The EconomistJune 1st 2019 Finance & economics 67H
ere comethe Germans. On May 21st
Raisin, a “deposit marketplace” from
Berlin, declared its intention to set up shop
in America. Within a year Raisin hopes to
follow its compatriot, n26, a mobile bank
that is due to open there soon. Yet neither
will, technically, be a bank. Remarkably, no
such startup yet has a national banking
charter in America, although the country is
a hotbed of financial technology, spawning
innovators from PayPal to Quicken Loans.
Both Raisin and n26will rely, at least at
first, on the charters and deposit insurance
of local “sponsor” banks. That route is
“fastest to market”, says Nicolas Kopp of
n26. It is also common. Sponsors such as
the Bancorp Bank, Cross River Bank and
WebBank stand behind fintechs and others
wanting to offer banking services. (They of-
ten supply technology, too.)
Varo Bank, of Salt Lake City (hitherto a
partner of Bancorp), is likely to be the first
purely mobile bank with a national charter.
Last August the Office of the Comptroller of
the Currency (occ), a supervisor, gave Varo
preliminary approval, subject to its raising
$104m in capital and other conditions.
Varo will also need a nod from the Federal
Deposit Insurance Corporation (fdic),
which it first approached in early 2017. Rob-
inhood, an online wealth-manager, has
also applied to the occand Square, which
handles payments for small businesses
(the chairman of The Economist Group,
Paul Deighton, is on its board), to the fdic.
In Australia, Britain, Hong Kong, Singa-
pore and elsewhere, online banks and oth-
er fintechs have a fairly clear path to regula-
tory approval. Regulators have provided
“sandboxes” in which startups can develop
their products safely. In Britain, online
challengers have restricted licences at first;
some, such as Monzo and Starling, have
gained full bank status.
The Consumer Financial Protection Bu-
reau (cfpb) and the occhave proposed set-
ting up sandboxes. Arizona, Utah and Wyo-
ming, all eager to attract startups, are
building their own. But although things are
starting to shift, America is still far behind.
It also has no equivalent of the European
Union’s payment-services directive, which
allows third-party companies to make pay-
ments and aggregate data from accounts—
with consumers’ permission—or the Brit-
ish variant, Open Banking. Both may help
open up banking to digital competition.
Steven Mnuchin, the treasury secretary,has proposed modernising the Communi-
ty Reinvestment Act (cra), an anti-dis-
crimination law whose requirements are
tied largely to the location of branches—
hard to square with a world of digital bank-
ing—but nothing has changed yet.
America’s regulatory system is fiend-
ishly complex, comprising “patchworks on
patchworks”, says Brian Knight of the Mer-
catus Centre at George Mason University.
As well as several federal regulators,
created in response to successive crises—
the occduring the civil war, then the Feder-
al Reserve, the fdic, the cfpband more—
every state has its own authorities.
Overseeing digital banks is thus no
one’s business and everyone’s. The occ has
tried to take the initiative—last year it in-
vited applications for “special purpose na-
tional bank charters” aimed at fintechs—
but state regulators took umbrage, though
the charter does not permit deposit-taking
and none has been awarded. On May 2nd a
federal court ruled that New York’s Depart-
ment of Financial Services could proceed
with a suit against the occ.The prospect of
a legal battle, progressing at much less than
internet speed, may well put off potential
applicants for special charters.
Would-be banks have plenty of options,
but all have pitfalls. As Varo Bank has
found, the route to a conventional federal
charter is slow (it went for a full occchar-
ter, not the limited special version). Hook-
ing up with a sponsor buys time and conve-nience, but at some expense (eg, a cut of
“interchange” fees from card transactions).
Digital firms can buy a chartered bank, if
they can find a suitable one: Moven, anoth-
er fintech, has made three unsuccessful at-
tempts, says Brett King, its founder. The
biggest obstacle, he adds, was that the cra
would have obliged it to keep branches
open. (Moven maintains a partnership
with a bank in Kansas.) Or they can be
bought themselves. Simple, a digital bank
set up after the financial crisis to provide
basic bank accounts, at first tied up with
Bancorp, but in 2016 was acquired by bbva,
a Spanish bank already active in America.
Admittedly, new banks face similar
choices in other countries. At first n26
piggybacked on the licence of Wirecard, a
German financial-services firm. Raisin’s
domestic sponsor was mhbBank—which it
bought this March. Nevertheless, the sheer
thickness of America’s regulatory under-
growth surely hands an advantage to al-
ready-licensed banks of all sizes. Several
have their own online brands.
Thus the most prominent digital en-
trant is arguably Goldman Sachs. Its off-
shoot, Marcus, has scooped $35bn in de-
posits, helped by a famous name and
generous interest rates. Ally Financial, the
biggest online-only bank, used to be Gen-
eral Motors’ financial arm. Meanwhile
BankMobile, owned by Customers Bank, a
Pennsylvanian lender with just $10bn in
assets, has 2m checking-account custom-
ers; most are students, thanks to deals with
their colleges. In April BankMobile
launched t-Mobile money, providing
banking services under the telecoms net-
work’s brand. Luvleen Sidhu, BankMobile’s
president, says she is gaining 5,000 ac-
counts a week—against just one through a
typical bank branch. “Our path was easier”,
says Ms Sidhu, “because we didn’t have to
apply for a bank charter.”^7NEW YORK AND WASHINGTON, DC
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The banking system that time forgot