With preliminary approval for SoFi bank charter, OCC expands field for fintechs

The move marks one of the final steps in the chartering process for SoFi

SoFi, once known by the tagline “Don’t bank, SoFi,” is now on the fast track to become a bank.

The Office of the Comptroller of the Currency (OCC) granted preliminary approval for a national bank charter for SoFi, the company announced Wednesday. This marks one of the final steps in the chartering process for the company, which in July filed an application with the OCC as “SoFi Bank, National Association.”

“By pursuing a national bank charter, we hope to be able to give consumers more choices and enhanced value when it comes to a full suite of financial services, which can help even more people achieve financial independence,” SoFi CEO Anthony Noto said in an emailed statement to FinLedger. 

While the Federal Reserve and Federal Deposit Insurance Corporation still need to sign off on SoFi’s charter, the OCC’s green light is encouraging news for SoFi’s product ambitions. This development comes nearly three months after digital banking company Varo received a national charter, and possibly blazes a trail for other fintech firms that may want to pursue the charter route.

A charter would allow SoFi to hold deposits and offer loans without having to rely on bank partners, providing it with a source of reliable, low-cost funding. This may help the company build a competitive advantage compared to other financial startups that rely on bank partnerships.

“It will improve their operating margins, and they’ll be able to launch other core banking products, such as issuing loans with deposits and holding FDIC-insured deposits, assuming that they receive approval from the FDIC,” said John Popeo, a principal at bank consultancy The Gallatin Group. “It should also generally lower the company’s cost of funds relying on those customer deposits.”

According to SoFi’s charter application to the OCC, a charter would allow it to pursue an “originate and hold” model instead of an “originate and sell” business model, and fulfill customer demand through a variety of economic cycles. 

A charter also would “level the playing field” with traditional banking competitors, and permit it to offer consumers an “innovative set of personal finance products” through mobile-first channels, the company stated.

The process to acquire a charter has been a winding road for the 9-year-old, San Francisco-based company. The company initially applied for an industrial loan company charter in 2017, but later that year withdrew it following the departure of former CEO Mike Cagney and other senior leaders amid sexual harassment allegations made by two former employees.

But SoFi’s recent history suggests it’s on a growth trajectory, moving closer to a one-stop shop for a range of products and services. With 1.5 million customers, SoFi first began offering student loan refinancing. It’s since expanded to wealth management, loans, banking, and this week, credit cards.  SoFi has seen its investor accounts double this year, and its capacities grew through its $1.2 billion acquisition of payments infrastructure company Galileo in April.

With SoFi’s progress on its trajectory to obtain a bank charter, analysts suggest regulators may be showing openness toward new business models.

“Now that the Comptroller of the Currency and the FDIC have signaled that they will approve these [charters], then the cost of the entry is lowered by that fact, and therefore, you should see more of these fintechs interested in acquiring charters and deposit insurance,” Thomas Hoenig, a distinguished senior fellow at the Mercatus Center at George Mason University and a former vice chairman of the FDIC, told FinLedger.

Regulators’ attitudes are in part driven by a shift in digital adoption of financial services, amplified by the COVID-19 pandemic, suggested Julie Hill, a professor at the University of Alabama School of Law who focuses on financial institution regulation.

“Part of what we’re seeing is just regulators acknowledging what is happening in the real world,” she said. “Not only are regulators more open to online banking, but that banks have had to be more open to online banking because for consumers, that’s the best, safest way for them to access their money.”

While the charter model may prove advantageous for some fintech firms, the expense, time and regulatory burden may not make a worthwhile effort for others, said Popeo.

“[These firms] would become subject to more comprehensive supervision and regulation, and they’re going to become subject to the Bank Holding Company Act, which places restrictions on the holding company’s operations, activities, and investments,” he said. “There are cost structure concerns from a regulatory standpoint, and there should be higher fixed costs, regulatory capital requirements, examinations [and] compliance.”

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