Chris Furlow

Chris Furlow
TBA President & CEO

Regulatory vigilance for neo-banks

Does the OCC intend to grant fintech-driven neo-banks special regulatory forbearance?

Suspend reality for a moment and imagine that your community bank was losing $645,000 PER DAY. Further, imagine that your community bank had lost more money in its first six months of operation than it has in remaining capital. Would you expect your regulator to give you a special pass?

Of course, this is not your bank, nor is it your reality. But this does appear to be the reality for a “neo-bank” called Varo Bank. In the second quarter of this year, Varo raised $62 million while losing $104 million. Don’t take my word for it, look at Varo’s filings.

When Varo’s charter was announced last year, the OCC stated: “National bank charters inspire confidence because they are accompanied by value-added supervision and access to world-class experts. A national bank charter is both a privilege, which Varo has earned, and a responsibility, which it has embraced.”

To my knowledge, Varo’s troubles have not received regulatory scrutiny even as they bleed cash and put consumers at potential risk. Have they already been released from their embrace of responsibility? A bottomless pit of VC funding may exist for them, but this certainly does not inspire confidence. Is their accumulating list of financial backers and ongoing business model being reviewed?

Moreover, does the OCC intend to grant fintech-driven neo-banks special regulatory forbearance that it does not give to traditional community banks? If so, this would certainly add more dirt on an unlevel playing field.

Testifying before Congress in August, Acting Comptroller of the Currency Michael Hsu warned banks to be “especially vigilant” in this challenging environment. The same could be said when it comes to the OCC’s approach to fintechs seeking a coveted Federal charter in uncertain times.

To be in banking, fintechs and neo-banks must clearly understand from Federal regulators that they will be regulated on equal terms with other banks. 

In the future of banking, innovation and convenience cannot come at the price of safety and soundness. TBA strongly supports fintech innovation partnerships that bolster community banks. But we will oppose fintechs and neo-banks that are granted special regulatory privileges putting them at competitive advantage over traditional community banks.

Federal regulators say they are watching banks closely. They are not the only ones that will be paying close attention. 

Note: This commentary is the second in a series asking critical questions about the regulation of fintech and neo-banks.