In a recent survey of Americans, Fidelity Investments found that while Americans are #optimistic about their finances in 2020, they also plan to reduce personal debt and save more.
Financial Technology
PREMIUM — Digital payments are on the rise across the globe. In the U.S., the world’s largest economy, the use of mobile payments has increased significantly in the past two years. Add to that mix the prevalence of e-commerce and, the growing popularity of P2P apps, such as Venmo and Zelle, as well as digital banking. […]
Bank Innovation
Financial #technology (#fintech) firms have been disrupting the financial landscape through innovative products and efficient operations. That disruption is now entering the realm of operating models, as leading #fintechs recently initiated efforts to #become #banks. SoFi1 and Square2 applied for Industrial Loan Company charters in June 2017 and September 2017, respectively. SoFi since withdrew its application, citing recent leadership transition as the primary reason3. Varo applied for a National Bank Charter in July 20174. Others may pursue Special Purpose National Bank Charters, should they become available. Achieving such charter status could increase fintechs’ ability to gain market share and would place them in direct competition with legacy providers. The decision on the applications—whether yay or nay—is likely to have significant implications for the future of the financial services industry.
The U.S. financial services industry is highly regulated. Bank charters are required for membership in the U.S. Federal Reserve System and to engage in a breadth of banking services, including accepting customer deposits. While fintechs offer a myriad of financial products and services, none have yet to obtain national banking status. This limits their ability to quickly expand nationwide and hold and lend against deposits. Fintechs typically rely, instead, on bank partnerships or state-by-state banking licenses to grow their businesses.
1. Bank partnerships—sometimes referred to as a “rent-a-charter” model—allow fintechs to leverage three key assets of their bank partner:
In return, the partner bank gains fees or revenue sharing value generated by the fintech.
2. State-by-state bank licenses allow fintechs to obtain bank charters for the specific states in which they operate. While often helpful for small and new start-ups, established fintechs with national operations often find that differences in individual state laws limit their profitability and agility. State-by-state strategies can be costly and complex and, as such, typically serve as backup plans to the rent-a-charter model.
While fintechs, so far, have relied primarily on these two options to grow business, the array of viable options may be expanding.
Industrial Loan Company (ILCs) charters enable non-financial institutions to establish a bank to engage in lending and other specific banking activities. ILCs have two important distinctions: ILCs may be owned by a commercial company; and ILCs are exempt from the Bank Holding Act and are not subject to supervision or regulation by the Federal Reserve.
ILCs have been around for over a century, and are commonly used by automakers such as GM, Toyota, BMW and others to support their in-house financing activities. However, ILCs have fallen out of favor since Wal-Mart’s 2005 ILC application. An ILC would have enabled Wal-Mart to process its stores’ electronic check, debit card and credit card transactions, eliminating its cost of paying a third-party financial institution to perform these services6. Many large banks pushed back, claiming that an ILC would unfairly advantage Wal-Mart by allowing it to offer financial services without comprehensive regulatory oversight. The Federal Deposit Insurance Corporation (FDIC) implemented a statutory moratorium on ILC applications for commercial companies while it evaluated Wal-Mart’s application, which the retailer withdrew in 2007. The FDIC’s moratorium was followed by a Dodd-Frank imposed moratorium that lasted until 2013. At this point, no ILC applications have been approved in over a decade.
The FDIC recently eased the capital requirements for ILC applicants to encourage new participants. Fintechs are testing the waters. An approval on their applications could re-open ILCs as an attractive, viable alternative to bank partnerships. It would enable fintechs to operate commercial businesses, make loans and accept deposits.
The other option available to fintechs is to apply for a National Bank Charter directly. Under this charter, a bank is not subject to individual state usury laws in exchange for consolidated regulation. While a National Bank Charter would allow a fintech to operate more easily across the country, it comes with significant regulatory burdens (outlined in the Bank Holding Act), which would likely constrain broader commercial activities. As such, most fintechs have chosen not to pursue this path. Varo Money is a recent exception.
Recognizing that modern innovation may warrant a different type of charter for non-banks offering alternative financial solutions, the Office of the Comptroller of the Currency (OCC) announced in 2015 that it was exploring a Special Purpose National Bank Charter for fintechs. Although still under review, recent proposals indicate that it will differ from a National Banking Charter by specifying which banking services fintechs may offer (for example, make loans but not accept deposits) and suspending the requirement for charter holders to comply with the Community Reinvestment Act or the Federal Deposit Insurance Act. Proponents of this charter view it as a responsible way to bring fintechs under the broader regulatory umbrella; opponents argue that the charter would unfairly advantage fintechs over regulated financial institutions. Whether the OCC will eventually offer Special Purpose Charters—and whether fintechs will apply for them—remains to be seen.
Regulators have understandably struggled to keep pace with the evolving landscape of innovative financial services products and providers. Recent activities by the OCC and FDIC (for example, exploration of the Special Purpose Charter and easing of capital requirements for ILCs) suggest that regulators have a vested interest in ensuring that all banking activities fall under regulatory supervision. With this shift in sentiment, an approval of an ILC applicant (e.g., Square) in particular could very well encourage other commercial companies such as Amazon or Google to consider similar paths for their financial services. All eyes will be on the OCC and FDIC as these applications undergo the review process.
[1]TechCrunch, “Sofi applies to be a bank,” June 12, 2017. https://techcrunch.com/2017/06/12/sofi-applies-to-be-a-bank/
[2]TechCrunch, “Square will apply for an industrial loan company license this week, September 6, 2017. https://techcrunch.com/2017/09/06/square-will-apply-for-an-industrial-loan-company-license-this-week/
[3]LendEdu, “SoFi Withdraws Industrial Loan Charter Application, Cites Leadership Changes,” October 18, 2017. https://lendedu.com/news/sofi-withdraws-industrial-loan-charter-application-cites-leadership-changes
[4]BusinessWire, “Varo Bank, N.A. Applies for a National Bank Charter,” July 25, 2017. https://www.businesswire.com/news/home/20170725005537/en/Varo-Bank-N.A.-Applies-National-Bank-Charter
[5]Interest Rate Exportation refers to the way a bank will use its National Bank Charter to “export” the interest rate cap of its headquarter state, and therefore, potentially lend at higher rates than individual state caps.
[6]CNN Money, “Wal-Mart withdraws industrial banking push, March 16, 2007. http://money.cnn.com/2007/03/16/news/companies/walmart/index.htm
The post Might fintechs become banks? appeared first on Accenture Banking Blog.
Paris-based #startup #Lydia, on its way to becoming a leader in #French mobile payments, has raised a $ 16.1 million round of #funding to #become the next #PayPal in mobile payments. While a lofty goal, Lydia has demonstrated impressive growth in 2017, processing about a million transactions a month, it told TechCrunch. It has over a […]
Bank Innovation
Startup #Varo #Money has raised $ 45 million for its plans to #become a full-fledged, “#national #bank,” the startup announced yesterday. The funds will go towards marketing its service as well as for laying “the foundation” to become a bank, company CEO Colin Walsh told TechCrunch. Varo, a mobile banking startup that provides an FDIC-insured bank […]
Bank Innovation
Financial #technology (#fintech) firms have been disrupting the financial landscape through innovative products and efficient operations. That disruption is now entering the realm of operating models, as leading #fintechs recently initiated efforts to #become #banks. SoFi1 and Square2 applied for Industrial Loan Company charters in June 2017 and September 2017, respectively. SoFi since withdrew its application, citing recent leadership transition as the primary reason3. Varo applied for a National Bank Charter in July 20174. Others may pursue Special Purpose National Bank Charters, should they become available. Achieving such charter status could increase fintechs’ ability to gain market share and would place them in direct competition with legacy providers. The decision on the applications—whether yay or nay—is likely to have significant implications for the future of the financial services industry.
The U.S. financial services industry is highly regulated. Bank charters are required for membership in the U.S. Federal Reserve System and to engage in a breadth of banking services, including accepting customer deposits. While fintechs offer a myriad of financial products and services, none have yet to obtain national banking status. This limits their ability to quickly expand nationwide and hold and lend against deposits. Fintechs typically rely, instead, on bank partnerships or state-by-state banking licenses to grow their businesses.
1. Bank partnerships—sometimes referred to as a “rent-a-charter” model—allow fintechs to leverage three key assets of their bank partner:
In return, the partner bank gains fees or revenue sharing value generated by the fintech.
2. State-by-state bank licenses allow fintechs to obtain bank charters for the specific states in which they operate. While often helpful for small and new start-ups, established fintechs with national operations often find that differences in individual state laws limit their profitability and agility. State-by-state strategies can be costly and complex and, as such, typically serve as backup plans to the rent-a-charter model.
While fintechs, so far, have relied primarily on these two options to grow business, the array of viable options may be expanding.
Industrial Loan Company (ILCs) charters enable non-financial institutions to establish a bank to engage in lending and other specific banking activities. ILCs have two important distinctions: ILCs may be owned by a commercial company; and ILCs are exempt from the Bank Holding Act and are not subject to supervision or regulation by the Federal Reserve.
ILCs have been around for over a century, and are commonly used by automakers such as GM, Toyota, BMW and others to support their in-house financing activities. However, ILCs have fallen out of favor since Wal-Mart’s 2005 ILC application. An ILC would have enabled Wal-Mart to process its stores’ electronic check, debit card and credit card transactions, eliminating its cost of paying a third-party financial institution to perform these services6. Many large banks pushed back, claiming that an ILC would unfairly advantage Wal-Mart by allowing it to offer financial services without comprehensive regulatory oversight. The Federal Deposit Insurance Corporation (FDIC) implemented a statutory moratorium on ILC applications for commercial companies while it evaluated Wal-Mart’s application, which the retailer withdrew in 2007. The FDIC’s moratorium was followed by a Dodd-Frank imposed moratorium that lasted until 2013. At this point, no ILC applications have been approved in over a decade.
The FDIC recently eased the capital requirements for ILC applicants to encourage new participants. Fintechs are testing the waters. An approval on their applications could re-open ILCs as an attractive, viable alternative to bank partnerships. It would enable fintechs to operate commercial businesses, make loans and accept deposits.
The other option available to fintechs is to apply for a National Bank Charter directly. Under this charter, a bank is not subject to individual state usury laws in exchange for consolidated regulation. While a National Bank Charter would allow a fintech to operate more easily across the country, it comes with significant regulatory burdens (outlined in the Bank Holding Act), which would likely constrain broader commercial activities. As such, most fintechs have chosen not to pursue this path. Varo Money is a recent exception.
Recognizing that modern innovation may warrant a different type of charter for non-banks offering alternative financial solutions, the Office of the Comptroller of the Currency (OCC) announced in 2015 that it was exploring a Special Purpose National Bank Charter for fintechs. Although still under review, recent proposals indicate that it will differ from a National Banking Charter by specifying which banking services fintechs may offer (for example, make loans but not accept deposits) and suspending the requirement for charter holders to comply with the Community Reinvestment Act or the Federal Deposit Insurance Act. Proponents of this charter view it as a responsible way to bring fintechs under the broader regulatory umbrella; opponents argue that the charter would unfairly advantage fintechs over regulated financial institutions. Whether the OCC will eventually offer Special Purpose Charters—and whether fintechs will apply for them—remains to be seen.
Regulators have understandably struggled to keep pace with the evolving landscape of innovative financial services products and providers. Recent activities by the OCC and FDIC (for example, exploration of the Special Purpose Charter and easing of capital requirements for ILCs) suggest that regulators have a vested interest in ensuring that all banking activities fall under regulatory supervision. With this shift in sentiment, an approval of an ILC applicant (e.g., Square) in particular could very well encourage other commercial companies such as Amazon or Google to consider similar paths for their financial services. All eyes will be on the OCC and FDIC as these applications undergo the review process.
[1]TechCrunch, “Sofi applies to be a bank,” June 12, 2017. https://techcrunch.com/2017/06/12/sofi-applies-to-be-a-bank/
[2]TechCrunch, “Square will apply for an industrial loan company license this week, September 6, 2017. https://techcrunch.com/2017/09/06/square-will-apply-for-an-industrial-loan-company-license-this-week/
[3]LendEdu, “SoFi Withdraws Industrial Loan Charter Application, Cites Leadership Changes,” October 18, 2017. https://lendedu.com/news/sofi-withdraws-industrial-loan-charter-application-cites-leadership-changes
[4]BusinessWire, “Varo Bank, N.A. Applies for a National Bank Charter,” July 25, 2017. https://www.businesswire.com/news/home/20170725005537/en/Varo-Bank-N.A.-Applies-National-Bank-Charter
[5]Interest Rate Exportation refers to the way a bank will use its National Bank Charter to “export” the interest rate cap of its headquarter state, and therefore, potentially lend at higher rates than individual state caps.
[6]CNN Money, “Wal-Mart withdraws industrial banking push, March 16, 2007. http://money.cnn.com/2007/03/16/news/companies/walmart/index.htm
The post Might fintechs become banks? appeared first on Accenture Banking Blog.
Winnie-the-Pooh isn’t normally considered a business guru, but it turns out that A.A. Milne had a pretty good grasp on the challenge of digital transformation. “How does one #become a butterfly?’ Pooh asked Piglet in one of the stories. ‘You must #want to fly so much that you are willing to give up being a caterpillar,&8217; Piglet replied. &8216;You mean to die?&8217; asked Pooh. &8216;Yes and no,&8217; Piglet answered. &8216;What looks like you will die, but what&8217;s really you will live on.”
Leaders at many retail and commercial #banks are having similar conversations as they figure out how to win in a digital economy that is beginning to make their old business models look somewhat caterpillar-like. The big banks that succeed in the decade to come will be those willing to transform themselves by shedding the old versions of themselves in favour of something quite different.
The first step for many is to become outstanding Digital Relationship Managers, coupling their traditional strengths with a modern, open model approach to serve a wide range of customer needs and segments. It means having organisational agility and vibrancy that can quickly capitalise on the continuous and personalised stream of data generated by the digitisation of everything to satisfy the customer’s ongoing needs—both financial and non-financial.
Click to enlarge
The next step forward for these banks is to think of themselves as a #Living Business in ways that challenge traditional industry boundaries. That transition is about being hyper-relevant and embedding vitality across the organisation to adapt to changing customer needs and behaviour, beyond banking. It’s a transition that is not evolutionary but revolutionary. A bank that is a Living Business is not a better caterpillar, but more akin to a financial services butterfly. To take flight, banks will need to draw on ecosystem partnerships and plug-and-play functionality for all products and services, to refresh services and reinvent business models as fast and as often as needed. “Run the business” will essentially be automatic, while most talent and investment will be aligned against “change the business” activities. Many transactions will come through digital natives, such as Google, Facebook or equivalent multi-use digital platforms. Some transactions will be text-based, but a huge portion of interactions will be voice-based. From within that digital conversation, banks will need to identify the opportunities for a smaller number of higher-value transactions where it seamlessly provides more complex services, such as financial advice to its customers.
While the potential to grow revenue streams that come with Banking as a Living Business are enticing, banks will also have to embrace the more daunting aspects, such as prioritising their customer-oriented initiatives and cutting the caterpillar-improvement programs that do not map to the bank’s future business model.
Must banking as we know it die? Yes and no. Traditional concepts of the bank will die as banking moves from something customers step outside their regular activities to do and to a business that is fully integrated and embedded with the rest of their daily lives.
I join my colleagues at Accenture, Allen International, and Fjord to share further details in our new report, Banking As A Living Business: Driving Hyper-Relevance And Vitality Beyond Industry Boundaries. I invite you to read it as you contemplate what’s ahead for the banking industry.
The post What banks will want to become: a living business appeared first on Accenture Banking Blog.
Want a #national #bank that’s #mobile-only? So does #Varo #Money. Varo applied for a banking #charter from the Federal Deposit Insurance Corporation (#FDIC), as well as for a charter from the Office of the Comptroller of the Currenc, in the hopes of forming “Varo Bank,” the mobile banking startup announced today. “[Varo] was founded o […]
Bank Innovation
I’ve been a big Doctor Who fan since I first cowered behind my parents’ sofa in Scotland in the early 1970s, hiding from the Daleks. From the original black and white 1960s series to the recent news that, for the first time, the 13th Doctor will be a woman, the sci-fi series has continually reinvented itself to remain relevant to new audiences. One secret to its success has been the Doctor’s ability to regenerate into a completely new character every 2 to 3 years. Originally an elegant solution to the failing health of the first actor to play the role, regular regeneration has ensured that the writers have had the flexibility to take the show in different directions.
Read the report
If only it were that easy for #banks to reinvent themselves! Instead of a flash of light and a miraculous rebirth, it’s becoming increasingly obvious that to win in the digital economy, banks not only need to have the right business strategy, they also need to #master the discipline of continuously reinventing themselves. Instead of the #change being a Doctor Who-like episodic and disruptive process, the ability to change and adapt needs to be part of the core DNA of the #bank.
In Accenture’s recent 2017 Banking Change Survey, we asked more than 300 executives about their change priorities, how they embed change in their organisations, and the outcomes they are achieving. The study showed that those who have focused on change as a core capability—our ‘change leaders’—are seeing better results across a range of areas from cost control to customer service. The only category in which change leaders were not advantaged was product and service innovation, where it seems that too much change discipline may hinder spontaneity and creativity to some extent.
The leaders don’t treat change management as an ‘add on’ to other programs like network transformation or IT re-platforming. Instead, they view change management as a distinct discipline that not only ensures that they do the things they need to do, but also have the capacity to execute business strategies that will truly differentiate them. Cristoforo Avagliano, an executive at BNP Paribas, summed it up this way: “You have mandatory change because of regulation, you have change because of what competitors are doing, and then you have another kind of change: to catch the latest trends and what the customer is asking of you, but also what the customer has not asked for, but which you imagine. This is the change that can deliver the greatest economic benefit.”
More broadly, change leaders tell us that they have gotten comfortable with the need for rapid, non-stop transformation. While M&A or other disruptive events can occasionally create an opportunity for a Doctor Who-style radical regeneration, the reality for most banks is that superior performance requires them to master the less glamorous, but demonstrably vital process of continuous improvement.
To learn more, read our full 2017 Banking Change Survey.
The post Discover how your bank can become a change master appeared first on Accenture Banking Blog.
Bank depositors get tax-payer funded #insurance in many jurisdictions (such as FDIC in America) in case a bank goes bankrupt. Your #Bitcoin in Mt.Gox or BitFinex….buyer beware. People paying by Credit Card can fight back against a fraudulent charge. Once you send those Bitcoin it is like handing over cash…buyerRead More
Bank Innovation
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