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SoFi Applies for a National Bank Charter

The leading fintech has filed a de novo bank application with the OCC this week

July 9, 2020 By Peter Renton 1 Comment

SoFi CEO Anthony Noto speaking at LendIt Fintech USA

SoFi has become the latest fintech to apply for a full national bank charter. They filed a de novo bank application with the OCC on Wednesday.

You may remember that back in 2017, when co-founder Mike Cagney was still CEO, that SoFi applied for an industrial loan charter. They pulled the plug on that application a few months later after Cagney resigned from the company.

The interesting difference is that SoFi has decided to pursue a full bank charter this time rather than the ILC as they did before and as fellow fintech Square has done. Of course, it could be that ILCs are somewhat controversial, with many banks, large and small, opposing their very existence.

I reached out to SoFi today and they responded back with this official statement:

We can confirm that SoFi has formally submitted an application to the OCC for a proposed de novo national bank, SoFi Bank, National Association. We look forward to working closely with the Office of the Comptroller of the Currency, as well as with the Fed and FDIC, as they review our application.

CEO Anthony Noto had this to say:

SoFi is on a mission to help our members achieve financial independence to realize their ambitions. We firmly believe that by pursuing a national bank charter, we will be able to help even more people get their money right with enhanced value and more products and services.

SoFi will no doubt be leaning on the experience of Varo, the digital bank that is three years ahead of SoFi on this journey, having filed with the OCC in the summer of 2017. They are still waiting for final approval from the OCC (the FDIC has given their approval) . Hopefully, SoFi will not have to wait three years before getting their approval as they should be able to follow a similar playbook. The other fintech that has applied for a full banking charter is Robinhood, a company that has been in the news for many of the wrong reasons lately. LendingClub decided to go down the acquisition route as they announced in February that they intend to acquire Radius Bank.

One advantage that SoFi has now is that Brian Brooks, the new Acting head of the OCC, is intimately familiar with fintech, having previously been on the board of Avant. FDIC Chairman Jelena McWilliams is also very innovation minded, so for the first time the heads of both banking regulators are very reform minded and SoFi should receive a more receptive audience for their ideas.

For any non-bank the big advantage of getting a banking license is that it should lead to a cheaper cost of capital. Today, SoFi has to get bank funding lines to finance their loans but a bank charter will allow them to offer deposits directly. Right now, anyone can open a SoFi Money account which accepts deposits but that account is officially a cash management account with deposits being held with SoFi’s partner banks. This obviously has a cost involved and SoFi cannot lend this capital directly.

Another benefit is lending licenses. SoFi does not work with a partner bank to originate loans, instead it has obtained consumer and mortgage lending licenses separately in every state where it is required. National banks can lend with just one license simplifying the licensing process. Now, there is obviously a much bigger compliance burden overall when becoming a national bank.

The entire industry will be watching SoFi’s progress here with great interest. It is clear that fintech leaders are moving towards offering more bank-like features and many will likely end up becoming banks themselves (or be acquired by a bank). By applying to become a bank SoFi is cementing their position as a fintech leader and one that will continue to blaze their own trail as fintech goes mainstream.

Varo Breaks New Ground With FDIC Approval For National Bank Charter

Varo will be the first fintech to receive a National Bank Charter, simplifying the way they operate in the United States.

February 11, 2020 By Ryan Lichtenwald 1 Comment

While there are always interesting things happening around fintech there is not often news which moves the needle for the entire industry. Because of the regulatory environment in the U.S. the digital banking startups have partnered with banks in order to offer banking services. While the digital bank may offer some compelling features and a user friendly interface, it is more of a skin on top of the actual bank which holds the funds and operates the core banking platform. At the end of the day it is the bank calling the shots, which is potentially frustrating for a nimble startup. Many fintech companies were holding out hope for the OCC Fintech Charter, but this potential opportunity was shut down by a federal judge in 2019. One of the options that remain is a national bank charter, though it comes with its own set of challenges.

In July 2017 it was reported that Varo was pursuing a National Charter. Varo first started operating their digital bank offering through a partnership with Bancorp Bank but their goal was always to be able to act as a standalone national bank. In fact CEO and Co-Founder of Varo Colin Walsh shared in our 2018 podcast episode that they started conversations all the way back in 2016 which demonstrates his clear vision for the future:

…Actually in the 4th quarter of 2016 that we started the conversation with the OCC and we said to them that we’re not interested in the ILC charter or state charter. We’re not really interested in the fintech charter because we’re collecting deposits, facilitating payments and making loans and that’s what national banks do and so we were very clear that we really wanted a full national bank charter.

Varo was given preliminary approval for their national bank charter by the OCC in September 2018, but subsequently withdrew their application with the FDIC to make revisions. Their latest application was refiled last summer and yesterday we learned that the FDIC has officially approved their application for deposit insurance, a first for a digital bank in this country. The company will still need to get final approval from the OCC through a pre-opening examination and the Federal Reserve for their bank holding application.

What makes a national charter so special is that Varo will be able to make loans in all 50 states without having to worry about state by state licensing which can be an arduous process. They will also be able to act as a standalone bank, not tied to their partnership with Bancorp bank. This includes checking and savings accounts along with other loan products.

However, their longtime desire to achieve a national bank charter came with significant cost. In an American Banker article Colin Walsh revealed that the process cost them an estimated $100 million. In addition they must capitalize the bank as Walsh shares:

The agency, as part of its Feb. 7 approval, is requiring Varo to provide about $104.4 million in capital to the bank.

The process was rigorous with the FDIC requiring detailed information on everything from their executive hires to their core banking platform to stress testing scenarios. From there, examiners visited Varo’s offices and obviously this has all been going on over the last several years.

This news sets Varo apart from any fintech operating in the United States. Not only was this a big risk for the Varo team but also for their backers such as Warburg Pincus, The Rise Fund and TPG who were willing to provide the capital for Varo to see the process through. When you’re breaking new ground in an area like this there are certainly no guarantees. It is hard to fathom the amount of time that went into this process and to contrast it with other regulatory schemes such as the UK where dozens of digital banks operate. Walsh noted that Varo opened 150,000 accounts in January but stopped short of disclosing their entire customer base. Varo has always been one to keep an eye on in the digital banking space but now they are the company that I’m sure many peers will be looking up to. Congratulations to the entire Varo team.

If you’re interested in reading more Colin Walsh shared a blog post titled Varo to Become America’s First Digital National Bank.

Are Digital Banks Struggling to Get Traction?

A new survey suggests that digital banks are not getting much traction yet but there is more to the story

May 22, 2019 By Peter Renton 4 Comments

An article in Forbes earlier this month about the traction of digital banks caught my attention. A survey of U.S. consumers conducted by Cornerstone Advisors showed that traction among many of these new neobanks (I use this term and digital bank interchangeably in this article) is not happening as quickly as many of us expected. According to the survey only 3% of millennials have their primary checking account at a digital bank like Chime, Simple or Moven.

The survey also found that only 7 million deposit accounts have been opened at digital banks and that only Ally, Chime and BankMobile have more than one million deposit accounts. Simple, the first digital neobank to launch almost 10 years ago, has just 517,000 accounts according to the survey.

Now, when Chime announced they had raised $200 million in March they claimed to have opened 3 million FDIC-insured bank accounts. So, it is quite possible this survey is undercounting the total or that maybe there is a difference between an open account and a funded one. Regardless, we have a long way to go before any digital bank can challenge the size of even a midsized regional bank.

There are, of course, many other neobanks not included in the survey. At LendIt Fintech USA 2019 last month the CEO of MoneyLion, Dee Choubey, said that his company has more than 4 million users today. Another example is Square Cash, which has over 15 million monthly active users and with the debit card some consumers are using this as a primary bank account. So, one could even include Square Cash as a neobank (Square is in the process of applying for a banking license).

All this should be put in the context of a special report in The Economist earlier in the month with the cover exclaiming “Tech’s raid on the banks”. One of the many interesting stories in that report was about “Flanker banks” where banks create a new brand to compete with themselves. We have seen that at JPMorgan Chase with Finn and Greenhouse by Wells Fargo and there are numerous examples internationally. But according to the Cornerstone Advisors survey Finn is not getting much traction yet – their number of 47,000 accounts is surprising, if not shocking, to me. Greenhouse is still in limited rollout.

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