Chartering a bank in the United States is a complex process filled with regulatory requirements. To demystify bank chartering, let’s follow along with a Roman Law Firm client we’ll call “FintechCo” on their journey to get a U.S. bank charter.
While based on a real scenario, specifics about the company are anonymized. Read on to learn about the process to apply for a bank charter through this foreign fintech company’s journey. This guide links to related resources to help your bank chartering journey at any stage.
Many organizations may consider chartering a U.S. bank at some point. This guide is designed to inform:
- Entrepreneurs and startups, including fintech firms
- Private investors looking to establish or invest in a bank
- Existing U.S. financial institutions (including private banks) seeking a new charter type
- Foreign banks interested in entering the U.S. market
- Business consortiums chartering a bank to serve members
By seeing the steps and requirements through FintechCo’s application process for a fintech charter, you can gain critical insights for your own chartering endeavors. Be sure to reference our other banking law guides, which you’ll find linked throughout this article.
FintechCo is a rapidly growing payments processing company based overseas. With a remarkable success story in its home market, FintechCo is now setting its sights on expanding to the U.S. and offering a comprehensive suite of banking services.
They’re seeking a fintech charter to give them the regulatory permissions to expand their impact and customer base.
When it comes to entering the U.S. market, Roman Law Firm helps FintechCo to evaluate two options carefully:
1. Partner with an existing U.S. bank
Partnering with an established bank allows FintechCo to make a swift market entry while avoiding the costs of chartering their own bank. However, this approach does come with some trade-offs:
- Less control: By partnering with a bank, FintechCo will have to share customer relationships with the partner bank, limiting their control over the customer experience. While co-branding is possible, it can be a complex endeavor.
- Limited capabilities: Relying on the licenses and product offerings of the partner bank means that FintechCo may have to work within certain constraints. Expanding their capabilities further down the line could be challenging.
- Compliance considerations: Even with the support of a partner bank’s license, FintechCo will still need to implement robust risk and compliance procedures to meet regulatory requirements.
- Revenue sharing: In exchange for leveraging the resources of the bank partner, FintechCo will have to share a portion of its revenues, potentially impacting its profit margins.
2. Charter its own U.S. bank
Alternatively, FintechCo can establish its own bank in the U.S., giving it greater control over its operations and customer relationships. However, this path comes with its own set of considerations:
- Higher costs: Chartering a bank involves significant financial investments and regulatory requirements. FintechCo must allocate resources to meet capitalization requirements and comply with various regulations.
- Longer time to market: Establishing a new bank takes time, from obtaining regulatory approvals to building the necessary infrastructure. FintechCo would need to carefully assess the implications of a longer time to market.
- Independence and flexibility: Chartering its own bank gives FintechCo the freedom to shape its brand and offerings, allowing for greater flexibility and control over its operations.
- Enhanced capabilities: Owning a bank would enable FintechCo to develop and offer a broader range of products and services, expanding its capabilities to cater to the needs of its customers.
By assessing the pros and cons of each approach, Roman Law Firm helps FintechCo to determine the best path forward for their innovative firm and to successfully penetrate the U.S. market with their cutting-edge payment processing solutions.
Given FintechCo’s goals of prompt U.S. entry and offering a diverse array of banking services, partnering falls short. FintechCo would still need to comply with regulations as if chartering its own bank but without the control, customization, and capabilities it desires.
💡 For these reasons, FintechCo decides to charter its own U.S. bank. Doing so will allow the firm to build a banking presence from the ground up to its specifications.
FintechCo must now choose what type of charter it wants to establish its bank under. You can find further pathways in the ‘Alternatives’ section later on in this guide.
For now, let’s consider their options for a U.S. bank charter:
- National bank: Chartered by the Office of the Comptroller of the Currency (OCC), a federal regulatory agency responsible for overseeing national banks. To qualify as a national bank, institutions must also become members of the Federal Reserve, a centralized banking system, and obtain FDIC insurance, which protects customers’ deposits in case of bank failure.
- Federal branch: The national bank branch operates under the charter and regulation of the OCC, the Fed, and the FDIC (Federal Deposit Insurance Corporation). This means that it adheres to the guidelines set by these governing bodies to ensure safe and sound banking practices.
- State bank: Chartered by a state banking authority, state banks are subject to state banking laws and regulations. While state banks may also be members of the Federal Reserve and have FDIC insurance, they primarily adhere to state-specific rules.
- Industrial loan company (ILC): ILCs are chartered in certain states like Utah and are subject to a different regulatory treatment. This includes unique regulatory oversight, which may vary from traditional banks, providing them with flexibility in their operations and lending practices.
- Federal Savings Associations (FSA): FSAs are chartered by the Office of the Comptroller of Currency (OCC) and are subject to their regulations. FSAs, like state banks, may be members of the Federal Reserve and have FDIC insurance. However, they must also comply with OCC-specific lending practices and operations rules.
Each charter option has its pros and cons regarding permitted activities, ownership regulations, and compliance requirements.
💡 For the complete national presence it desires, FintechCo decides to pursue chartering a national bank in the U.S. This offers the broadest powers and capabilities.
We’ll continue with FintechCo’s journey in just a moment. But if you’re still wondering what other types of bank charters are available besides a national bank charter, consider the following options:
- State bank charters – These limit the entity’s operations to one state but involve fewer application requirements. Regulation occurs at the state level.
- Savings and loan associations – Chartered by states, S&Ls (Savings and Loan associations) provide housing and mortgage services, following state and Federal Home Loan Bank (FHLB) regulations. Choosing an S&L offers specialized services but requires compliance with unique regulatory standards.
- Offshore bank chartering – Foreign banks may choose offshore jurisdictions with friendlier regulations and tax incentives when entering the U.S. market.
- Private bank charters – A private bank charter authorizes a bank to offer personalized financial services to high-net-worth individuals, typically at a state level. Regulation is often more localized than for national banks.
- Federal branch chartering – Allows foreign banks to operate federally licensed U.S. branches overseen by multiple regulatory bodies.
- Industrial loan company charters – Only available in select states like Utah, ILCs offer FDIC insurance without the full regulatory structure of a traditional bank. However, the ILC has limited powers.
- Representative offices – Foreign banks can open representative offices that market services and solicit business but cannot conduct actual banking.
Each model has tradeoffs that applicants should weigh based on their business model and objectives. As an applicant, you may also consider approaches like offshore banking and private banking if no national charter is truly needed. But, national chartering remains the gold standard for foreign banking expansion across the U.S.
Now, back to FintechCo’s journey! To receive a national bank charter, the foreign fintech firm must navigate through a meticulous application process with three primary federal regulators:
1. OCC (Office of the Comptroller of the Currency): This regulatory body takes charge of issuing national charters and thoroughly assesses management capabilities, business plans, and capital adequacy. By meticulously evaluating these aspects, the OCC ensures that potential banks are well-equipped for success.
2. Federal Reserve: In addition to the OCC’s approval, the Federal Reserve plays a crucial role by granting permission for bank-holding company ownership of banks. They also require rigorous evaluation of capital maintenance, a vital factor in ensuring the stability and resilience of the financial institution.
3. FDIC (Federal Deposit Insurance Corporation): The FDIC comes into play by providing federal deposit insurance, a fundamental aspect of banking industry operations. They play a pivotal role in evaluating the viability of FintechCo’s business plan, analyzing capital requirements, and ensuring that the financial institution is equipped to protect depositors’ funds.
At the initial stage, the bank organizing group will engage in a vital meeting with the OCC, during which they will discuss their objectives, present their comprehensive business plan, and address any concerns that may arise. Following this meeting, the OCC issues preliminary conditional approval, outlining the remaining steps that FintechCo needs to fulfill in order to achieve full charter approval.
The entire application and approval process usually unfolds over a period of 6 to 12 months. In this critical phase, ensuring compliance with all regulatory requirements is pivotal to obtaining the final charter approval. This not only confirms the legitimacy and robustness of FintechCo’s banking operations, but also solidifies its commitment to upholding industry standards.
As a newly chartered “de novo” bank, FintechCo’s bank will face heightened capital requirements from regulators during its first years of operation. These requirements are put in place to safeguard the stability and financial health of the institution as it establishes itself in the market.
For example, de novo banks may need to maintain a Tier 1 leverage ratio of at least 8% for three years. This ratio, which includes common equity and retained earnings, ensures that the bank has a solid capital base to absorb potential losses and support its lending activities. With $200 million in assets, FintechCo’s bank would need to have at least $16 million in Tier 1 capital, providing a strong foundation for its operations.
In addition to capital requirements, lending activities for the new bank will be subject to certain restrictions until it has established safe and sound operations. De novo banks are not allowed to make loans exceeding 15% of their capital without prior approval. This safeguard ensures that the bank maintains prudent lending practices and manages its risk exposure responsibly.
By meeting these requirements, FintechCo’s bank demonstrates a commitment to sound financial management, with ample capital and liquidity. This ensures stability and instills confidence in customers and regulators.
Community Reinvestment Act Compliance
All U.S. national banks must demonstrate how they will meet the credit needs of the communities they serve, including low- and moderate-income areas.
FintechCo’s application must detail plans to achieve Community Reinvestment Act (CRA) goals. This will involve collecting and reporting small business and community development lending data.
Banks undergo periodic CRA examinations. Earning a satisfactory CRA rating is required to open branches and complete mergers. Meeting CRA obligations is an integral part of the bank chartering process and ongoing operations.
To successfully obtain and maintain a U.S. bank charter, FintechCo must prioritize the implementation of robust Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance programs at its new bank. These programs should encompass several crucial aspects:
- Customer due diligence and enhanced due diligence for high-risk clients to ensure a thorough understanding of their backgrounds and activities.
- Implementing effective monitoring mechanisms to detect and report any suspicious activities promptly. This will aid in identifying potential cases of money laundering or other criminal activities.
- Filing Suspicious Activity Reports (SARs) whenever there is reasonable suspicion of illicit behavior to further assist law enforcement agencies in their investigations.
- Compliance with Currency Transaction Report (CTR) requirements to accurately report and document significant cash transactions.
- Addressing any past AML deficiencies by providing a comprehensive explanation, and implementing improved controls and training to prevent future issues.
Regulators closely scrutinize compliance efforts. FintechCo must prioritize and ensure effective AML measures to establish trust and integrity for operating in the regulated U.S. banking sector.
If FintechCo acquires commercial firms like retailers or automakers, this commercial ownership could impact its U.S. banking presence.
Owning commercial companies would make FintechCo a “foreign banking organization” (FBO) in the U.S. This subjects it to some activity restrictions under the Bank Holding Company Act.
- Adhering to comprehensive consolidated supervision standards of their home country regulator.
- Limits or conditions imposed based on any past regulatory sanctions in their home country.
- Restrictions on non-banking activities and transactions in the U.S.
- Providing assurance of the capabilities of the home regulator for global oversight and information sharing.
- Maintaining an adequate U.S. structure for oversight of stateside banking activities and compliance.
However, foreign banking entities can certainly overcome these hurdles through close engagement with regulators. They should partner with a legal advisor to ensure they stay transparent and demonstrate their commitment to compliance, safety, and soundness in the process.
If FintechCo did choose to acquire commercial firms, regulators would examine their new U.S. bank to ensure their home country supervisor can monitor its global activities and relationships with affiliates. Transactions with commercial affiliates would be limited and require collateral.
To sum it up: with proper boundaries, commercial ownership should not prevent chartering a U.S. bank. But meeting requirements takes care and transparency. If the company faces prosecution in the future, it would be vital to secure support for any financial institution litigation.
While currently exempt as a smaller bank, it is crucial for FintechCo to proactively monitor and prepare for the evolving expectations of climate risk management. The OCC and FDIC have outlined risk principles that address the financial risks of climate change.
These regulators emphasize governance, strategic planning, risk analysis, and climate scenario testing. Although compliance with these principles is currently not mandatory for FintechCo, adhering to them would demonstrate the company’s commitment to sustainable and resilient operations.
In addition, the SEC has proposed rules that would require public banks to disclose climate risks and greenhouse gas emissions. This further highlights the increasing importance of climate accounting. Such disclosure requirements will soon become an expectation for financial institutions.
By taking proactive measures and getting ahead of the curve on climate preparations, FintechCo can establish a strategic edge with regulators and position itself as an appealing choice for eco-conscious consumers.
It is evident that incorporating climate risk management practices into FintechCo’s operations will not only contribute to the company’s long-term success, but also align with the global trend towards environmental sustainability.
The U.S. bank chartering journey is complex but surmountable with proper planning. Choosing the right charter type and satisfying regulatory requirements in areas like capital, lending, compliance, risk management, and community needs is essential.
While partnering with an existing bank can enable faster U.S. market entry, chartering a custom bank may better serve firms wanting maximum capabilities and control like the Roman Law Firm client, FintechCo.
By understanding the step-by-step chartering process, any organization can gain valuable insights to inform their own future U.S. bank chartering endeavors.
If you still have questions about your bank chartering process, don’t hesitate to contact the international banking law experts at Roman Law Firm.
A chartered bank is a financial institution that has been granted the authority to carry out banking activities under government regulations.
Chartered banks must comply with specific regulatory requirements and be licensed by the federal or state governments to operate within the United States.
A fintech charter refers to a specialized banking license that allows financial technology companies (fintechs) to operate and provide banking services. It enables fintech companies to offer various financial products and services like payments, lending, and investing, similar to traditional banks.
The fintech charter helps streamline the regulatory process for fintech companies, reducing barriers to entry and promoting innovation in the financial industry.
While fintech banks’ partnerships are well regulated, charters ensure that Fintech activity is managed with minimal administrative burdens. Fintechs with their own charters could gain more consumer trust through the federal regulatory framework or through other financial rights. Ultimately, chartering a bank can offer regulatory permissions that allow them to grow their customer base.
To obtain a bank charter, consider these important steps and requirements. First and foremost, it’s crucial to thoroughly research the regulatory and licensing process set by the relevant authorities, such as the Office of the Comptroller of the Currency (OCC) or state banking departments. Understanding and meeting the specific criteria and documentation for a bank charter application is vital.
In addition to conducting your own research, seeking guidance from international banking attorneys who specialize in this area can be highly beneficial. They can provide invaluable expertise and support to help you meet each aspect of regulator compliance.
Remember, successfully obtaining a bank charter in the US requires meticulous attention to detail and a clear understanding of the process. By staying informed, seeking expert guidance, and diligently fulfilling the requirements, you can position yourself for a robust bank charter application.
The time it takes to obtain a bank charter can vary depending on several factors, including the specific requirements and processes of the regulatory authorities involved. Generally, the process may take several months to a year or more.
It entails comprehensive assessments, evaluations, and compliance with regulatory standards to ensure the safety and soundness of the banking institution. It’s essential to consult with all of the relevant regulatory authorities or seek professional advice for more specific and up-to-date timelines for your application.
Still have questions? The international banking law experts at Roman Law Firm are standing by to answer. Schedule a call today.