Global fintech and funding innovation ecosystem

A Scaling Fintech’s Decision “To Bank or Not to Bank?”

Digital Banking | Sep 18, 2023

Unsplash Susan Q Yin Maze - A Scaling Fintech's Decision "To Bank or Not to Bank?"

Image: Unsplash/Susan Q Yin

As the industry matures, the decision to become a bank or remain an independent fintech entity is becoming increasingly significant. The recent decision by Figure, led by its visionary CEO Mike Cagney, to withdraw its bank application has ignited a fresh debate on this topic.

Mike Cagney's leadership at Figure (and Co-founder of SoFi) has always been characterized by forward-thinking and innovation. His decision for Figure not to become a bank wasn't a reflection of the company's inability to do so, but rather a strategic choice rooted in a broader vision for the fintech industry.  Cagney's perspective offers valuable insights for other fintech leaders grappling with similar decisions.

When my startup, Figure, recently withdrew our OCC bank application, many in the media took it as a sign that fintechs like us need to become a bank to survive—but that the process is simply too hard. They got it wrong.

  • While becoming a bank can simplify licensing processes, it also brings with it a slew of regulatory hurdles and licensing challenges. For fintechs like Figure, which already hold numerous state licenses, the allure of a single banking license might be outweighed by the regulatory constraints that come with it.
  • Traditional banking models come with stringent capital requirements, especially for specific loan types. These requirements can make certain financial products uneconomical for banks but lucrative for fintechs.
  • Fintechs, unlike banks, trade on earnings, allowing for more dynamic growth opportunities. Banks, on the other hand, often trade on a multiple of book value, potentially limiting their market capitalization growth.
  • One of Figure's standout achievements under Cagney's leadership has been its pioneering work with public blockchains. Regulatory views on such innovations can be restrictive for banks who are less flexible, potentially stifling the very innovation that fintechs thrive on.

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Having said that, there are numerous pros of becoming a bank that we shouldn't overlook!

  • Fintech companies often have to manage multiple state licenses for various financial services. Becoming a bank would simplify the licensing process, allowing them to operate under a single banking license across states.
  • Having one regulator can lead to significant operational and compliance savings.
  • Banks have the ability (and the requirement) to accept deposits insured by the FDIC. This can provide a more stable and predictable source of financing compared to wholesale capital markets.
  • Banks can access funding backstops such as the FHLB and the Fed Window, which can offer lower costs.

Where Does the Rubber Hit the Road for Growing Fintechs?

For many fintechs, the decision to become a bank is not just about regulatory and capital considerations. It's about identity. Fintechs, at their core, are disruptors. They challenge traditional financial models, introduce innovations, and often operate at the cutting edge of technology.

See:  When Big techs and fintechs own banks

The real question is: Can fintechs maintain their innovative edge within the confines of a traditional banking model? Or do they risk losing their unique value proposition by becoming too enmeshed in the very system they set out to disrupt?

As more fintechs reach the crossroads that Figure encountered, they would do well to consider not just the immediate benefits of becoming a bank, but the long-term implications for their brand, their innovation potential, and their role in reshaping the financial landscape.

While the allure of becoming a bank is undeniable, as Mike Cagney's leadership at Figure illustrates, sometimes the boldest move is to chart a course that aligns with the company's core values and vision for the future of finance.

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