A Strategic Guide for Fintechs and Financial Startups
Starting a financial institution or fintech in the United States involves navigating a complex regulatory landscape. Two primary routes available for offering banking services are:
- Obtaining a Federal Bank Charter, or
- Partnering with an FDIC-insured bank.
Each option comes with its own set of benefits, challenges, costs, and timelines. Your decision depends on your long-term vision, capital, operational capabilities, and regulatory readiness.
1. What is a Federal Bank Charter?
A Federal Bank Charter is an official license granted by the Office of the Comptroller of the Currency (OCC) that authorizes a business to operate as a national bank under federal regulation.
A chartered bank can:
- Accept deposits,
- Make loans,
- Provide payment services,
- Operate across state lines without separate state licenses.
In addition to the OCC, chartered banks usually need to register with:
- The Federal Deposit Insurance Corporation (FDIC) – for deposit insurance,
- The Federal Reserve – for clearing and settlement systems, and possibly for holding company oversight.
2. Benefits of a Federal Bank Charter
- Full Regulatory Authority: The bank operates under a unified federal framework, eliminating the need to comply with multiple state licensing requirements.
- National Presence: A federal charter allows expansion across all 50 states without separate state approvals.
- Higher Trust and Credibility: Being directly regulated by federal agencies lends prestige and public trust.
- Ownership of Infrastructure: You control your own compliance systems, banking stack, and product roadmaps.
- Fintech Flexibility: Special Purpose Charters are being considered by OCC for fintechs (e.g., limited-purpose banks focused on payments or lending).
3. Challenges of a Federal Bank Charter
- Complex Application Process: Includes extensive documentation like business plans, governance structures, financial projections, and risk management policies.
- Long Timeline: Approval typically takes 12 to 24 months or longer.
- High Capital Requirements: Startups need to prove financial strength, sometimes with tens of millions in committed capital.
- Ongoing Compliance: Full-scale regulatory exams, audits, and continuous supervision.
- No Quick Pivots: Once chartered, regulatory changes take time and approval.
4. Partnering with an FDIC-Insured Bank
Instead of forming a new bank, many fintech companies partner with existing banks to offer banking services. These partner banks already have the required licenses and regulatory approvals.
For example, popular fintech brands like Chime, Cash App, and Dave started by partnering with banks such as Bancorp Bank, Stride Bank, or Evolve Bank & Trust.
5. Benefits of Partnering
- Faster Market Entry: Go live in months, not years.
- Lower Cost: No need for initial capital requirements or application fees for chartering.
- Built-in Compliance: Partner bank handles major regulatory interactions.
- Access to FDIC Insurance: Your users’ deposits can be protected via your partner’s FDIC status.
- Focus on User Experience: You can concentrate on product design and technology while the bank handles the back-end operations.
6. Challenges of Partnership
- Shared Compliance Burden: You are still responsible for some compliance obligations (e.g., KYC/AML).
- Limited Control: The bank has final say on many aspects of service offerings.
- Dependency Risk: If the partner bank’s strategy shifts, your product could be disrupted.
- Revenue Sharing: Partnerships often involve profit splits or service fees.
- Brand Limitations: Customers might not clearly associate you as the bank; the partner’s name may appear on debit cards, statements, etc.
7. Comparison Table
| Feature | Federal Bank Charter | FDIC-Partnered Model |
|---|---|---|
| Setup Time | 1–2 years | 3–6 months |
| Initial Capital | $10M–$50M+ | <$1M possible |
| FDIC Insurance | Direct via application | Indirect through partner bank |
| Regulatory Oversight | OCC, FDIC, Fed | Shared with partner bank |
| Licensing Requirements | Federal preemption | Bank’s license used |
| Control | Full control of operations | Partial; constrained by partner |
| Scalability | High; operate in all 50 states | Depends on partner agreement |
| Flexibility | Low (regulated structure) | High (faster product iteration) |
8. Real-World Examples
- Chime: Partnered with The Bancorp Bank and Stride Bank to offer mobile banking services without obtaining its own charter.
- SoFi: Initially operated under partner banks, but later acquired a national bank charter in 2022 to become a direct lender and deposit holder.
- Varo Bank: First fintech to transition from a partner model to receiving a national charter (2020), after a multi-year application process.
These examples show a potential hybrid approach—start with a partner, prove the model, then transition to a charter.
9. Strategic Considerations
- If You’re a Startup:
- Partnering is typically the smarter move to start offering services quickly, build traction, and attract investment.
- Focus on customer acquisition, UX, and front-end innovation while banking operations run via your partner.
- If You’re Scaling:
- With funding and customer base, transitioning to a federal charter gives you long-term cost savings, regulatory flexibility, and brand ownership.
- If You’re Building Core Banking Products:
- Chartering might be necessary to control the end-to-end user experience and infrastructure.
10. Which One Should You Choose?
| Your Need | Best Fit |
|---|---|
| Fast go-to-market | Partner Model |
| Full product control | Federal Charter |
| Small or seed-funded startup | Partner Model |
| Long-term financial institution | Federal Charter |
| Avoiding dependency risk | Federal Charter |
| Regulatory ease and support | Partner Model |
11. Conclusion
Choosing between a Federal Bank Charter and a partnership with an FDIC-insured bank depends on your business model, vision, and available resources.
- A federal charter offers full independence, scalability, and trust—but comes at the cost of time, money, and intense regulatory oversight.
- Partnering with an FDIC-insured bank allows startups to quickly and affordably enter the market and validate their business models.
Many successful fintech companies have started with partnerships and later pursued a charter. This staged approach can give you the best of both worlds—speed and control.