Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Fintech Charters and Challenger Banks Driving Competition
Fintech Competition | Oct 21, 2025
Image: Freepik/kues1
New Data Show How Proportionate Licensing and Capital Models Boost SME Credit and Competition
On October 8 2025, QED Investors and Oliver Wyman released Seizing the Bank Charter Moment (37 page PDF), tracking that fintechs filed more than 20 charter applications in 2025 (3x the number in 2023). The analysis found that obtaining a charter reduced funding costs by 150 to 300 basis points and improved net interest margins by 2 to 4%, driven by access to insured deposits and direct payment rails.
Also, on October 16 2025, Innovate Finance published Challenger Banks: A British Success Story (28 page PDF) confirming that UK challengers now hold about 25% of SME business current accounts and provide 60% of SME lending, up from under 5% seven years earlier.
Bank Charters in United States Regaining Momentum
The report found that fintechs with a bank charter earn an average return on equity of 14 to 16%, compared with 9 to 10% for those still operating as non-banks. The analysis outlined three main ways fintechs can hold a charter: (1) Full national bank charter; (2) Industrial loan company model that allows more flexibility for parent investors; and (3) Limited-purpose charter that does not take deposits but still falls under direct supervision.
The report shows that about 20 new applications had been filed by fintechs and new entrants, at the time of publishing. The Financial Technology Association said this renewal of new fintech charter bank activity can help increase competition. FDIC officials noted that the total number of US banks has fallen from roughly 8,500 in 2008 to 4,500 today, strengthening the case to restore market entry options.
For growing fintechs, the economic break-even point for considering the bank charter pathway is around $5 billion in assets and a return on equity above 12%. Meaning beyond that level, the cost savings from having a charter more than offset the added compliance and capital requirements. Even with about $50 to $100 million in new capital requirements and $8 to $12 million in yearly compliance costs, the charter still provides a net advantage.
See: Ripple Seeks US Bank Charter for Stablecoin Expansion
As an aside, the lower cost of capital for chartered banks comes from structure, not size. Non-banks depend on wholesale funding or partner-bank arrangements that add about 1.5 to 3% to their cost of money because these funds are not insured. And chartered banks fund mainly through insured deposits, giving them a built-in advantage even after paying for regulatory oversight.
United Kingdom Competition Via Proportionate Rules
Innovate Finance report shows that challenger and specialist banks increased their small business lending to £110 billion in 2024 (about $140 billion CAD), which is 4.5% higher than the year before. The British Business Bank reports that these banks now provide about 60% of all lending to UK small and medium-sized enterprises (SMEs), a significant achievement.
However, the report warns that upcoming rules under Basel 3.1 and the Small Domestic Deposit Taker (SDDT) regime could make it harder for smaller banks to lend. They estimate that the new rules could reduce small business lending by up to £44 billion, which they describe as a potential tax on growth. Their Think Challenger proposal calls for more balanced regulation so that smaller, well-managed banks can continue to support small firms and customers while staying safe and sound.
See: UK Open Banking Update and Road to Open Finance
This UK's experience offers clear lessons for Canada; that clear and fair (proportionate) rules can encourage innovation and competition while maintaining trust and stability in the system.
For larger banks, the benefits of collaboration are also visible. Institutions that work with challenger banks or fintechs on digital credit and data analytics see 10 to 15% faster deposit growth compared with those that compete alone.
Canada Has A Narrow Window to Modernize
In July 2025, the federal government began consulting on how to update the country’s deposit insurance system. Open banking including accreditation rules are expected to appear in the fall budget. The Retail Payment Activities Act (RPAA) is now fully in effect, bringing both domestic and international payment firms under the supervision of the Bank of Canada. Together these steps strengthen oversight but do not yet create a path for fintechs to operate as full banks.
For policymakers, both reports referenced in this article are evidence that fair and proportionate rules for capital and licensing help increase competition and small business lending without creating extra risk. Canada could adopt a tiered model where smaller fintech lenders meet simpler capital and reporting standards based on their size and activities, while full deposit-taking banks continue to meet the higher bar.
Canada doesn't yet have a charter pathway for fintechs or smaller non-bank lenders. Introducing a proportionate licensing framework with a transparent and time-bound review process would improve predictability, attract investment, and show that Canada is open to fintech banking innovation.
See: How Competition Powers Canada’s Economic Growth
For fintech founders, timing, a level playing field and the ability to innovate and compete without structural barriers now matters. For investors, the valuation gap is becoming clear. In the US, fintech banks with charters trade at about 1.6 times book value, compared with 1.1 times for similar lenders without charters. A well-defined Canadian charter model could close that gap and attract more long-term domestic investment into fintech banking.
Conclusion
The simple truth is when proportionate rules are clear and scaled to risk, competition improves, credit costs go down, and innovation thrives. The UK and US results show that proportionate regulation produces measurable gains in lending and economic resilience. Canada now has a short window in 2025 to enable domestic fintechs a fair chance to grow and succeed at home.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create aa vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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