Guest Commentary
By Carl White, Senior Vice President, Supervision Federal Reserve Bank of St. Louis
Digital Banking: A Look at the Playing Field
There is more competition than ever in the provision of banking services, and financial technology developments have turbocharged this trend. Traditional commercial banks are vying with fintech firms and other enterprises for customers or are pairing up with these new competitors to widen offerings, improve speed of service and take advantage of new technologies. Some of these nontraditional providers are specializing in one product or service or are targeting a very narrow customer base. A number of them are obtaining bank charters while others are seeking alternative charters.
WHAT’S IN A NAME? Te new competitors have been given a variety of labels, including neobanks and challenger banks. While some use these terms interchangeably, there are technical differences between them. Te term neobanks typically refers to companies that use applications — desktop or mobile — to offer financial services to customers. Even though some of these companies have “bank” in their names and operate much like banks, they have no physical presence and are not chartered or regulated as banks. Instead, they rely on relationships with existing chartered banks to provide services.
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mobankers.com
Neobanks typically target specific customer groups, such as small business owners, gig workers and students, and many offer nontraditional products and services — early access to paychecks, for example — as well as checking and savings accounts. Financial management tools such as budgeting and person-to-person payments are other popular offerings. Chime, Dave and MoneyLion are among the industry’s leaders in transactions volume and number of users.
Challenger banks, on the other hand, are chartered, regulated financial institutions with brick-and-mortar locations and fintech-based services. Because challenger banks have bank charters, they can offer customers traditional banking services like credit cards and mortgages, as well as applications-based ones. Other advantages of a bank charter may include access to the Federal Reserve’s discount window and direct access to the payments system. One of the best-known challenger banks is Varo, which obtained a national bank charter in the summer of 2020.
RETURN OF THE INDUSTRIAL LOAN COMPANY A few fintech companies have sought and obtained industrial loan company charters. ILCs are state-chartered financial
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