infrastructure providers for fintech products
- The charter bottleneck created a window of opportunity for dedicated BaaS platforms to emerge as intermediaries