This announcement can rock the payments world in many ways.
Bank cards are called bank cards because industry requirements dictate that there be an insured financial institution sponsoring the card. It doesn’t matter where you are, from Argentina (Comisión Nacional de Valores) to Zimbabwe (Reserve Bank of Zimbabwe); if you want to issue bank cards, you need to be a licensed bank regulated and insured by an appropriate regulating body.
There are some ways to get around the process, such as co-branding or through a bank sponsor, but at that point you are only a fringe player. The classic way to do it in the US is to come through the back door of the banking process by getting licensed as an industrial bank, the only way that a non-financial corporation can own a bank. For a variety of reasons, this type of license has not been issued in ten years. Wal-Mart was one of the last applicants and when their application was rejected, they went north to Canada and south to Mexico to get their credentials. Utah is the home of the bulk of industrial loan companies, where you will find Merrill Lynch Bank USA, UBS Bank, American Express, Centurion, Target, Nordstrom, Harley Davidson, BMW and First Data.
Now comes SoFi, the first fintech with enough clout to make this work.
- Since launching in 2011, SoFi has gradually added new financial products and services to serve its member community. Banking is one area that it’s keen to enter, as it sees an opportunity to provide checking, deposit and credit card accounts to its users.
- SoFi has long been interested in applying for an industrial banking charter, and has even weighed the possibility of acquiring a regional or community bank to offer those services. In a profile of the company published last summer, The Wall Street Journal reported SoFi had met with Utah and federal regulators about applying for a charter in March 2016.
- … with $1.9 billion in venture capital backing it and its tech stack in place, Cagney told me that the company has plans to apply for an ILC charter in the next month.
Three interesting issues, beyond SoFi’s move to become a quasi-bank. First, it is a sign that requlators might open the gate for non-banks; this is a significant change over the past decade. Second, armed with a banking license, how much can the disrupters disrupt? New payment networks? New pricing models? New terms? It will be interesting to watch. Third, is this an indicator of industry friendly terms from payment
- That means SoFi’s application could be a watershed moment for the industry.
- As a result, the company is working on other ways that it could begin offering a SoFi-branded banking product later this year. Even if the company is not able to get approval for an industrial bank charter, it would still be able to offer checking, deposit and credit card services through a regional banking partner.
Initial banking product offerings will likely be traditional but you can be sure to see some non-traditional design factors as the process matures.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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