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Podcast 312: Dan Snyder of Lower

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The home mortgage space has been undergoing a transformation over the past couple of years. We have seen fintech lenders grabbing market share as they were best suited to grow during the pandemic when everything went virtual. There has been so much innovation that financing a home is no longer the long and painful process that it historically has been.

Our next guest on the Fintech One•On•One podcast is Dan Snyder. He is the CEO and co-founder of Lower. They have been flying under the radar until recently but they are part of the new breed of fintech lender that is digitally native and growing rapidly.

Welcome to the Fintech One-on-One Podcast, Episode No. 312. This is your host, Peter Renton, Chairman and Co-Founder of LendIt Fintech.

(music)    

Peter Renton: Today on the show, I’m delighted to welcome Dan Snyder, he is the CEO and Co-Founder of Lower.com. Now, Lower is a really interesting company, they’ve been flying under the radar until recently, but they’ve actually built a really successful real estate lending business and they’ve done this really in a way that is unusual for fintech companies so far as they have just bootstrapped this, they haven’t raised outside capital until recently. 

They raised a $100M Series A led by Excel and we talk about that in some depth, we talk about why they went and did that, how they were able to build a company in a bootstrapped fashion in today’s… certainly not the norm in fintech. We talk about how their approach to the market differs from others, how their underwriting works and much more. It was a fascinating interview, hope you enjoy the show.

Welcome to the podcast, Dan!

Dan Snyder: Yeah, thanks for having me.

Peter: My pleasure. So, let’s kick it off with a little bit of background about yourself. Why don’t you give the listeners some of the highlights of your career to date before you started Lower.

Dan: Since 7th grade, I had dreamed of being a lawyer. (Peter laughs) My Mom’s a real estate attorney who owned a title company and so I was like my dream and ended up thinking up a little bit of a left turn/right turn and ended up in the mortgage business. It’s not something that I don’t think anyone really dreams of being in and then yet though, now, it’s like the greatest career and one of the greatest causes I think period. 

So, I didn’t go to law school, ended up working at Wells Fargo, worked up the ranks there a little bit and doing like sales finance and same as cash financing for like jewelry stores, what have you. I bought my first house when I was 22 or 23, it was like a fixer upper, downtown Columbus, Ohio and met my wife three years/four years later, sold the home and ended up having over $100,000 in equity in that house and that’s what kind of really spurred my interest in the home mortgage space and how I ended up co-founding what is now Homeside, I guess, in 2014, just like that, crazy wealth appreciation.

Peter: Right, right, understood. So, tell us about the founding story of Homeside and then what you decided to do and launch Lower and how those two sort of fit together.

Dan: I was like leading the Lending Division of a small depository bank, we’ve grown that bank to a billion dollars or so in loan buying and we wanted to continue the offer best-in-class product and yet what we found was that banks, they weren’t completely and relentlessly focused on that mortgage experience. 

So, started Homeside in 2014 with a couple of co-founders with the idea of building a NextGen bank for mortgages that blended like technology enhancing, that was our bet. It was like how can we create a great platform for folks to connect into that were sick of working at a bank maybe and we started in 2014 and just grew rapidly across the country. We were able to like bring in great, you know, experienced folks that had contingencies of business, had partners with realtors or builders and they’ve plugged into Homeside and really, you know, serving grew that business. 

And then in 2018, there was such a growing need for a complete digital experience so we went to the drawing board and that’s when we created Lower. Lower is meant to be that kind of pure play digital experience. I think we catered towards that millennial, late stage millennial, to the GenZ and getting them into that home ownership journey, but anybody that watches like streaming video or doesn’t want to go maybe the traditional path can also enjoy a digital experience. You know, one thing led to another and now, with our recent funding round, it kind of sits on the landscape of Lower Corporation in that we’ve got a direct to consumer channel that is the digital experience. 

We have our channel partner network where Homeside is the largest of those brands and so what we found is that Homeside is a brand and then we’ve got 18 other brands of our retail channel partners that we’ve been able to bring in and we continue to expand that and then, of course, our whole ecosystem of other products. We’re really trying to approach it as whenever the customer wants to interact in order to get a home, we want to be there for them.

Peter: Right, that makes sense. So then, before we dig into all of that, let’s take a step back and I’d love to get your perspective on the US housing market right now. It, obviously, had a pretty crazy 18 months or so. Where do we stand right now and what’s your view as far as home ownership and the challenges there?

Dan: You know, obviously, I’m bullish on the housing market and I have been. I mean, it’s really….I think if you’ve been dialed into this like you have, you’ve seen that….I mean, there was demand for home ownership for years and the cost of home ownership continued to rise in over the course of….go back to home appreciation, we’ve had consistent appreciation for decades with a couple of blips, in a way a couple of blips. 

Now, we’re seeing this awakening, if you will, the pandemic caused a great migration where folks from New York, California….now you can work anywhere you want, you can live anywhere you want. And so, if you’re living in California, New York with high appreciation, you come into Columbus, Ohio and, all of a sudden, a $500,000 house is isn’t expensive to you. It started to block the first-time homeowner zone like one of the folks in my neighborhood have relocated from higher net worth areas, if you will, so I think it’s created this inventory crunch. 

Average price now is what…in some markets, it’s increased 44% if you look at like Austin, Texas or Nashville. Even in Cleveland, it’s gone up significantly, you know, from where it normally would be and I think it’s blocking a lot of people. It sets up really well for folks like us because, you know, the traditional mortgage lender or bank is they’re really there for you in that moment of transaction and that’s a weekend, we play on that. 

Also, when customers come in to a Lower account, they can start with a savings account, they can put a goal in place and so maybe they have to rent for the next couple of years, at least we’re trying to get them on that path so that when inventory frees up, which I think it’s going to because….even though builders right now are going to build a catch us up independently. I do think there’s….whether it’s the forbearance restrictions being lifted, foreclosure moratoriums being lifted, I think there’s going to be some inventory that’s going to come out during the rest of the year. You know, I think you’ll have more activity in the home purchase space towards the second half than you saw on the first half. everything has been really gridlocked.

Peter: Makes sense, okay.  So, let’s dig into Lower and you’ve just touched on it just there. I’m on your website right now and I see you’ve got like four tiles; Finance, Save, Buy/Sell which is one tile, Insure. When I first sort of went to your website, I expected, you know, the real focus on the Finance, but it seems like you’ve got like four different streams here. Tell us a little more about the suite of products and why go beyond just the financing product.

Dan: Clearly, our core product is our Home Finance, but with the various entry being so high, we wanted to really provide more of a holistic approach and for a number of reasons. Number One, if we really want to provide, as much as possible, no dead ends so that if a consumer came through and they’re interested in home ownership and they couldn’t buy that house or couldn’t put a down payment together, you name it, maybe their credit scores aren’t enough, that we would be able to keep them in our ecosystem so that when the time is right they would think of us.

The second thing is on the cost side. It’s unrealistic to be lowest priced in the moment every single minute, but we can aim to be a lower price and give great service if we’re capturing more wallet share of the customer and you’ve seen folks do this. You’ve seen like SoFi do this and some other folks that we really have a lot of respect for, but our focus is only on that home like on the home ownership journey. We’re not trying to get into investments, we’re not trying to get into life insurance; we’re really singularly focused on, okay, lightweight, download our app, go one our site, what’s your credit score, okay, that’s good, what do you have in savings. If you have everything, great, we’ll help you do the loan; if you don’t, let’s help you save a few bucks. I mean, like it’s a novel concept and yet not very many people do it.

Peter: Yeah, that’s really true. So then, you mentioned it, I want to go into like this combination of tech and personal approach, tech and a handshake, whatever. Tell us a little bit about how you’re approaching that, particularly when it comes to underwriting. Are you trying to build a human interaction into the underwriting process itself or how does that work?

Dan: I think that you’re starting to see a lot of innovation in the space, in mortgage specifically, and yet there’s still such apprehension to embrace it and so that’s what we try to attack this probably old guard mentality that you still have to have a whole team of people around making sure that the appraisal is sound appraisal when there’s data, it takes out any sort of bias at all. Same thing with underwriting, I mean, if you look at …..I just literally was looking at this 680 credit score and above in our portfolio, 45 people defaulted out of 5,514 people.

Peter: Less than 1%, yeah, 1%.

Dan: So, it’s like we’re creating algorithms and other technology to pair with our expert underwriters and team to just make smarter decisions faster, help enable human beings to do more work. I think we’re up to now almost 2,000 team members and they’re amazing and our goal is to empower them to build a new one and you can do that with technology. That’s what we really embrace and it’s one of the reasons why we’ve grown so quickly.

Peter: Like I’d love to get a sense of the data that’s part of the underwriting process. You have technology for your people, but what about technology in the actual underwriting process and accessing different data sources, can you touch on that?

Dan: We have a custom proprietary application, we call Personal (inaudible). You come through our application and where we get 85% fill rate, where the industry standard is more like 45%, customers will provide the information and behind-the-scenes we can link your bank account, whether it’s with Plaid or you name it, there’s a whole host of data and APIs that will connect us to data without having to bother you for the information. We can get your employment information, we can get you verified, every single thing we need to make it smooth and then what we do is we insert in a human touch point when necessary and when it’s more efficient. 

So, a 15-minute chat with you or with the first-time home buyer or a first-time investor, you name it, right, we’re buying the investment property, one of our loan advisors, they don’t have to spend time getting all of your employment data, they can spend more time understanding your goals and needs just as a human being and whether it’s how long you plan on living in the house, you know, what your current life cycle is like and then we go back to the tech. 

We have a document upload tool that is easy to use, it’s super secure, it streamlines the most arduous of process, it will normally cause friction at a…maybe your traditional place. That’s how we think about it and we continue to double down to create the best product for a mortgage experience. And then also, when we do have a conversation over the phone, text, email, what have you, it’s the staff that, right now, AI or machine learning or technology just can’t quite pick up. These are the risks of buying a duplex, this is the risk of …you have a private road, this is what that means. It’s hard to solve for everything, that’s where we’ve seen a good balance of tech and people. 

The reviews speak for themselves, I mean, we’ve got 17,000, 18,000 5-start reviews more than most other lenders out here, no matter when they started. That’s how we measure our success, is our customer satisfaction, it’s not an award we apply for. It’s no different from a 5-star hotel getting Tripadvisor reviews like I’m only leaving a review for a restaurant or a hotel if they blow me away, because it is a pain and that’s the same thing we treat here like if you’re going to leave us a review on Zilla, you’ve got to go and create your own account, you have to register your account, then you have to go and find the account and you have to put some comments down. So, we feel like if we’re going above and beyond for a consumer at the right points, making an easy experience then we’ll continue to keep doubling down and making the tech work and human element work.

Peter: So, on that, though, you talk to other CEOs of some of the, you know, digital lenders, some of the traditional lenders as well, they talk of similar type thing about how their tech is streamlined and how their customers are really satisfied. I mean, there’s obviously some very, very big players in the space, some of them have gone public in the last few months and others that are going, but, you know, I can see how you differentiate yourself from the traditional lenders because they still have, for the most part, a pretty clunky experience, but there are digital lenders out there that are bringing a streamlined kind of processing play here. How do you differentiate between those companies?

Dan: Someone asked me once like there seems like a lot of noise right now, just like you said. I think what we’re seeing is that….like what’s happened in maybe some of the neobanking with Chime or Monzo or investments with Robinhood, you’re starting to see more entrants into this on the lending space. And so, there are very few full stack digital lenders like Lower where we are the…from originator to…we service 94% of our loans, there’s a couple of others out there. 

So, I think from a differentiation, what we work on is to make sure that we’re not just doing tech for tech’s sake, if that makes sense, like there’s a lot of talk and yet I’m patrolling the floor myself and making sure that it is really working. You don’t want to have an API that connects and does digital employment verification if it doesn’t work or you don’t layer-in the OCR technology to read self-employment documents if you don’t trust the data and it doesn’t work. 

And so, we’re both building our own, we’re buying some, we’re partnering, we’re testing and we’re not afraid to tear it down if it’s not working. I think that’s ultimately not necessarily the flashiest thing, it’s just starting to work for us then all we’ll do is we’ll say, you know what, our document upload tool is best-in-class in this, our application is best-in-class.  

As an example, like Blend, which we’ve used in the past which is a great product, it’s just not as good as what we’ve got. And so, I think that’s where we start differentiating is in that letting the consumer tell us the idea was good, it just didn’t resonate like the idea that I could just load up my tax returns and you would verify my income, it didn’t really work so I had to go and enter in 75 more data points so let’s replace it with something different. That’s how we keep doing it, that’s going to be the winning formula, our growth going up, our reviews going up, our word-of-mouth and referrals from other customers are happy from the experience improving, that’s our scoreboard.

Peter: Right, right. The one thing that was also interesting, I think, about you guys when looking at others in the space is that you’ve really bootstrapped your company here. I mean, you see others raising massive rounds and you went out and raised a sizable Series A, but it was your first fundraise. And so, tell us a little bit about the approach there, why bootstrap, why not go out and make a big splash with the multiple large funding rounds?

Dan: Fundamentally, my founders and I were interested in building this a great business that was fun to work for and challenged our team members and profitable along the way. There was a never a need necessarily until we had the platform built, we were well beyond proof of concept and now it’s kind of a cliche, you know, pouring gasoline on fire, that’s really….you think some jet fuel was what we needed because you’re right, there’s other competitors to us. There’s only a handful of digital lenders out there like us and some of them have raised more money than we’ve ever spent in seven years.

Peter: Right.

Dan: And so, you know, we raised $100 Million that’ll allow us to make big investments into furthering the technology because it’s not cheap, it’s really not. It’ll allow us to invest in our servicing platform, but we plan on bringing the entire thing in-house where a lot of large lenders don’t do that, they’ll outsource the servicing. We feel like it’s a huge opportunity for us to create the best servicing experience which is there for the customers we interact with every month. Instead of using a sub-servicer out there, that’s a big investment, and then I also think that candidly…..and that’s the reason why we picked Accel is that they’re not just a tertiary, they’re a blue chip VC, they pick winners, they’re not only big from a capital perspective, they know how to take bootstrapped companies public, take them to the next level. 

You’ve seen it with lots of their companies across multiple verticals and that’s what we’re excited for, I mean, we’re a rapidly growing fintech, but we’ve never taken any money and we’re based in Columbus, Ohio so they’re just two big knocks. You know, I love Columbus and I love that we’ve grown it profitably, but, you know, we were able to bring on a minority partner with their strength, I mean, it’s going to be really fun.

Peter: I hear that Columbus is becoming a little bit of a tech hub, even a fintech hub these days.

Dan: Absolutely. We almost lost our soccer team to Austin, which is like the Columbus competitor in that space and we were able to save the team and we named the field.

Peter: Yeah. Tell us a little bit about that, that was a surprise. I wasn’t expecting you guys to have the naming rights to a major league soccer stadium in Columbus so tell us a little bit about why you did that. Obviously, it’s not cheap and what are you hoping to get out of it?

Dan: From a direct-to-consumer perspective, we have to be able to scale centrally as much as possible. So, it really …….getting the word out, the awareness out was important so there’s an awareness factor. Then there’s a opportunity like how often, it’s a once every, I don’t know, 10/20 years, maybe never that you get an opportunity to not only name a stadium in your headquarters location. but it was right downtown where tons of our employees all live, great ownership team that own the Browns and the Haslam Group and kind of, you know, I didn’t think we had a shot. These are things the normally a company like us get the opportunity to do, it’s usually your big, publicly traded company, you know, the utility company or something and so for us to be able to actually compete and win and get that was awesome. 

It’s been great, so far, I mean, Columbus is a hot market, in general, in housing and so our goal is to be the….not just be a little tertiary player in our home market, but really kind of gain market share which we’re already seeing a huge spike in consumer awareness and application just here in our hometown which is really cool.

Peter: Yeah, it is cool. So, I’d love to get a sense of the growth that you’ve experienced over the last 18 months, since the start of the pandemic. Can you give us some sense of the scale you’re at today and how you’ve grown over the last 18 months?

Dan: We’ve been steadily growing, if not like doubling year over year. We did right around $300 Million revenue last year, we plan on doubling it; $5 Billion in loan volume, we should come in $9 or $10 Billion or so this year. That’s before the funding, that’s before any sort of …not that the soccer stadium is going to catapult our growth nationally, but I do think it will help us attain talent more efficiently locally. I think that our partnership with Accel helped us obtain tech talent nationally like I’m already seeing…..I didn’t used to be able to pick up the phone and instantly get a call with a top CTO at a tech firm in Cupertino and now I can and that’s the power you get from these types of partnerships with a firm like Accel. 

So, we’re already doubling and I think that this next year, next six months and beyond, our plan is to really double down on the tech in experience for our mortgage product and then further build out our ancillary products to help with that. So, our real estate referral platform, our insurance marketplace and then I’d love to rush it up, our home fund match for our savings and our APY to help people save more and give them a reason to save more money because our goal long term, candidly, is to help people save money and hope that we do a good enough job and they become a client and do a mortgage with us, right. So, you know, our aim is to create more brand awareness, rise up our brand throughout the country.

Peter: Right. So, what about the funding side of the business, I mean, how are you funding these loans? Are you securitizing, you holding these on balance sheet, are you selling them right away, how are you funding the large number of loans you’re doing?

Dan: We have a number of warehouse bank providers that help facilitate the funding of the loans, 95% of our loans are going direct to Fannie or Freddie or we’re securitizing, we’re retaining 90 to 95% of our loans in our servicing portfolio. You couldn’t have a better time to do that, the quality of loans is just off-the-charts and it gives us a lot more control over the customer. We’re a full soup to nuts, we do everything from attract the customer, originate, underwrite, close, fund, service, the whole stack. We already have a strong balance sheet, but, you know, you add another $100 Million to that, it’s even stronger, we have more.

Peter: (laughs) Yes, indeed. So, what about attracting customers, I mean, you talked about the 18 channel partners that you have, you obviously have a direct-to-consumer business, tell us a little bit about what are the ways that you’re bringing the customer in the door.

Dan: I think, traditionally, people focus on let’s see if we can compete in the moment for the customer that’s going to Zillow or LendingTree or Bankrate or these aggregators and we do attract and go and compete in those sites and we do really well. I think that Lower as the ecosystem, it’s a 5-letter URL, we rank high when customers are searching for lower mortgage rates, lower insurance rates, you name it, we get a lot of people coming into our funnel and then we’re capturing them within our ecosystem and incubating them as a systemic step until they’re ready to buy a house or if they’re ready to buy a house or helping them to buy a house. 

I mean, right now, I think a lot of our consumers, just anecdotally, are having a lot of fatigue, I mean, it’s not uncommon where customers have ……..they’re placing 15, 20, 30 offers on a property before they land one. I remember going through this, maybe a few years ago, maybe five years ago and I remember losing out once and my wife and I were like devastated. I couldn’t imagine, once you’re in the double digits, like you just say the heck with it, let’s just rent for another year and I think that’s definitely a risk. More than interest rates, inventory is ….there’s a concern in inventory right now period.

Peter: So, we’re running out of time and I want to get to a couple of more things. Firstly, even now that an outside investor…mind you, a blue chip one as you mentioned Accel, what is the thought process around going to the public markets. Some of the biggest, particularly the digital-type real estate lenders in the country have all gone public recently, what’s your attitude there? Is this something for next year or for way down the track?

Dan: If you look at some of the other companies from a revenue and profit perspective, we’re to the size where we could maybe economically go public, but from a like a need, we don’t have a capital need and from a professional maturity of a company, we’re not ready yet. I mean, think that’s one the things where….. we are very entrepreneurial, we bootstrapped this company, we’ve got a great team, but we’ve never even had an institutional partner, let alone the public market scrutiny that would come with that. So, we’re going to kind of walk before we run there and we don’t even have like, you know, like a formal board until now. (laughs)

Peter: (laughs) Right.

Dan: So, we’re all experiencing this thing for the first time and that’s one of the things where Accel’s been great like a lot of my other CEO friends of mine, you’re going to watch out for these guys, you know, I will watch out for the company. As long as we have a great performing company, there will be no worries. And also, like we went in this, you know, have really kept doubling down on customer experience, double down on our team, keep being the best place to work, make sure all of that is shored up and have a long-term view. Here’s the 10-year plan, let’s get to a billion in revenue, let’s get to a $3 Billion revenue, let’s help out more homeowners across the country create wealth through home ownership than any other place and then everything will work itself out. 

It’s no different than this, I mean, we never sought out a $100 Million check, we just built a good company with a good platform and some aspiration, I think, I mean, that’s all it came down to at the end it’s interesting. Right before the deal closed, Excel had asked like are you sure you’re ready? I’m like, oh yeah, we’ve been through all this due diligence, oh my God, and I’m ready. No, no, no, are you ready to go and like legitimately compete against Rocket because that’s what we want to do.

Peter: Right.

Dan: I mean, giddyup! Yeah, that’s what we want to do. I mean, we’ve got such an amazing team, we have been talking to them about this like build your career here, we’re going to the moon, that’s where we’re going, but we can’t just do it all….you know, my founders, Dan’s money and my other founders. It’s like if we needed some institutional horsepower behind us that have seen and helped with the company….that’s why we’re so excited about the time horizon that we’re on now. We are a platform.

Peter: Right, right. You’ve touched on it, but I’d love just to end with teasing out the vision of what you have for Lower and, you know, looking a decade or even two decades down the track, what do you want to build here?

Dan: Number one, we want to build a sustainable company, obviously, but we want to be the first look when consumers go to buy a house one day, Lower is the first one. We’re instantly approving people, we have the data, there shouldn’t really be an application process, there should be an opt-in if you’re interested and here’s your limit. I think there’s a whole bunch of other verticals that we can explore to unlock home ownership by offering Mortgage as a Service. We’re working on that right now where other popular brands can ….no different than the big rise in credit cards, everyone’s offering a credit card now. Instead of getting people more debt, I’ve got a huge fund of giving them the opposite; how about some assets, how about some wealth creation. 

If you can spend money on a $200 a month apartment or $2,000 a month apartment, like a lot of our employees do, it’s not that much more and sometimes even less to own a home, but we have to make it easier and the odds of making Lower a household name in the next two years is unrealistic, but over the next ten, yes, it could happen. And I think by us just connecting into the pipeline of customers looking to buy a house, that’s what we’re going to be aiming for, to be number one. So, ten years from now, you dig Columbus, Ohio, you know, there’s Ohio State/Michigan rivalries, you know….

Peter: Right.

Dan: Rocket’s up in Michigan, I woudn’t try to overtake them.

Peter: (laughs) Right. Well, that’s great aspiration and I’ll be following that with great interest. Anyway, Dan, really appreciate your coming on the show today.

Dan: Thank you very much, appreciate it.

Peter: Okay, see you.

Dan: Bye.

Peter: You know, I love the innovation that we’re seeing in the mortgage lending business. I feel there’s still a long way to go to create a completely digital mortgage experience, we’re not quite there yet. Companies like Lower are really raising the bar when it comes to mortgage lending and the expectations of consumers. I feel like fintech has changed the game here dramatically and many of the mortgage lenders, the leading mortgage lenders now in the country, are fintech lenders. 

The banks, obviously some of the very largest banks still have substantial mortgage businesses, but we’re seeing more and more…if you look at the top ten, top 20 lenders you’ll see more and more of them have had fintech roots. That’s only going to become more so as time goes on.

Anyway, on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

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Crowdfunding

Top 10 Fintech News Stories for the Week Ending October 23, 2021

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This week was all about funding rounds. Fintech raised billions of dollars from investors this week with N26 and FTX leading the way. Plaid is making waves in payments, we now have a bitcoin futures ETF and Facebook launched its digital crypto wallet. Here are what I consider to be the top ten fintech news stories of the past week.

Plaid Pushes Into Payments Business After Scuttled Visa Deal from The Wall Street Journal – Plaid is teaming up with a bunch of big names in payments such as Square, Stripe and Marqeta to create a “pay with bank account option” at checkout, going head to head with Visa and Mastercard.

SEC-approved Bitcoin futures ETF goes live from LendIt Fintech News – After years of trying, a bitcoin futures ETF finally launched this week. The Proshares Bitcoin Strategy ETF (Ticker BITO) is not a true bitcoin ETF, it is focused on bitcoin futures, butit was celebrated widely by the crypto community.

Facebook selects Coinbase as custody partner for its Novi cryptocurrency wallet from Markets Insider – Facebook launched Novi, its digital crypto wallet, this week and selected Coinbase as the custody partner. It also selected Paxos (USDP) as the stablecoin for transactions.

PayPal is in late-stage talks to acquire Pinterest from CNBC – Pinterest was not on my fintech M&A bingo card (it clearly should have been) but PayPal is in advanced talks to buy the social media company as it bets on the future of social commerce.

Two Crypto-Lending Firms Ordered Shut by New York’s James from Bloomberg – This may have been the strangest story of the week, not because the New York Attorney General sent cease and desist letters to two crypto companies, but because it got at least one of the companies wrong (Nexo does not operate in New York). There is real mystery as to who they were actually trying to target here.

FTX raises $420 million in funding round with backing from 69 investors including Tiger Global, Ribbit Capital from The Block – The crypto exchange FTX (formerly Blockfolio), the one with the ads starring Tom Brady and his wife, has raised another staggering amount of money making it more than $1.3 billion in equity funding closed in the last four months.

Challenger bank N26 raises $900 million at $9 billion valuation from TechCrunch – It seemed to me that N26 was falling behind a little after they withdrew from the UK and have failed to get much traction in the US but this funding round will help put them back on track. The CEO said their focus is now squarely on Europe as they look to go public in “3 to 4 years”.

Brex just signed a term sheet for $300M at a $12.3B valuation from TechCrunch – Brex has signed a term sheets for a big new funding round at a higher valuation, just six months after closing a round at a $7.4 billion valuation.

Fanatics Digital Collectibles Firm Candy Valued at $1.5 Billion from Bloomberg – Let’s not forget NFTs in this week’s funding frenzy. Candy Digital, a collectibles marketplace for NFTs, was just formed in June and is now a unicorn (is that a record?). The $100 million investment was led by Softbank and Insight Partners and included the likes of Peyton Manning on the cap table.

Fixed-income titan Pimco is starting to embrace cryptocurrencies, CIO says from CNBC – The world’s largest fixed income asset manager has waded into crypto with some of Pimco’s hedge funds already trading in digital assets and will gradually invest more.

Every Thursday the LendIt Fintech News team and a special guest discuss the news of the week live on LendIt TV, YouTube, LinkedIn, and Twitter. We have now made the show available in podcast format – just click on the audio player below.

The post Top 10 Fintech News Stories for the Week Ending October 23, 2021 appeared first on LendIt Fintech News.

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Source: https://www.lendacademy.com/top-10-fintech-news-stories-for-the-week-ending-october-23-2021/

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Top 10 Fintech News Stories for the Week Ending October 23, 2021

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This week was all about funding rounds. Fintech raised billions of dollars from investors this week with N26 and FTX leading the way. Plaid is making waves in payments, we now have a bitcoin futures ETF and Facebook launched its digital crypto wallet. Here are what I consider to be the top ten fintech news stories of the past week.

Plaid Pushes Into Payments Business After Scuttled Visa Deal from The Wall Street Journal – Plaid is teaming up with a bunch of big names in payments such as Square, Stripe and Marqeta to create a “pay with bank account option” at checkout, going head to head with Visa and Mastercard.

SEC-approved Bitcoin futures ETF goes live from LendIt Fintech News – After years of trying, a bitcoin futures ETF finally launched this week. The Proshares Bitcoin Strategy ETF (Ticker BITO) is not a true bitcoin ETF, it is focused on bitcoin futures, butit was celebrated widely by the crypto community.

Facebook selects Coinbase as custody partner for its Novi cryptocurrency wallet from Markets Insider – Facebook launched Novi, its digital crypto wallet, this week and selected Coinbase as the custody partner. It also selected Paxos (USDP) as the stablecoin for transactions.

PayPal is in late-stage talks to acquire Pinterest from CNBC – Pinterest was not on my fintech M&A bingo card (it clearly should have been) but PayPal is in advanced talks to buy the social media company as it bets on the future of social commerce.

Two Crypto-Lending Firms Ordered Shut by New York’s James from Bloomberg – This may have been the strangest story of the week, not because the New York Attorney General sent cease and desist letters to two crypto companies, but because it got at least one of the companies wrong (Nexo does not operate in New York). There is real mystery as to who they were actually trying to target here.

FTX raises $420 million in funding round with backing from 69 investors including Tiger Global, Ribbit Capital from The Block – The crypto exchange FTX (formerly Blockfolio), the one with the ads starring Tom Brady and his wife, has raised another staggering amount of money making it more than $1.3 billion in equity funding closed in the last four months.

Challenger bank N26 raises $900 million at $9 billion valuation from TechCrunch – It seemed to me that N26 was falling behind a little after they withdrew from the UK and have failed to get much traction in the US but this funding round will help put them back on track. The CEO said their focus is now squarely on Europe as they look to go public in “3 to 4 years”.

Brex just signed a term sheet for $300M at a $12.3B valuation from TechCrunch – Brex has signed a term sheets for a big new funding round at a higher valuation, just six months after closing a round at a $7.4 billion valuation.

Fanatics Digital Collectibles Firm Candy Valued at $1.5 Billion from Bloomberg – Let’s not forget NFTs in this week’s funding frenzy. Candy Digital, a collectibles marketplace for NFTs, was just formed in June and is now a unicorn (is that a record?). The $100 million investment was led by Softbank and Insight Partners and included the likes of Peyton Manning on the cap table.

Fixed-income titan Pimco is starting to embrace cryptocurrencies, CIO says from CNBC – The world’s largest fixed income asset manager has waded into crypto with some of Pimco’s hedge funds already trading in digital assets and will gradually invest more.

Every Thursday the LendIt Fintech News team and a special guest discuss the news of the week live on LendIt TV, YouTube, LinkedIn, and Twitter. We have now made the show available in podcast format – just click on the audio player below.

The post Top 10 Fintech News Stories for the Week Ending October 23, 2021 appeared first on LendIt Fintech News.

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Source: https://www.lendacademy.com/top-10-fintech-news-stories-for-the-week-ending-october-23-2021/

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Podcast 321: Michele Alt of Klaros Group

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Until recently virtually no fintech companies were interested in a bank charter. It was just back in 2016 that SoFi ran a Superbowl ad with the “Don’t Bank. SoFi” tagline. Now, they are looking to become a bank. Square and LendingClub have joined SoFi as approved banks (via different routes) and there are many applications that are still pending. So, I thought it was time to talk bank charters on the podcast.

Our next guest on the Fintech One-on-One podcast is Michele Alt, a co-founder and partner at Klaros Group. We spend a lot of time discussing the various options for fintech companies and we delve into some of the unique ways fintech companies are pursuing bank charters today.

In this podcast you will learn:

  • The impetus behind the founding of Klaros Group.
  • Why fintech companies want a bank charter.
  • The two main categories of bank charters.
  • The five types of exempt bank charters.
  • Why many fintech companies lean towards the ILC charter.
  • The advantages a national bank charter provides.
  • The main stumbling block for fintechs with the Bank Holding Company Act.
  • The interesting avenue that Figure has taken (more on Figure’s charter application here).
  • Why the fintech charter and any other national special purpose charters are dead.
  • How the states have taken the lead when it comes to chartering fintechs.
  • Why Varo’s application has not made it easier for other fintechs.
  • What is behind the frequent application withdrawals by fintech companies.
  • What Michele would do if she was running the OCC right now.

You can subscribe to the Fintech One on One Podcast via Apple Podcasts or Spotify. To listen to this podcast episode there is an audio player directly above or you can download the MP3 file here.

Download a PDF of the Transcription or Read it Below

Welcome to the Fintech One-on-One Podcast, Episode No. 321. This is your host, Peter Renton, Chairman and Co-Founder of LendIt Fintech.

(music)

Today’s episode is brought to you by LendIt Fintech LatAm, the region’s leading fintech event. It’s happening both online and in-person in Miami on Dec. 7th and 8th. Latin America is still the hottest region for fintech in the world and LendIt Fintech LatAm features the leading players in the region. So, join the LatAm fintech community this year where you will meet the people who matter, learn from the experts and get business done. In-person and virtual tickets are available at lendit.com/latam.

Peter Renton: Today on the show, I’m delighted to welcome Michele Alt, she is a Co-Founder and Partner at Klaros Group. I wanted to get Michele on the show because we’re going to be digging deep into bank regulation here, bank charters, fintech charters, the whole nine yards. I learned a great deal in this episode and I’m sure you will too so make sure you stick around all the way to the end. 

We cover the nuances of different types of bank charters, why fintechs go for one charter over another, we talk about some of the unique things that are happening like what Figure is doing, talk about the Wyoming State Special Charter they have there. We talk about Varo’s charter and we also cover some of the things that Brian Brooks talked about last year when he was head of the OCC and Michele also talks about what she would do if she was head of the OCC. It really was a fascinating episode, hope you enjoy the show.

Welcome to the podcast, Michele!

Michele Alt: Well, thank you, Peter, it’s delightful to be back talking to you.

Peter: Yes, indeed. So, let’s get started by giving the listeners a little bit of background about yourself. I know you spent many years as a bank regulator, but why don’t you give us some of the highlights of your career to date.

Michele: Be happy to. I am a Co-Founder of the Klaros Group and a Managing Director of Klaros Advisors. I am a lawyer by training and inclination, I must admit. I spent more than 20 years in various policy and legal roles at the OCC focusing on national bank powers, preemption, inter-agency regulation, licensing and Dodd-Frank. After leaving the OCC, I cut my teeth in the consulting world helping a range of banks with various risk and strategy matters, ultimately, focusing on bank chartering and fintech before leaving to co-found Klaros.

Peter: Right. So, tell us a little bit about that. What was the impetus behind the founding of Klaros Group?

Michele: Well, my partners and I believed that there was a need for a consulting firm focused on the future of financial services. We observed that legacy consulting firms were too tethered to the legacy financial services industry and not really attuned to the business models and technologies that increasingly define financial services in the US and around the globe. So, we set out to build a firm that combined deep experience in the management of financial services businesses, deep regulatory expertise and deep understanding of the capital markets and investment landscape.

Peter: Okay, interesting, interesting. So, I want to dive right in and just talk about bank charters. We’re going to spend a bit of time on this, not the entire interview, but it’s really interesting watching the space over the last several years where, you know, there was initially a real push for a fintech charter and we’re going to talk about that in a little bit, but then in recent times, fintechs are really going after a full bank charter. So, why do you think fintechs, you know, want this bank charter?

Michele: Well, you know, when my fintech clients come to me… they’re typically late stage, they’re worried they’re outgrowing the bank partnership they grew up with. Their options, at that point, are to figure out how to optimize that bank partnership, become a bank, acquire a bank or sell themselves. I work with my clients to figure out which of those options work for them and then help them execute on their decision. 

For the fintech clients who decide they want a bank charter, the reason they do is very simple. A bank charter provides direct access to the payment system, low cost stable funding in the form of insured deposits and in certain instances preemption of state laws so it’s a pretty good deal. Fintechs also…they want to reduce the complexity of their businesses, increase their efficiency and reach more consumers and for some fintechs the bank charter is the way to do that.

Peter: Right. So, let’s maybe talk about the different types of bank charters, I know there are several. Maybe you could kind of just give us a little bit of an overview of the different types of charters that are available.

Michele: Since you don’t want this podcast to be 45 minutes of bank charters, I will try to be brief because it could really be a long discussion, Peter. So, let me rate the charter types into two very broad categories. First Category are those that subject the bank’s parent company to the Bank Holding Company Act, that’s Category One. Category Two is those that don’t.

Peter: (laughs) Okay. So, all charters fit into one of those categories, Id’ say.

Michele: Almost all, almost all, yeah.

Peter: Okay.

Michele: So, on the non-exempt bank charters, so we have two basic types, FDIC-insured national banks , those are OCC-regulated, they’re members of the Federal Reserve and they can engage in a full range of banking services and then there are State Fed member and non-member banks. They are state-regulated and they can also engage in a full range of bank services. So, really on the non-exempt bank charters there are two basic types, national and state and they are full service banks. When we get into the exempt bank charters it gets more complicated and fintechs are typically interested in exempt charters. They are interested in those exempt charters so that the fintechs will not be subject to federal oversight and they can continue to engage within the broader corporate group and activities that may not be permissible for the bank holding company. 

Broadly speaking, there are five types of exempt charters. Let’s start with the one that is always the most popular is number one, ILCs, industrial loan companies or industrial banks, depending on the state statute, they’re the same thing, ILCs and industrial banks are the same thing. They’re offered in about six states, they are state-regulated, they can pretty much do what a full service bank can do with certain limited exceptions that you can work around. They are FDIC-insured, they are very controversial and we’ll get more into that in a minute. 

Number two on the hit parade is the national trust bank, those are OCC-regulated, they can only engage in activities permitted by state laws for state trust banks so they derive their powers from state law. Generally, that means no lending. So, a national trust charter is a very old type of charter, but the OCC recently conditionally approved national charters for several crypto companies which is, of course, a controversial use of that charter and we’ll get more into that in a minute too. 

Number three in the exempt charters are state trust companies, those are state-regulated, basically the same as national trust banks. Now, some states like New York are for trust charters for crypto companies, specifically. 

Number four would be the uninsured national bank, we’re going to talk about that in a minute when we talk about the Figure Bank application. 

And then, finally, Number Five is the Wyoming Special Purpose Depository Institution which is a SPDI, that is primarily a bank that accepts deposits and provides digital asset custody services and is prohibited from lending. A SPDI that is not FDIC-insured does not qualify as a bank under the Bank Holding Company Act so we’ll talk about those in a minute too. And then I would just say that there are some other states that are getting into the Wyoming SPDI game like Nebraska and Illinois and I think that’s a space to watch.

Peter: Interesting.

Michele: (laughs) So, those are the exempt and non exempt 

Peter: Well, you’ve given us a lot to dig into there. Maybe you can talk about the different….like you said, the ILC charter is one that many fintechs are going after and Square has been approved for theirs, but there are then others that are doing the, I don’t know what officially the charter is called, but Varo got this, they were the first.

Michele: That’s a national bank charter.

Peter: That’s just a national bank charter and so they are non-exempt, right.

Michele: That’s correct.

Peter: Yes. So, they have to adhere to all of the Bank Holding Company Act rules. Is the main reason that a fintech would go for an ILC rather than what Varo did, a national bank charter, is it because of some of those rules really aren’t very suitable for fintech companies. Maybe you can talk about that.

Michele: So, ILCs, pretty much every fintech client who comes across the transit for me ask me first about ILCs, they always want an ILC, right, and an ILC is a good gig if you can get it. (both laugh) You get pretty much all of the benefits of a full service bank without the Bank Holding Company oversight, but as I mentioned, they are controversial. Banking industry advocates argue that ILCs are a loophole to the Bank Holding Company Act sort of. Personally, I like this oversight and they argued that loophole should be closed. I would say that that has a receptive body ends of the FDIC, I think that the shift at the FDIC Board recently makes the prospect for new ILCs perhaps a bit dimmer and there haven’t been very many ILCs in the first place. 

There was a moratorium post-financial crisis and then you mentioned Square and now that has two ILCs that got approved for something. I don’t know how many more we’re going to see make it, make it across the finish line, but the other thing to come caution about ILCs is that the FDIC also has proposed a rule that would effectively impose Bank Holding Company Act-like requirements on the parent of an ILC. So, that might lessen the interest in these charters a little bit.

Peter: I mean, if a new fintech were not a new fintech but a new client of yours, potential client, comes to you and says, we’re interested in ILCs, do you advise them because there’s going to be risk involved because as you said, the FDIC Board has changed its make up, they’re not going to approve any more ILCs. So, you could go down that path and not have any luck, do you advise your clients now to sort of go to the national bank charter-type like what Varo did or what do you say?

Michele: Well, not in the first instance. What I do when a client comes and says, I want an ILC, usually, my first question is why, even though I know the why is because they don’t want a Bank Holding Company Act application to their business. But then, I dig a little bit deeper, right, so what is it that you’re concerned about, what is it that you think having an ILC will help you avoid, what are you trying to do. I’m not saying that Bank Holding Company Act application is not a big deal, it is a big deal, but being a bank of any kind is a big deal. 

So, what we do is we just work through the options with these clients and one of the main criterion that I apply is likelihood of approval and that depends not just on charter type, but what is the business at issue, etc. If you read the Nelnet and Square approvals there’s some insights on what the FDIC might be receptive to so it’s really not something I can say, you know, thumbs up, thumbs down about, it depends on the business itself. That said, fintechs should certainly consider national bank charters a la Varo, right. 

There are some really important benefits to a national bank charter for fintechs. Absent a national bank charter to operate nationwide, a fintech company must rely on a complex patchwork of licenses, attempt to comply with conflicting state rules, sometimes conflicting state rules and submit to perhaps a dozen different examinations by state agencies each year, it’s a hassle, right. A national bank charter, by contrast, is a single charter administered by a single regulator pursuant to a comprehensive set of rules. 

So, obtaining a national bank charter will allow a fintech to offer a cohesive set of products and services nationwide, focus it’s compliance efforts on the requirements of a single regulator, reduce its legal and regulatory costs, complexity and risk and offer its customers the security and safety of dealing with a federally-regulated and supervised national bank. That’s great, but it’s a big lift.

Peter: So, what is it about the Bank Holding Company Act that really is a stumbling block, is that something like a number of investors? I think I’ve read, what is the main stumbling block?

Michele: You know, there are often issues about ownership with fintechs. Quite often, they have, you know, very concentrated ownership and that doesn’t always align with the Bank Holding Company Act requirements. Ownership is an issue and often comes down to just are the FTVs, right, that are going to be conducted within the broader corporate group. For many fintechs, it’s no big deal, you know, they are primarily conducting activities that are bank permissible or financial in nature, but sometimes, I’ve had clients that, and I’m not going to name any, it’s no unusual for a fintech to have a brilliant visionary founder/CEO, right. 

Sometimes, they want to get into some pretty interesting (Peter laughs) areas that are just going to be non-starters before the banking regulators. And so, what I often see when we’re talking about when I said, you know, the potential applicant comes to me and says, I want an ILC, I don’t want a bank holding company and I say, okay, how come. In fact, a lot of times, what they’re doing is completely permissible within a bank holding company structure, but they don’t want to be constrained in case something really interesting comes up that they’d like to do.

Peter: Right, that makes sense. So, speaking of visionary founders, I want to talk about Figure and obviously Mike Cagney’s company. We had a session on this a few months back with the general counsel and yourself discussing this in detail and I’ll link to that in the show notes, but when I sort of heard about what Figure was doing I didn’t even know this path existed so maybe you can explain it and why someone would want to go down this sort of path that is not well trodden.

Michele: That’s true, it’s not well trodden. It’s very simple though in concept and here it is. Figure Bank would not take retail deposits, therefore, it would not be FDIC-insured, therefore, it would not be a bank for purposes of the Bank Holding Company Act and, therefore, the holding company will not be a bank holding company subject to that supervision. Very simple in concept, right. 

Deposits, the rest of that stuff does not flow. The thing that’s important to remember when we’re talking about this because a lot of people would say, what do you mean a bank that doesn’t take deposits, right, it doesn’t take insured deposits, I want to stress, insured retail deposits. There is ample historical precedent for this charter, keep this in mind, because the National Bank Act dates to post-civil war, time of Lincoln…….

Peter: Right.

Michele: …..which preceded the Federal Deposit Insurance Act by many decades, right. All of the national banks, originally, were not FDIC-insured. So, lawyers can do what they do and, you know, split hairs and get in the arguments, but that is the crux of it. The National Bank Act is not conditioned or premised on the idea that the banks would be FDIC-insured because when it was written federal deposit insurance didn’t exist. That said, there isn’t a lot of examples of banks currently that are uninsured in the way that Figure is attempting. That decision is pending with the OCC so we will see.

Peter: Right, right, interesting. So then, does this still mean that the fintech charter is dead. I mean, you were at the OCC I think with the genesis of this with Tom Curry, it all sort of came out then. What is the status and your opinion of the fintech charter?

Michele: Yeah. Everything that we’ve been talking about does not lead to the conclusion that the fintech charter is dead, but indeed, the fintech charter is dead, in my opinion. The OCC and I really commend Tom Curry on this, in 2016 recognized that the traditional national banks subject to the Bank Holding Company Act just doesn’t work for many fintechs seeking to innovate within the financial services space. Unfortunately, though, I think that the OCC got out of over it’s skis with the fintech charter in 2016 and didn’t have the buy-in of the other banking agencies or the trade groups and without that, I just don’t think that charter could succeed.

Peter: I mean, we’ve certainly seen a lot of traditional banks, trade organizations, you know, particularly the state, competent state board….supervisors, for example, have come out and they tried to sue to the OCC that there was no charter that had been issued so it was trying out, but I’d love you to weigh-in on this sort of conflict between the state bank supervisers and the fintech companies that want a federal charter-type thing. What do you say to them and what….fintech companies, by definition, are online-based, it knows no state boundaries typically so how do you kind of approach that argument.

Michele: This is a toughie. The debate and the dual banking system, state versus Fed, I am not going to say it’s as old as Adam and Eve, but it’s old (Peter laughs) and I’m not going to be able to solve that problem on this podcast. But, I think what we see, with respect to the idea of the fintech charter, are really good intentions on both sides, right. We see, as I said, the OCC seeking to foster innovation, right, in the national banking system and do so in a way that accommodates fintech business models, that’s great, right. 

On the state side, we see similarly good intentions, right, but what the CSBS typically points out is state regulators often are the incubators for innovation, we’ll get to that, the SPDI is a good example of that and that they are primarily focused on consumers in their states and know their needs very well, right, and are concerned about what might appear to be a work around some of the regulatory burdens that their state banks are faced with. Their state banks are not getting a pass on the BHCA.

Peter: Right, right, got it. So, before we move on, I want to just go back to revisit the Special Purpose Charter which is what the fintech charter was because we had Brian Brooks who had a short but quite active time as acting head of the OCC late last year and early this year, I mean, he was really vocal about how we should have special purpose charters. He talked about the fintech charter, he talked about the payments charter, what are your thoughts on those sort of narrowly-defined charters.

Michele: Well, I also commend Brian Brooks on his desire to foster innovation in the national banking system, but I think the current regulatory environment just isn’t conducive to new types of charters. With the caveat and in a minute we’ll talk about the possible StableCoin issuer charter that’s very intriguing, but leaving that aside, I think it’s also important to remember, there’s a lot you can do within the existing national bank charter, for example, or some of the state charters. 

So, within the existing national charter as we see, you’re not demonstrated by the Figure application, you can accommodate some very innovative business models and, as I said, there are a number of the SPDIs and the trust charters that we recently conditionally approved for some crypto companies show that within very, very old legal frameworks, innovation is possible.

Peter: Well, can we touch on that then now like the Wyoming Charter which….you know, they’ve granted the charter to at least two crypto companies, Avanti Bank and Kraken, can you describe what is unique about what Wyoming has done.

Michele: First let me say, I think that the Wyoming SPDI and other similar efforts afoot show that the states are going to eat the Fed’s lunch, right. (both laugh) As the winds are blowing cold on crypto in DC right now, there is more and more interest in developing these state charters. I’m getting more questions about it and I don’t see the state regulators, you know, comparing crypto to credit default swaps, right, they are very much signaling that they are open for business and receptive to new applications. 

So, I promise this will be my last commendation at the podcast, but Albert Portner in Wyoming has really provided a very interesting option allowing SPDIs to accept all types of deposits, including demand deposits from consumers which may be an on-ramp to crypto and other digital assets like in the Kraken Bank model. So, I think there’s much to be explored there and with, as I said, similar state efforts.

Peter: You keep saying SPDIs, I haven’t heard that term before, would you explain that.

Michele: Oh, I’m sorry. It’s Special Purpose Deposit Institution.

Peter: I’ve heard that, I just didn’t think that was how it was said.

Michele: (laughs) Are we talking about Speedy Gonzalez here?

Peter: Right, right, okay, great. So, let’s go back to Varo because…I believe you worked on that as well, but that was a long process and they got it over the line. It’s always hard to be first, but do you think that the fact what Varo has done has paved the way for an easier time for fintechs to go down that route now?

Michele: I don’t think it’s ever going to be easy (Peter laughs). You know, I just, a moment ago, promised that was going to be my last commendation and I know I’m doing a lot of commending on this, but my hat is off to Colin Walsh and his team including his general counsel, Marina Gracias. A De Novo National Bank application is not for the faint of heart. Varo applied for and received approval for a national bank charter then it had to apply for FDIC insurance which got approved, then they had to apply for status as a bank holding company, right, that is a lot of work. 

So, in response to your question, do they make it easier for other fintechs? No, they provide a model which is very important, they provide an example that the lift is large, but it’s not impossible. But, any applicant for a bank charter should prepare for a very lengthy chartering or perhaps change of bank control application if they go the acquisition route and if they succeed, a very high degree of regulatory complexity and scrutiny, right.

Peter: So, should it take three years, is that what people should expect which I think is roughly what it was for Varo.

Michele: I don’t think it should take (Peter laughs) three years, I don’t think the process is going to be fast. One important difference I think in the current environment, and we’re seeing and Michael Soo has made an important point of this which is we’re seeing a greater emphasis on inter-agency coordination in reviewing these applications. I think that one thing that’s kind of unfortunate is, speaking of the OCC, the OCC and the FDIC have slightly different application processes, but they use the same application. So, I think in Varo’s case and there were good reasons why it did a serial set of applications that I described, first National Bank and FDIC and the Fed, you can apply for the bank charter and the FDIC insurance at the same time which may reduce the overall processing time.

Peter: So, I’ve seen a lot of fintech companies over the years, let’s say some, they apply and then they withdraw the application. Why do they do that, is that just inexperience or is there some reason behind this apply/withdraw kind of process?

Michele: Nobody should ever apply thinking they may withdraw. Withdrawals happen for a variety of reasons. One reason though is that the agency has determined that the application will not succeed, either it’s not complete as presented or raises fundamental concerns on the part of the regulator. Common concerns with fintech applications are lack of profitability at the parent level or uncomfortable with banking and commerce. Those are two things that give regulators quite a bit of heartburn. The profitability issue, it’s a real rub. 

Fintechs often focus on growth over profitability, at least in their initial phases, and that is not an approach that the regulators are particularly comfortable with, right. Pursuant to Dodd-Frank, the parent company of a bank is required to serve as a source of financial and managerial strength to the subsidiary bank so if the parent is not profitable, that raises concerns about its ability to serve as a source of strength. These are issues that can tank an application or at least cause it to be withdrawn and resubmitted. I always tell my clients, we’re not going to go forward if there is any risk of withdrawal.

Peter: Obviously, profitability isn’t a deal breaker because Varo has not been profitable and they were approved so what’s the rub there?

Michele: I do believe Varo is intending to be profitable within the de novo period and that is, in fact, a hard requirement of the regulators.

Peter: Okay.

Michele: They don’t expect profitability out of the gate, but they do expect a bank to achieve it within three years.

Peter: Got you. So, final question, I want to sort of do a little fantasy game here like let’s say the current OCC pick is rejected and President Biden puts your name forward, you are confirmed by the Senate and you’re running the OCC, what changes are you going to make? I’m particularly interested in things that would make it better for fintech companies.

Michele: If in this fantasy I were leading the agency, I would make changes that would help consumers and help banks and fintechs by leveling the field on which they compete. I’m deeply concerned that a significant portion of Americans receive their financial services outside the regulated banking system. 

The fundamental purpose of bank regulation is to protect consumers and without visibility into what’s called the “shadow banking system,” the banking regulators really can’t protect these consumers. Unfortunately, I think that recent statements from Washington are reflective of a profound reluctance to allow fintechs into the regulatory fold and keeping fintechs out of that fold means that the banking regulators will not have to address the risk of certain innovative business models.

Peter: Right.

Michele: And it will mollify banking industry advocates worried about competition from fintechs and, therefore, opposed to chartering them, but it won’t keep consumers from seeking alternatives to banks and, therefore, really won’t keep the fintechs from eating the banks’ lunches. (laughs) There’s a lot of lunch-eating going on in this podcast right now, maybe I’m hungry. In other words, there’s a consumer demand for services provided by fintechs, that’s clear, right. 

Fintechs are going to meet that demand and unless chartered, fintechs will be able to do so free of the costly regulatory burden imposed on their bank competitors and that’s a fact. In my opinion, the best way to ensure consumer protection and healthy competition among financial services providers is to require fintechs offering banking services to consumers to apply for bank charters and submit to the rigorous oversight to which banks are subject.

Peter: Okay, interesting, simple and probably not what every fintech wants to hear, but it’s a great point to end on. It’s been really insightful, Michele, I’ve learned a lot today, I hope the listeners have as well. Thank you so much for coming on the show.

Michele: It’s my pleasure, thank you, Peter.

Peter: Okay, see you.

Michele: Bye.

Peter: You know, Michele and I were chatting after we stopped recording just now and we figured, it’s almost amusing in some ways how some of the banks and the bank trade associations how they have approached fintechs, in general. On the one hand, they say, well, it’s not fair because fintechs have a lighter lift when it comes to regulation, on the other hand, it says, we don’t want them to become regulated. So you can’t sort of have it both ways. 

The reality is it’s inevitable that the major players in fintech are all going to become fully regulated banks, there may be one or two exceptions, but the vast majority, if you want to be a really national scale fintech company and you really do want to have some kind of bank charter and that’s what we’re starting to see. I think, long term, it’s inevitable that we are going to see most of the major fintech companies with charters.

Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

(music)

Today’s episode was brought to you by LendIt Fintech LatAm, the region’s leading fintech event. It’s happening both online and in-person in Miami on Dec. 7th and 8th. Latin America is still the hottest region for fintech in the world and LendIt Fintech LatAm features the leading players in the region. So, join the LatAm fintech community this year where you will meet the people who matter, learn from the experts and get business done. In-person and virtual tickets are available at lendit.com/latam

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Podcast 321: Michele Alt of Klaros Group

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Until recently virtually no fintech companies were interested in a bank charter. It was just back in 2016 that SoFi ran a Superbowl ad with the “Don’t Bank. SoFi” tagline. Now, they are looking to become a bank. Square and LendingClub have joined SoFi as approved banks (via different routes) and there are many applications that are still pending. So, I thought it was time to talk bank charters on the podcast.

Our next guest on the Fintech One-on-One podcast is Michele Alt, a co-founder and partner at Klaros Group. We spend a lot of time discussing the various options for fintech companies and we delve into some of the unique ways fintech companies are pursuing bank charters today.

In this podcast you will learn:

  • The impetus behind the founding of Klaros Group.
  • Why fintech companies want a bank charter.
  • The two main categories of bank charters.
  • The five types of exempt bank charters.
  • Why many fintech companies lean towards the ILC charter.
  • The advantages a national bank charter provides.
  • The main stumbling block for fintechs with the Bank Holding Company Act.
  • The interesting avenue that Figure has taken (more on Figure’s charter application here).
  • Why the fintech charter and any other national special purpose charters are dead.
  • How the states have taken the lead when it comes to chartering fintechs.
  • Why Varo’s application has not made it easier for other fintechs.
  • What is behind the frequent application withdrawals by fintech companies.
  • What Michele would do if she was running the OCC right now.

You can subscribe to the Fintech One on One Podcast via Apple Podcasts or Spotify. To listen to this podcast episode there is an audio player directly above or you can download the MP3 file here.

Download a PDF of the Transcription or Read it Below

Welcome to the Fintech One-on-One Podcast, Episode No. 321. This is your host, Peter Renton, Chairman and Co-Founder of LendIt Fintech.

(music)

Today’s episode is brought to you by LendIt Fintech LatAm, the region’s leading fintech event. It’s happening both online and in-person in Miami on Dec. 7th and 8th. Latin America is still the hottest region for fintech in the world and LendIt Fintech LatAm features the leading players in the region. So, join the LatAm fintech community this year where you will meet the people who matter, learn from the experts and get business done. In-person and virtual tickets are available at lendit.com/latam.

Peter Renton: Today on the show, I’m delighted to welcome Michele Alt, she is a Co-Founder and Partner at Klaros Group. I wanted to get Michele on the show because we’re going to be digging deep into bank regulation here, bank charters, fintech charters, the whole nine yards. I learned a great deal in this episode and I’m sure you will too so make sure you stick around all the way to the end. 

We cover the nuances of different types of bank charters, why fintechs go for one charter over another, we talk about some of the unique things that are happening like what Figure is doing, talk about the Wyoming State Special Charter they have there. We talk about Varo’s charter and we also cover some of the things that Brian Brooks talked about last year when he was head of the OCC and Michele also talks about what she would do if she was head of the OCC. It really was a fascinating episode, hope you enjoy the show.

Welcome to the podcast, Michele!

Michele Alt: Well, thank you, Peter, it’s delightful to be back talking to you.

Peter: Yes, indeed. So, let’s get started by giving the listeners a little bit of background about yourself. I know you spent many years as a bank regulator, but why don’t you give us some of the highlights of your career to date.

Michele: Be happy to. I am a Co-Founder of the Klaros Group and a Managing Director of Klaros Advisors. I am a lawyer by training and inclination, I must admit. I spent more than 20 years in various policy and legal roles at the OCC focusing on national bank powers, preemption, inter-agency regulation, licensing and Dodd-Frank. After leaving the OCC, I cut my teeth in the consulting world helping a range of banks with various risk and strategy matters, ultimately, focusing on bank chartering and fintech before leaving to co-found Klaros.

Peter: Right. So, tell us a little bit about that. What was the impetus behind the founding of Klaros Group?

Michele: Well, my partners and I believed that there was a need for a consulting firm focused on the future of financial services. We observed that legacy consulting firms were too tethered to the legacy financial services industry and not really attuned to the business models and technologies that increasingly define financial services in the US and around the globe. So, we set out to build a firm that combined deep experience in the management of financial services businesses, deep regulatory expertise and deep understanding of the capital markets and investment landscape.

Peter: Okay, interesting, interesting. So, I want to dive right in and just talk about bank charters. We’re going to spend a bit of time on this, not the entire interview, but it’s really interesting watching the space over the last several years where, you know, there was initially a real push for a fintech charter and we’re going to talk about that in a little bit, but then in recent times, fintechs are really going after a full bank charter. So, why do you think fintechs, you know, want this bank charter?

Michele: Well, you know, when my fintech clients come to me… they’re typically late stage, they’re worried they’re outgrowing the bank partnership they grew up with. Their options, at that point, are to figure out how to optimize that bank partnership, become a bank, acquire a bank or sell themselves. I work with my clients to figure out which of those options work for them and then help them execute on their decision. 

For the fintech clients who decide they want a bank charter, the reason they do is very simple. A bank charter provides direct access to the payment system, low cost stable funding in the form of insured deposits and in certain instances preemption of state laws so it’s a pretty good deal. Fintechs also…they want to reduce the complexity of their businesses, increase their efficiency and reach more consumers and for some fintechs the bank charter is the way to do that.

Peter: Right. So, let’s maybe talk about the different types of bank charters, I know there are several. Maybe you could kind of just give us a little bit of an overview of the different types of charters that are available.

Michele: Since you don’t want this podcast to be 45 minutes of bank charters, I will try to be brief because it could really be a long discussion, Peter. So, let me rate the charter types into two very broad categories. First Category are those that subject the bank’s parent company to the Bank Holding Company Act, that’s Category One. Category Two is those that don’t.

Peter: (laughs) Okay. So, all charters fit into one of those categories, Id’ say.

Michele: Almost all, almost all, yeah.

Peter: Okay.

Michele: So, on the non-exempt bank charters, so we have two basic types, FDIC-insured national banks , those are OCC-regulated, they’re members of the Federal Reserve and they can engage in a full range of banking services and then there are State Fed member and non-member banks. They are state-regulated and they can also engage in a full range of bank services. So, really on the non-exempt bank charters there are two basic types, national and state and they are full service banks. When we get into the exempt bank charters it gets more complicated and fintechs are typically interested in exempt charters. They are interested in those exempt charters so that the fintechs will not be subject to federal oversight and they can continue to engage within the broader corporate group and activities that may not be permissible for the bank holding company. 

Broadly speaking, there are five types of exempt charters. Let’s start with the one that is always the most popular is number one, ILCs, industrial loan companies or industrial banks, depending on the state statute, they’re the same thing, ILCs and industrial banks are the same thing. They’re offered in about six states, they are state-regulated, they can pretty much do what a full service bank can do with certain limited exceptions that you can work around. They are FDIC-insured, they are very controversial and we’ll get more into that in a minute. 

Number two on the hit parade is the national trust bank, those are OCC-regulated, they can only engage in activities permitted by state laws for state trust banks so they derive their powers from state law. Generally, that means no lending. So, a national trust charter is a very old type of charter, but the OCC recently conditionally approved national charters for several crypto companies which is, of course, a controversial use of that charter and we’ll get more into that in a minute too. 

Number three in the exempt charters are state trust companies, those are state-regulated, basically the same as national trust banks. Now, some states like New York are for trust charters for crypto companies, specifically. 

Number four would be the uninsured national bank, we’re going to talk about that in a minute when we talk about the Figure Bank application. 

And then, finally, Number Five is the Wyoming Special Purpose Depository Institution which is a SPDI, that is primarily a bank that accepts deposits and provides digital asset custody services and is prohibited from lending. A SPDI that is not FDIC-insured does not qualify as a bank under the Bank Holding Company Act so we’ll talk about those in a minute too. And then I would just say that there are some other states that are getting into the Wyoming SPDI game like Nebraska and Illinois and I think that’s a space to watch.

Peter: Interesting.

Michele: (laughs) So, those are the exempt and non exempt 

Peter: Well, you’ve given us a lot to dig into there. Maybe you can talk about the different….like you said, the ILC charter is one that many fintechs are going after and Square has been approved for theirs, but there are then others that are doing the, I don’t know what officially the charter is called, but Varo got this, they were the first.

Michele: That’s a national bank charter.

Peter: That’s just a national bank charter and so they are non-exempt, right.

Michele: That’s correct.

Peter: Yes. So, they have to adhere to all of the Bank Holding Company Act rules. Is the main reason that a fintech would go for an ILC rather than what Varo did, a national bank charter, is it because of some of those rules really aren’t very suitable for fintech companies. Maybe you can talk about that.

Michele: So, ILCs, pretty much every fintech client who comes across the transit for me ask me first about ILCs, they always want an ILC, right, and an ILC is a good gig if you can get it. (both laugh) You get pretty much all of the benefits of a full service bank without the Bank Holding Company oversight, but as I mentioned, they are controversial. Banking industry advocates argue that ILCs are a loophole to the Bank Holding Company Act sort of. Personally, I like this oversight and they argued that loophole should be closed. I would say that that has a receptive body ends of the FDIC, I think that the shift at the FDIC Board recently makes the prospect for new ILCs perhaps a bit dimmer and there haven’t been very many ILCs in the first place. 

There was a moratorium post-financial crisis and then you mentioned Square and now that has two ILCs that got approved for something. I don’t know how many more we’re going to see make it, make it across the finish line, but the other thing to come caution about ILCs is that the FDIC also has proposed a rule that would effectively impose Bank Holding Company Act-like requirements on the parent of an ILC. So, that might lessen the interest in these charters a little bit.

Peter: I mean, if a new fintech were not a new fintech but a new client of yours, potential client, comes to you and says, we’re interested in ILCs, do you advise them because there’s going to be risk involved because as you said, the FDIC Board has changed its make up, they’re not going to approve any more ILCs. So, you could go down that path and not have any luck, do you advise your clients now to sort of go to the national bank charter-type like what Varo did or what do you say?

Michele: Well, not in the first instance. What I do when a client comes and says, I want an ILC, usually, my first question is why, even though I know the why is because they don’t want a Bank Holding Company Act application to their business. But then, I dig a little bit deeper, right, so what is it that you’re concerned about, what is it that you think having an ILC will help you avoid, what are you trying to do. I’m not saying that Bank Holding Company Act application is not a big deal, it is a big deal, but being a bank of any kind is a big deal. 

So, what we do is we just work through the options with these clients and one of the main criterion that I apply is likelihood of approval and that depends not just on charter type, but what is the business at issue, etc. If you read the Nelnet and Square approvals there’s some insights on what the FDIC might be receptive to so it’s really not something I can say, you know, thumbs up, thumbs down about, it depends on the business itself. That said, fintechs should certainly consider national bank charters a la Varo, right. 

There are some really important benefits to a national bank charter for fintechs. Absent a national bank charter to operate nationwide, a fintech company must rely on a complex patchwork of licenses, attempt to comply with conflicting state rules, sometimes conflicting state rules and submit to perhaps a dozen different examinations by state agencies each year, it’s a hassle, right. A national bank charter, by contrast, is a single charter administered by a single regulator pursuant to a comprehensive set of rules. 

So, obtaining a national bank charter will allow a fintech to offer a cohesive set of products and services nationwide, focus it’s compliance efforts on the requirements of a single regulator, reduce its legal and regulatory costs, complexity and risk and offer its customers the security and safety of dealing with a federally-regulated and supervised national bank. That’s great, but it’s a big lift.

Peter: So, what is it about the Bank Holding Company Act that really is a stumbling block, is that something like a number of investors? I think I’ve read, what is the main stumbling block?

Michele: You know, there are often issues about ownership with fintechs. Quite often, they have, you know, very concentrated ownership and that doesn’t always align with the Bank Holding Company Act requirements. Ownership is an issue and often comes down to just are the FTVs, right, that are going to be conducted within the broader corporate group. For many fintechs, it’s no big deal, you know, they are primarily conducting activities that are bank permissible or financial in nature, but sometimes, I’ve had clients that, and I’m not going to name any, it’s no unusual for a fintech to have a brilliant visionary founder/CEO, right. 

Sometimes, they want to get into some pretty interesting (Peter laughs) areas that are just going to be non-starters before the banking regulators. And so, what I often see when we’re talking about when I said, you know, the potential applicant comes to me and says, I want an ILC, I don’t want a bank holding company and I say, okay, how come. In fact, a lot of times, what they’re doing is completely permissible within a bank holding company structure, but they don’t want to be constrained in case something really interesting comes up that they’d like to do.

Peter: Right, that makes sense. So, speaking of visionary founders, I want to talk about Figure and obviously Mike Cagney’s company. We had a session on this a few months back with the general counsel and yourself discussing this in detail and I’ll link to that in the show notes, but when I sort of heard about what Figure was doing I didn’t even know this path existed so maybe you can explain it and why someone would want to go down this sort of path that is not well trodden.

Michele: That’s true, it’s not well trodden. It’s very simple though in concept and here it is. Figure Bank would not take retail deposits, therefore, it would not be FDIC-insured, therefore, it would not be a bank for purposes of the Bank Holding Company Act and, therefore, the holding company will not be a bank holding company subject to that supervision. Very simple in concept, right. 

Deposits, the rest of that stuff does not flow. The thing that’s important to remember when we’re talking about this because a lot of people would say, what do you mean a bank that doesn’t take deposits, right, it doesn’t take insured deposits, I want to stress, insured retail deposits. There is ample historical precedent for this charter, keep this in mind, because the National Bank Act dates to post-civil war, time of Lincoln…….

Peter: Right.

Michele: …..which preceded the Federal Deposit Insurance Act by many decades, right. All of the national banks, originally, were not FDIC-insured. So, lawyers can do what they do and, you know, split hairs and get in the arguments, but that is the crux of it. The National Bank Act is not conditioned or premised on the idea that the banks would be FDIC-insured because when it was written federal deposit insurance didn’t exist. That said, there isn’t a lot of examples of banks currently that are uninsured in the way that Figure is attempting. That decision is pending with the OCC so we will see.

Peter: Right, right, interesting. So then, does this still mean that the fintech charter is dead. I mean, you were at the OCC I think with the genesis of this with Tom Curry, it all sort of came out then. What is the status and your opinion of the fintech charter?

Michele: Yeah. Everything that we’ve been talking about does not lead to the conclusion that the fintech charter is dead, but indeed, the fintech charter is dead, in my opinion. The OCC and I really commend Tom Curry on this, in 2016 recognized that the traditional national banks subject to the Bank Holding Company Act just doesn’t work for many fintechs seeking to innovate within the financial services space. Unfortunately, though, I think that the OCC got out of over it’s skis with the fintech charter in 2016 and didn’t have the buy-in of the other banking agencies or the trade groups and without that, I just don’t think that charter could succeed.

Peter: I mean, we’ve certainly seen a lot of traditional banks, trade organizations, you know, particularly the state, competent state board….supervisors, for example, have come out and they tried to sue to the OCC that there was no charter that had been issued so it was trying out, but I’d love you to weigh-in on this sort of conflict between the state bank supervisers and the fintech companies that want a federal charter-type thing. What do you say to them and what….fintech companies, by definition, are online-based, it knows no state boundaries typically so how do you kind of approach that argument.

Michele: This is a toughie. The debate and the dual banking system, state versus Fed, I am not going to say it’s as old as Adam and Eve, but it’s old (Peter laughs) and I’m not going to be able to solve that problem on this podcast. But, I think what we see, with respect to the idea of the fintech charter, are really good intentions on both sides, right. We see, as I said, the OCC seeking to foster innovation, right, in the national banking system and do so in a way that accommodates fintech business models, that’s great, right. 

On the state side, we see similarly good intentions, right, but what the CSBS typically points out is state regulators often are the incubators for innovation, we’ll get to that, the SPDI is a good example of that and that they are primarily focused on consumers in their states and know their needs very well, right, and are concerned about what might appear to be a work around some of the regulatory burdens that their state banks are faced with. Their state banks are not getting a pass on the BHCA.

Peter: Right, right, got it. So, before we move on, I want to just go back to revisit the Special Purpose Charter which is what the fintech charter was because we had Brian Brooks who had a short but quite active time as acting head of the OCC late last year and early this year, I mean, he was really vocal about how we should have special purpose charters. He talked about the fintech charter, he talked about the payments charter, what are your thoughts on those sort of narrowly-defined charters.

Michele: Well, I also commend Brian Brooks on his desire to foster innovation in the national banking system, but I think the current regulatory environment just isn’t conducive to new types of charters. With the caveat and in a minute we’ll talk about the possible StableCoin issuer charter that’s very intriguing, but leaving that aside, I think it’s also important to remember, there’s a lot you can do within the existing national bank charter, for example, or some of the state charters. 

So, within the existing national charter as we see, you’re not demonstrated by the Figure application, you can accommodate some very innovative business models and, as I said, there are a number of the SPDIs and the trust charters that we recently conditionally approved for some crypto companies show that within very, very old legal frameworks, innovation is possible.

Peter: Well, can we touch on that then now like the Wyoming Charter which….you know, they’ve granted the charter to at least two crypto companies, Avanti Bank and Kraken, can you describe what is unique about what Wyoming has done.

Michele: First let me say, I think that the Wyoming SPDI and other similar efforts afoot show that the states are going to eat the Fed’s lunch, right. (both laugh) As the winds are blowing cold on crypto in DC right now, there is more and more interest in developing these state charters. I’m getting more questions about it and I don’t see the state regulators, you know, comparing crypto to credit default swaps, right, they are very much signaling that they are open for business and receptive to new applications. 

So, I promise this will be my last commendation at the podcast, but Albert Portner in Wyoming has really provided a very interesting option allowing SPDIs to accept all types of deposits, including demand deposits from consumers which may be an on-ramp to crypto and other digital assets like in the Kraken Bank model. So, I think there’s much to be explored there and with, as I said, similar state efforts.

Peter: You keep saying SPDIs, I haven’t heard that term before, would you explain that.

Michele: Oh, I’m sorry. It’s Special Purpose Deposit Institution.

Peter: I’ve heard that, I just didn’t think that was how it was said.

Michele: (laughs) Are we talking about Speedy Gonzalez here?

Peter: Right, right, okay, great. So, let’s go back to Varo because…I believe you worked on that as well, but that was a long process and they got it over the line. It’s always hard to be first, but do you think that the fact what Varo has done has paved the way for an easier time for fintechs to go down that route now?

Michele: I don’t think it’s ever going to be easy (Peter laughs). You know, I just, a moment ago, promised that was going to be my last commendation and I know I’m doing a lot of commending on this, but my hat is off to Colin Walsh and his team including his general counsel, Marina Gracias. A De Novo National Bank application is not for the faint of heart. Varo applied for and received approval for a national bank charter then it had to apply for FDIC insurance which got approved, then they had to apply for status as a bank holding company, right, that is a lot of work. 

So, in response to your question, do they make it easier for other fintechs? No, they provide a model which is very important, they provide an example that the lift is large, but it’s not impossible. But, any applicant for a bank charter should prepare for a very lengthy chartering or perhaps change of bank control application if they go the acquisition route and if they succeed, a very high degree of regulatory complexity and scrutiny, right.

Peter: So, should it take three years, is that what people should expect which I think is roughly what it was for Varo.

Michele: I don’t think it should take (Peter laughs) three years, I don’t think the process is going to be fast. One important difference I think in the current environment, and we’re seeing and Michael Soo has made an important point of this which is we’re seeing a greater emphasis on inter-agency coordination in reviewing these applications. I think that one thing that’s kind of unfortunate is, speaking of the OCC, the OCC and the FDIC have slightly different application processes, but they use the same application. So, I think in Varo’s case and there were good reasons why it did a serial set of applications that I described, first National Bank and FDIC and the Fed, you can apply for the bank charter and the FDIC insurance at the same time which may reduce the overall processing time.

Peter: So, I’ve seen a lot of fintech companies over the years, let’s say some, they apply and then they withdraw the application. Why do they do that, is that just inexperience or is there some reason behind this apply/withdraw kind of process?

Michele: Nobody should ever apply thinking they may withdraw. Withdrawals happen for a variety of reasons. One reason though is that the agency has determined that the application will not succeed, either it’s not complete as presented or raises fundamental concerns on the part of the regulator. Common concerns with fintech applications are lack of profitability at the parent level or uncomfortable with banking and commerce. Those are two things that give regulators quite a bit of heartburn. The profitability issue, it’s a real rub. 

Fintechs often focus on growth over profitability, at least in their initial phases, and that is not an approach that the regulators are particularly comfortable with, right. Pursuant to Dodd-Frank, the parent company of a bank is required to serve as a source of financial and managerial strength to the subsidiary bank so if the parent is not profitable, that raises concerns about its ability to serve as a source of strength. These are issues that can tank an application or at least cause it to be withdrawn and resubmitted. I always tell my clients, we’re not going to go forward if there is any risk of withdrawal.

Peter: Obviously, profitability isn’t a deal breaker because Varo has not been profitable and they were approved so what’s the rub there?

Michele: I do believe Varo is intending to be profitable within the de novo period and that is, in fact, a hard requirement of the regulators.

Peter: Okay.

Michele: They don’t expect profitability out of the gate, but they do expect a bank to achieve it within three years.

Peter: Got you. So, final question, I want to sort of do a little fantasy game here like let’s say the current OCC pick is rejected and President Biden puts your name forward, you are confirmed by the Senate and you’re running the OCC, what changes are you going to make? I’m particularly interested in things that would make it better for fintech companies.

Michele: If in this fantasy I were leading the agency, I would make changes that would help consumers and help banks and fintechs by leveling the field on which they compete. I’m deeply concerned that a significant portion of Americans receive their financial services outside the regulated banking system. 

The fundamental purpose of bank regulation is to protect consumers and without visibility into what’s called the “shadow banking system,” the banking regulators really can’t protect these consumers. Unfortunately, I think that recent statements from Washington are reflective of a profound reluctance to allow fintechs into the regulatory fold and keeping fintechs out of that fold means that the banking regulators will not have to address the risk of certain innovative business models.

Peter: Right.

Michele: And it will mollify banking industry advocates worried about competition from fintechs and, therefore, opposed to chartering them, but it won’t keep consumers from seeking alternatives to banks and, therefore, really won’t keep the fintechs from eating the banks’ lunches. (laughs) There’s a lot of lunch-eating going on in this podcast right now, maybe I’m hungry. In other words, there’s a consumer demand for services provided by fintechs, that’s clear, right. 

Fintechs are going to meet that demand and unless chartered, fintechs will be able to do so free of the costly regulatory burden imposed on their bank competitors and that’s a fact. In my opinion, the best way to ensure consumer protection and healthy competition among financial services providers is to require fintechs offering banking services to consumers to apply for bank charters and submit to the rigorous oversight to which banks are subject.

Peter: Okay, interesting, simple and probably not what every fintech wants to hear, but it’s a great point to end on. It’s been really insightful, Michele, I’ve learned a lot today, I hope the listeners have as well. Thank you so much for coming on the show.

Michele: It’s my pleasure, thank you, Peter.

Peter: Okay, see you.

Michele: Bye.

Peter: You know, Michele and I were chatting after we stopped recording just now and we figured, it’s almost amusing in some ways how some of the banks and the bank trade associations how they have approached fintechs, in general. On the one hand, they say, well, it’s not fair because fintechs have a lighter lift when it comes to regulation, on the other hand, it says, we don’t want them to become regulated. So you can’t sort of have it both ways. 

The reality is it’s inevitable that the major players in fintech are all going to become fully regulated banks, there may be one or two exceptions, but the vast majority, if you want to be a really national scale fintech company and you really do want to have some kind of bank charter and that’s what we’re starting to see. I think, long term, it’s inevitable that we are going to see most of the major fintech companies with charters.

Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

(music)

Today’s episode was brought to you by LendIt Fintech LatAm, the region’s leading fintech event. It’s happening both online and in-person in Miami on Dec. 7th and 8th. Latin America is still the hottest region for fintech in the world and LendIt Fintech LatAm features the leading players in the region. So, join the LatAm fintech community this year where you will meet the people who matter, learn from the experts and get business done. In-person and virtual tickets are available at lendit.com/latam

The post Podcast 321: Michele Alt of Klaros Group appeared first on LendIt Fintech News.

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Source: https://www.lendacademy.com/podcast-321-michele-alt-of-klaros-group/

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