A Bank By Any Other Name: FinTechs Spark Debate

While often referred to as a leading digital bank, Chime is not technically a bank and will no longer be referring to itself as one to appease a California regulator who took issue with FinTech’s loose use of the term.

The popular “digital bank” as it is often called, ran afoul of  the California Department of Financial Protection and Innovation for using “chimebank” in its website address, as well as using the term “bank” and “banking” elsewhere in its advertisements, according to the agency in a settlement agreement.

Chime’s choice to heretofore drop the term “bank” came ahead of a ruling by regulator on the subject.

The change comes in line with a very strict reading of U.S. banking laws that no organization can represent itself as a bank or credit union minus an actual banking license — and Chime does not have such a license. The regulatory outfit that pushed back on Chime issues such licenses and regulates state-chartered banks in the state of California through the Department of Financial Protection and Innovation.

Dropping the association with the word bank likely won’t come as a major disruption to Chime, which distinguishes itself from a bank its market materials and fundraising efforts.

“We’re more like a consumer software company than a bank … It’s more a transaction-based, processing-based business model that is highly predictable, highly recurring and highly profitable,” CEO Chris Britt told CNBC.

But however it may think of itself, Chime is often grouped under the heading of “neobank” or “challenger bank” given it offers banking adjacent services — debit cards, spending accounts, savings accounts — via a mobile interface minus an actual banking license of its own (though Chime’s services are offered under the umbrella of Bancorp Bank and Stride Bank, both of which are both FDIC members).

The settlement means that Chime and “neobanking” players will likely have to be a lot more careful using the term “bank” in their marketing materials. Chime, on its website, it seems, has already undertaken the cleanup effort as the term “bank” has been replaced with “financial technology company” throughout.

But lest anyone think the issue is settled and laid to rest, there is yet another wrinkle to consider. That “not a bank” designation might soon be up for re-evaluation as FinTech banking charters are once again making headlines — and sparking debate.

The debate hinges on a move by the Trump-era Office of The Comptroller of Currency (OCC) to develop a new FinTech banking charter that would enable FinTech companies to offer lending and payment products, without taking deposits, FDIC insurance or being overseen by state banking regulators.

Debate In The House

In an appearance before the House Financial Services Committee last month, Brian Brooks, who served as acting comptroller of the currency for much of last year, voiced his support for the charters, saying they were a necessary addition to the regulatory system against a backdrop of extensive consolidation in the banking industry that saw the number of American banks shrink from 8,315 in 2000 to 4,519 in 2019.

“The rise of nonbank financial service providers, and in particular fintechs, is the result of market forces that include the dramatic reduction bank branches … the most in rural and urban low- and moderate-income communities,” Brooks told the committee, adding that he thinks “innovative technology emerged allowing fintech companies to provide consumers with better alternatives to traditional banks on the one hand and strip-mall financiers, like payday lenders, on the other.”

Brooks went on to argue that to deny FinTech and crypto companies banking charters would actually lead to those companies being less well-regulated and create a situation where a lot more financial services activity would go on outside their view and control.

Congressional response was mixed, and largely broken along party lines, with Democrats mostly skeptical of the new FinTech banking charters.

“State regulators, community banks and credit unions have raised alarms about how new entities, including big tech firms, are receiving unconventional bank charters and offering bank products and services while evading regulations most banks, including community banks, must comply with,” said Rep. Maxine Waters of California, the chairwoman of the House Financial Services Committee. “The [Office of the Comptroller of the Currency] has overstepped its authority, pretending that laws signed by Abraham Lincoln were intended to create charters for fintech or cryptocurrency.”

Rep. Patrick McHenry of North Carolina, the ranking Republican on the financial services panel, argued that banking, like everything else overseen by Congress, must evolve with current times.

“Consumer and business preferences have and continue to evolve. The private sector is innovating to meet the wants and needs of all consumers,” he said. “We should be encouraging our regulators to seek regulatory requirements that fit these advancements, not hinder them.”

For now, it seems, digital “neobanks” like Chime are going to have to drop the bank. As for whether the term bank is actually ready to evolve … That looks like it’s going to be an ongoing, and occasionally heated, debate.