FinTech Industrial Banks and Beyond: How Banking Innovations Affect the Federal Safety Net

The FinTech industry has been utilizing technological innovations to provide services traditionally offered by the banking and financial industry. Until now, many FinTech firms engaging in these activities had non-bank state licenses. The uncertainties surrounding their current business models and the desire to expand the operations led some of these firms to apply for industrial bank charters. An industrial bank charter is one of the few ways for a commercial firm to control a depository institution and allows FinTech firms to retain their technological investments that are not directly related to banking. However, access of these industrial banks to the federal insurance, payment services, and the discount window raise some concerns. It is claimed that the parent companies of these banks might gain an unfair advantage over their competitors, misguide their creditors, or limit their liabilities by benefitting from the federal subsidies given to the banking industry. This Note analyzes these claims and proposes two alternatives—credit card banks and state bank subsidiaries—for the FinTech firms seeking to engage in the business of banking. Particularly, engaging in non-bank activities through bank subsidiaries could eliminate some of the persistent moral hazard problems that the industrial bank model might entail. Although the industrial bank activities would not pose a significant risk to the federal safety net, these alternatives to the industrial banks could be preferable for sustaining the development of the FinTech industry as well as maintaining a safe and sound banking system