Two fintechs filed for industrial bank charters this year, and the community bank lobby has asked the FDIC to stop processing such applications until it explains how it will judge them. My view is that the FDIC should answer the second request by publishing its tests, and that it should do so before it rules on the next fintech filing.
What is on the record
On October 12, Upgrade announced applications to Nevada and the FDIC for Upgrade Bank, which the company describes as a proposed wholly owned subsidiary with independent governance and internal controls. On July 6, Klarna announced a similar filing in Utah, with its own independent board. We set out the facts of the Upgrade filing in our report on the application.
The opposition has a specific request. In an August 20 joint letter, the Independent Community Bankers of America and the Bank Policy Institute said the FDIC “should pause processing ILC deposit insurance applications until the agency provides guidance regarding its approach to considering those applications.”
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The same letter names the questions that guidance would have to answer. It says an industrial loan company “significantly reliant on an affiliate” carries a higher risk of breaking the laws on affiliate transactions, and that the FDIC “must ensure that ILCs abide by the anti-tying restrictions applicable to banks.”
The case for the pause
The strongest counter-argument comes from ICBA’s own position. After the FDIC approved Stellantis’ application in May, ICBA President and CEO Rebeca Romero Rainey said: “If a company wants to own a bank, it should have to operate by the same rules as everyone else.” ICBA’s objection is to the structure, which it says allows nonbank owners to avoid federal consolidated supervision under the Bank Holding Company Act. On that reading, no FDIC guidance can fix the problem, because only Congress can change the law, and every approval in the meantime locks in the gap.
I take that seriously. A rule that applies to everyone has force that a case-by-case review lacks, and ICBA has made its objection on the record for months.
Why published tests still come first
A pause leaves the same applications waiting under the same unwritten standard. The FDIC has already approved at least one industrial loan company application this year, so applicants and objectors are both operating without a published checklist. Delay gives neither side any new information.
Published tests give both sides something to argue against. ICBA and the Bank Policy Institute have already drafted a first list in their letter: how much the bank depends on its affiliate, and how the bank will keep from tying its products to the parent’s. An FDIC document that adopted, amended or rejected each item would tell Upgrade, Klarna and every later applicant what the application must show. It would also tell objectors where the agency draws the line, and they could then challenge the line directly.
The pause request also treats every pending filer alike. Upgrade’s release says its bank would add to existing bank partnerships. Klarna’s says its bank would bring existing banking operations in-house. Those are different dependency structures, and the affiliate-reliance test the lobby itself proposes would score them differently. A blanket stop prevents the FDIC from learning which structure holds up.
What the FDIC should publish
- How it measures an industrial bank’s dependence on its parent for customers, funding and servicing.
- How it will confirm that bank products are not tied to the parent’s other products.
- What independent governance must look like, since both fintech announcements promise it and neither release defines it.
- What the applicant must disclose about the partner banks it will keep using.
The cost of waiting
Congress may or may not act on the Bank Holding Company Act. I make no forecast about that. The FDIC controls its own guidance today, and its next decision will cite whatever standard exists when it is made. If the standard is still unwritten, every approval will read as precedent that nobody can inspect, and every denial will read as arbitrary to the applicant.
A fintech planning a charter filing should ask the agency for a pre-filing meeting now and write the answers to the four items above into the application before the FDIC does it for them. A banker who objects should file comments on specific tests rather than on the charter type, because specific comments are the ones an agency can adopt.
