Digital Transactions Authoritative, insightful and timely information for payments professionals
The floral and fauna of the payments industry will be much more diverse in the future.
New kinds of institutions are being chartered by both the states and the federal government. These institutions have a variety of purposes and powers, and they are lining up to compete against traditional banks. Will disintermediate banks or become important partners to fintechs and traditional players?
Several states have created charters for special purposes. For example, the Georgia Merchant Acquirer Limited Purpose Bank was created in 2012 to allow processors to have bank status solely for the purpose of connecting to the networks to facilitate transactions. As of this writing, only one company, Fiserv, is using this charter, but more will likely follow.
Connecticut in 2024 renamed its uninsured bank charter the Connecticut Innovation Charter to encourage fintechs to take up a charter. It offers a charter for wholesale and merchant banking. One charter has been issued to Banking Circle, a company focused on cross-border payments, and a second has been granted to Numisma Bank, a distributor of U.S. dollar and foreign bank notes.
While these are examples of charters designed to streamline existing banking services, other states have focused on charters that facilitate the creation of institutions focused on cryptocurrencies and digital assets.
For example, Wyoming in 2019 created special-purpose depository institutions charters for entities focused on digital assets. At this writing, the state’s division of banking says it has approved four of these charters.
Nebraska passed the Financial Innovation Act in 2021 to create digital-asset depository institutions. The state early last year granted Telcoin Inc. conditional approval for a charter to create an institution that offers services such as custody and exchange.
At the federal level, efforts to create a new fintech charter have been slow. But that has not stopped regulators from repurposing existing charters for new kinds of institutions.
In December, the Office of the Comptroller of the Currency announced it had granted conditional approval for five national trust charter applications. The applicants are companies that hold or issue digital assets, or that plan to offer stablecoins following the passage in July of the GENIUS act.
With the arrival of these new charters, businesses and consumers will have new options for financial services from chartered institutions. Good disclosures will be essential so that potential customers know what rights and responsibilities they have. Without that, confusion over what being a chartered institution means could lead to problems for customers and providers alike.
Traditional financial institutions will need to think about their charters in terms of the capabilities they provide. Various existing charters, and new ones to come, will allow new kinds of institutions to offer services associated with traditional banks. They will also allow for new kinds of financial services that were not even technologically possible when traditional charters were first created.
Banks may find themselves in discussions with their boards, regulators, and partners about the full scope of powers granted by their charter. They may need to consider using powers they haven’t previously exercised as they work to compete in the new environment.
New kinds of charters may also have traditional providers asking themselves once again if they need to build, buy, or partner to stay competitive. We may see banks expanding their charter collections to include subsidiaries with some of the new charters listed above.
The growth of fintech has already put traditional financial institutions on notice that they need to evolve. Now, new institutions are using new charter types to carve off business from traditional banks and leapfrog them into new kinds of businesses.
—Ben Jackson bjackson@ipa.org
