The banking world may face new competition in the form of tech-savvy companies getting bank charters.
Mid-March was dotted with announcements of deals, applications and approvals. On the deal front, marketplace small business lender SmartBiz closed its acquisition of United Community Bancshares in Northbrook, Illinois, and its $148 million bank unit. Meanwhile, UK-based digital bank OakNorth agreed to acquire Community Unity Bank. OneMain Financial, a nonbank, consumer lender focused on subprime customers, added its application for an industrial loan charter in West Valley City, Utah, to a growing pile in front of the Federal Deposit Insurance Corp. And on top of the application activity, Block’s industrial bank, Salt Lake City-based Square Financial Services, received approval recently from the FDIC to directly offer and originate a short-term consumer loan product called Cash App Borrow to customers in its payments app.
Before acquiring United Community, SmartBiz operated a marketplace for small business loans, including Small Business Administration loans, says Michele Alt, a partner at the advisory firm Klaros. Klaros assisted SmartBiz with the applications to acquire the holding company and bank unit. Operating as a bank will allow SmartBiz to leverage its technology and experience from operating the marketplace.
SmartBiz’s application is likely the last that regulators evaluated under the prior administration — a regulatory regime that Alt says was more skeptical of tech challengers. Alt, a former regulator at the Office of the Comptroller of the Currency, characterizes that environment as “very chilly and discouraging,” and at odds with America’s broader interest in accessing digital financial services or working with fintechs.
Going forward, Alt says regulators may be more receptive to new entrants seeking charters — so long as they are qualified, are financially healthy and have a compelling business plan with a proven ability to execute. That could include the application from OakNorth Bank, a digital bank in the United Kingdom. OakNorth received its U.K. charter in 2015 and leverages a data-driven digital distribution model to service small to medium-sized enterprises.
OakNorth isn’t new to the United States — the bank has long licensed credit intelligence software to stateside banks and the Federal Reserve approved a representative office in New York in August 2024 that has made $700 million in loans to date, says Sharon Miles, chief operating officer at OakNorth Bank. The bank started thinking seriously about entering the United States when Santa Clara, California-based Silicon Valley Bank and San Francisco-based First Republic Bank failed in Spring 2023. Those banks served some of the same customer groups that OakNorth targets and their collapses created an opportunity in the space, Miles says. The bank bid for the UK arm of Silicon Valley Bank, but lost to HSBC UK Bank.
She says OakNorth decided to search for a U.S. partner that shared an entrepreneurial mindset with a digital-first approach, which it found in Birmingham, Michigan-based Community Unity, a $64 million de novo. Miles liked that the bank’s business plan and executive team had been scrutinized by regulators as part of its de novo application, but that there isn’t a lot of legacy technology or processes. The plan is for Community Unity to become part of OakNorth and leverage the holding company’s technology stack and data-driven approach. The U.S. unit will add Michigan to its New York metropolitan geography before going more national.
“It will be interesting to see how our regulatory process goes,” Miles says. “We’re seeing good tailwinds in that direction from the regulators.”
A bank charter isn’t a great fit for all fintechs. Charters seem to work best for firms interested in gathering cheaper deposits to lend out, rather than those focused on innovative financial or payment products, says Michael Perito, head of bank strategy at executive search and talent advisory firm Travillian. In a prior role, Perito followed two tech firms that had successfully acquired bank charters — LendingClub Corp. and SoFi Technologies.
One advantage he says tech firms and newer nonbank entrants have over traditional financial institutions is a laser focus on who their customers are and how to reach them over digital channels. At the same time, he also sees structural profitability problems in the community bank space, with multiple banks struggling under net interest margin pressure and slow growth.
“You used to be able to have some branches, buy some banks, have an embedded customer base and make money,” he says. “I don’t think that’s going to be the case five to 10 years from now.”
Fintech acquisitions can be attractive to executives at small banks, says Christopher Olsen, cofounder and managing partner of investment bank Olsen Palmer, which advised the bank purchased by SmartBiz. Nonbank buyers seeking a charter tend to be less price sensitive than bank buyers and tend to leave the institution intact after the deal closes. But deals involving a new entrant carry greater regulatory scrutiny when it comes to approvals. One reason why is that the selling bank tends to be small. Olsen has seen regulators concerned by a nonbank buyer’s business plan that involved rapid growth outside the seller’s existing footprint.
Alt says there’s no regulatory advantage to applying to acquire a bank versus establishing a de novo — they both face lengthy approval processes, rigorous evaluation and costs. The key difference, instead, is the speed to market. De novos come with an 18-month organization period after charter approval, whereas an acquired bank already exists — along with its legacy technology and branch locations. The potential pool of small banks interested in selling to a tech buyer may be shrinking as well, says Olsen. Tech firms interested in charters may opt to build their own tech stack rather than replace another firm’s.
Alt and Perito don’t think the banking industry is entering a charter free-for-all, but Alt thinks many nonbanks see a charter as key to their business model and are prepared for the rigor of being a bank. Competition, in other words, may be rising.
“It’s getting hot out there,” she says. “Community banks do play an important role in our country. … Customers who value that and need that will pay for that. But otherwise, the more competitive models will win the day.”
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