Several recent developments, including changes by Trump regulators, suggest that banking charters for fintechs are back on the table. For most traditional bankers. This means more unwelcome competition – although a small group may land a one-time windfall.
Fintechs are gaining direct entry into banking via charter again. For most traditional banks, this will represent new challenges for some, new opportunities for others, and further evolution of the industry just as it faces unprecedented economic turmoil.
The recent acquisition of a community bank by small business fintech SmartBiz, creating SmartBiz Bank, is widely seen as a harbinger of more to come, just as the new administration is considered to be more favorably inclined to deal-making and mergers and acquisitions.
Three new fronts in this revolution include a specialized type of charter in Georgia, growing indications that fintechs could become state-chartered industrial banks; and a wave of fintech acquisitions of traditional banks specifically to acquire their charters.
Specialized Georgia Payments Charter Begins to Thaw
The most recent wrinkle is the news that Stripe has an application pending for a specialized charter in Georgia. This follows on Fiserv obtaining the same type of rarely granted charter in 2024.
Why Georgia? Atlanta has come to be known as “Transaction Alley.” According to one source, two-thirds of U.S. card transactions flow through payment companies based in or near the city. More than half of the country’s largest payment processing firms are based there, as are roughly 275 fintechs, including payment specialists. Thousands of jobs there come from the payments business.
Jobs were part of the impetus behind state legislation over a decade ago to create a new, limited state banking charter, the “merchant acquirer limited purpose bank charter,” or MALPB. Some use the shorthand “malpbee” to refer to the charter. Merchant acquiring is the process of accepting credit or debit card payments for merchants, historically done by a chartered bank.
As written, “it’s a very limited charter,” explains James Stevens, partner and co-leader of the financial services group of Troutman Pepper Locke LLP. “All it really does is enable somebody in the merchant acquiring business to become a bank under Georgia law, so they can become a member of the card networks and eliminate the need to have a sponsor bank.”
In fact, at present a holder of a MALPB charter cannot use the word “bank” in its name. As envisioned, MALPBs are not depositories and can’t engage in general deposit taking. They aren’t required to have federal deposit insurance, although they are allowed to apply for it. In addition, under federal rules, the charter doesn’t make the MALPB a “bank,” so owners of one don’t have to submit to Federal Reserve bank holding company oversight and regulation.
Since its passage, the MALPB charter lay fallow. One player, Credorax, received approval from the Georgia Department of Banking and Finance in 2014 but surrendered the charter without ever using it, according to a department spokesman. Industry experts explain that at the time, Credorax couldn’t obtain direct access to the Visa and Mastercard systems. Without that, the limited charter was just a piece of paper.
In the interim, of course, the payments business has rapidly evolved, dominated by commercial banks.
However, “distribution has shifted,” says Richard Crone, payments consultant. “Merchant acquiring has consolidated over the decades, moving from being bank-owned to ‘PayFac’- driven models.” PayFacs are merchant services businesses that set up electronic payment and processing services for business owners. Among the largest of these are Stripe, PayPal, Square and Adyen.
Crone explains that the digitization of acceptance removed much of the geographic component from acquiring — you no longer needed an acquiring bank in the merchant’s backyard — and the movement towards larger, national-level banks accelerated the trend. Many banks walked away from the merchant acquiring business, and as PayFacs’ influence grew, major banks that remained in the business became conduits connecting the PayFacs to Mastercard and Visa.
“All they are now is the plumbing,” says Crone. Still, without the plumbing, there is no flow.
Source: THE FINANCIAL BRAND
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