Fintech disruption in the banking industry

President Donald Trump’s return to the White House this year is likely to mean opportunity and change for the fast-evolving payments industry.

Payment fintechs, which have proliferated over the past decade, have been eagerly lobbying for regulatory leeway to offer more services, with less government friction. Trump’s administration is likely to give it to them, but that doesn’t mean there won’t be tumult and uncertainty over how the new era progresses, say lawyers who are familiar with the industry.

Fintechs have been begging for more credibility with the federal government for years, seeking to secure some of the same privileges as U.S. banks and credit unions.

National bank charter prospects

With Trump’s administration expected to be more friendly to business interests and innovation, nonbank payments players may finally see a path in pushing the Treasury Department toward creation of a special-purpose national bank charter, allowing fintechs to operate in certain areas without a bank license or partner, said Freshfields partner David Sewell.

That quest has bridged Republican and Democratic presidencies despite states’ objections, with attempts at introducing it through the Office of the Comptroller of the Currency, said Sewell, who heads Freshfields’ U.S. financial services regulatory work. 

The Federal Deposit Insurance Corp.’s similar industrial loan company charters have also failed to get traction. Payments players and fintechs often must secure 50 state licenses, one by one, to offer their services nationwide, Sewell said in January.

Such special-purpose national charters might preclude the need for companies to obtain money transmitter licenses in every state when they’re seeking to set up a nationwide payments system. For instance, Trump’s billionaire donor Elon Musk has been on a campaign to collect state licenses to create a payments tool attached to his social media site X, though a partnership with Visa’s international real-time rail may do the trick.

“If we take the Trump administration at their word, and I don’t see any reason why we shouldn’t ... I think some kind of a new charter option needs to be on the table,” Sewell said.

Treasury Secretary Scott Bessent, though, hasn’t shown his hand on the prospects for such a special bank charter.  

Stablecoins gain ground via Trump

As for digital assets, the Trump administration issued an executive order Jan. 23 touting the importance of fostering innovation in the space. That order supports the increased use of stablecoins, a cryptocurrency tied to the value of a fixed asset, such as the dollar.

As a result, stablecoins may develop more relevance in the economy, including possibly as a form of payment. It’s another area where the federal government has an opportunity to overcome the current dominance of some states, including New York, in setting regulations for stablecoin use, said Crowell & Moring partner Anand Sithian. 

Republican majorities in the House and the Senate may aid Trump’s stablecoin agenda. That could mean a new charter of sorts for stablecoins too, Sithian said. “What I see there is really a role for Congress to step in and provide a federal regulatory framework,” he said in January.

At the same time, Trump’s order echoed congressional moves to steer away from the issuance of a central bank digital currency.

How Congress handles the Credit Card Competition Act proposal remains to be seen. While the legislation’s key proponent was former Senate Majority Whip Sen. Dick Durbin, D-IL, one of the bill’s few sponsors last year also included then-Sen. J.D. Vance, R-OH, who is now Trump’s vice president. The bill’s aim to break Visa and Mastercard’s dominance in exacting fees from merchants also received Republican support during a Senate Judiciary hearing last year. 

How Trump will shape CFPB policy on payments

Under the Biden administration, the Consumer Financial Protection Bureau’s efforts to rein in payments companies was aggressive. The agency has issued rules attempting to set parameters for emerging payments tools, like buy-now-pay-later and earned wage access services. Some of them, including those related to BNPL and oversight of big tech companies’ digital wallets, have been challenged in court. 

Indeed, many states have been active, albeit at odds oftentimes, in trying to set new regulations for BNPL and EWA. They’ve also had different approaches to other emerging payments legislation, such as whether to allow credit card issuers and networks to impose interchange fees on taxes and tips. 

Former CFPB General Counsel David Silberman, who is now a visiting lecturer at Yale Law School, points to the mission statements of the first Trump administration to suggest it will likely encourage financial enterprises.

“The CFPB, under the Trump administration, would probably have a strong free market orientation, and would be looking to assure that consumers are empowered to make decisions for themselves, whereas under [Biden-era] Director [Rohit] Chopra, there was more of an emphasis of establishing rules of the road, [and] prohibiting practices that were deemed to be unfair or abusive,” Silberman said in January.

Any CFPB rules are subject to being rescinded, noted Silberman. The Congressional Review Act gives Trump and his Republican allies in Congress a chance to reverse regulations.

Banks may lose as paytechs gain

Regardless of how specific CFPB issues play out, industry professionals expect a new regulatory environment to support fintech and paytech firms’ efforts to innovate and expand. And that may come at the banks’ expense.

The Trump administration may pave the way for new entrants taking on established financial institutions, especially in light of the president’s sometimes testy tone toward big banks and their CEOs. While he has leveled barbs at Bank of America and JPMorgan Chase, Trump has recently embraced technology players, inviting Amazon founder Jeff Bezos and Apple CEO Tim Cook to inaugural festivities.

“You're seeing the innovators and the new entrants into the market in a somewhat more favorable position right now than legacy players,” said Sewell. “Don't forget that President Trump, and a lot of people around him, don’t like the big banks, at all.”

London-based digital bank OakNorth intends to buy Birmingham, Michigan-based Community Unity Bank, the U.K. company announced in March.

The deal will enable OakNorth to expand its business lending services across Michigan and the U.S., the company said.

The acquisition follows OakNorth’s authorization from the Federal Reserve and New York’s Department of Financial Services in August 2024 to open a representative office in New York City.

“Demand from US borrowers continues to be exceptionally strong and our differentiated offering and unique approach to lending has enabled us to rapidly establish a strong presence in the US market, resulting in us lending [three times] our initial expectations,” OakNorth CEO Rishi Khosla said in a statement. “As a founder-led business built by entrepreneurs, [Community Unity Bank] appealed to us as it shares a lot of our same values with regards to customer experience.”

OakNorth began offering its services in the U.S. in July 2023 and has since lent more than $700 million to businesses in the country, including many of its existing customers with U.S. and U.K. operations.

“In the summer of 2023 following the collapse of several US banks which had been focused on serving the lower mid-market, we saw an opportunity to step up and do our part in helping to fill the funding gap they were experiencing,” Khosla said in the press release.

OakNorth plans to close the deal as soon as it gets the regulatory green light, though regulatory approval can take up to a year or more, an OakNorth spokesperson said.

The digital lender intends to retain all of the community bank employees and keep the one Community Unity Bank branch open, the spokesperson said.

Founded in 2015, the digital bank focuses on serving lower mid-market businesses with $1 million to $100 million in turnover, providing roughly $16 billion in loans, it said.

Since OakNorth began lending in the U.S., its focus has been on the tri-state area around New York City, the spokesperson said, adding that the company plans to “continue growing organically vs via [mergers and acquisitions]” but is “open to exploring additional M&A opportunities” that align with OakNorth’s mission and strategic objectives. 

Community Unity Bank’s team will help OakNorth to expand across the U.S., and its CEO Greg Wernette, will serve as the CEO of OakNorth’s U.S. bank.

“With an entrepreneurial focus at our core, and every team member striving for customer delight, we are very excited to be joining forces with OakNorth to support an even greater number of US businesses together,” Wernette said in a statement.

The community bank offers businesses and individuals a suite of banking products, primarily in southeast Michigan.

“When I founded the bank in 2023, we were confident that with the right approach, the right people and the right customers, we would realize success,” founder Andy Meisner said in a LinkedIn post. “I did not anticipate, however, the degree to which we would move this bank forward in such a short period of time. We have built a tremendous foundation.”

President Donald Trump’s return to the White House has reignited the debate about whether we would see an uptick in mergers and acquisitions.

In a January interview, Robert Tammero, a partner at K&L Gates said he thinks smaller banks need to consider partnering or acquiring fintechs to remain strong and viable in the financial field since fintechs can benefit from stable, low-cost funding from banks.

Brian Graham, a partner at advisory and investment firm Klaros Group, said he expects an unpick in such deals – involving both international and U.S.-based fintechs and new charter applications. 

“OakNorth is pursuing a US banking license for the simple reason that the US is a large and attractive market and the new administration, unlike the previous regime, appears to be open to approving such transactions, just like it is open to reviewing and approving applications for new bank charters,” Graham said in an email.

SmartBiz, a small-business lender, also announced in March that it acquired Illinois-based Centrust Bank and received the regulatory approval to become a bank and a bank holding company.  

One Main Financial earlier in the month applied for an industrial loan company charter with Utah’s Department of Financial Institutions and the Federal Deposit Insurance Corp. Varo in July 2020 became the first challenger bank to secure a national charter.

“There are no laws or regulations that prevent such transactions,” Graham said. “The lack of receptivity under the [Biden] administration was an exercise, I suppose, of regulatory discretion.”

Graham’s Klaros colleague, Michele Alt, worked with SmartBiz and Centrust on their regulatory applications.

As global head of strategy and business management at HSBC, Brian Muse-McKenney was on the hunt for a fintech partner that could help build a social payments app worthy of competing with AliPay and WeChat in the Hong Kong market.

He said he knew the bank had a “massive technology disadvantage” against the internet giants. WeChat’s payments function had been around since 2013, and Alipay’s was even older. His scouring led him to Austin, Texas-based Episode Six, a fintech which purports to help banks graduate from their legacy payments technology to build innovative products their customers love.

With Episode Six’s infrastructure, HSBC did just that – and since its 2017 creation, its social payments app PayMe has grown to 70% market share in Hong Kong, Muse-McKenney said.

His experience with E6 led HSBC to lead a funding round in support of the firm, and Muse-McKenney joined E6’s board. Six years after PayMe was created, he left HSBC to join the firm full on.

“What really lights me up is, I really believe that regulated companies have the best suited position to deliver products that customers need, but also that customers love; but that to enable that and to effectively compete with some of these newer entrants, they need modern technology to do so,” said Muse-McKenney, now E6’s chief revenue officer.

E6’s infrastructure allows enterprise clients – mostly banks and fintechs – to issue and manage cards, virtual accounts, installments and rewards; and its platform supports use cases such as business-to-business payments and global wallets.

The firm also provides services for governments. Since November, Germany has used E6 to issue payouts to refugees and asylum seekers on programmable cards, digitizing what used to be a paper-based payment.

Using E6’s platform, the German government can more easily issue such payments, supporting financial inclusion while having control over where program participants spend the money they’re allocated. The cards are available digitally and physically, and are available in multiple different colors to avoid refugee discrimination.

In April, E6 announced a partnership with Yoo Financial, the Canada-based fintech subsidiary of global payment processor OTT Pay Inc. Leveraging Yoo’s Mastercard issuing and acquiring license and E6’s digital ledger platform, the firms together plan to create customizable credit products available throughout Canada.

“Personalization is no longer optional,” said Blair Cameron, founder of Yoo Financial and CEO of OTT Pay, in a prepared statement. “[W]ith E6 and Mastercard as our partners, we will continue to innovate and deliver on our promise of choice and value.”

Different worlds

While still at HSBC, Muse-McKenney had climbed to positions including innovation chief and chief business officer of HSBC platforms, and had achieved high-level positions at Citi before HSBC.

Working in fintech is worlds different from a banking career, Muse-McKenney said. 

“I would say I probably spent 70% of my time any given week on internal stuff – whether internal governance, internal risk committees, trying to get my budget approved for next year, stuff like that. So only 30% was focused on customers and growth. Being on this side, that's become like a 95/5 equation,” he said.

“One story I like to tell – I launched this one product that was going live in multiple countries simultaneously,” he said. “It was an international multi-currency wallet for SMEs. I had to get 168 approvals to launch that product into the market. When I joined Episode Six, we didn't even have 168 people.”

But one upside to being on the bank side? Everyone takes your call.

“I could pretty much call or write anybody and people would take meetings with me. They knew the company, versus if you're a relatively small but growing fintech, it's a lot harder to have people engage with you,” he said.

He doesn’t fret, though. Once he’s in the door, he said, he knows E6’s capabilities and customer roster speak for themselves.

“Obviously, [we’ve] got a great story to sell," he said.

The Senate lawmakers who passed the Guiding and Establishing National Innovation for U.S. Stablecoins, or GENIUS, Act in June aim to create a regulatory framework for the issuance of stablecoins — a step that could enable finance leaders to consider more use cases for the crypto asset.

The regulatory clarity the GENIUS Act, which has yet to pass the House, seeks to create in the cryptocurrency space will be a key factor in opening the door for wider adoption of stablecoins, especially by more conservative entities such as banks or executives like CFOs, said Paul Brody, EY’s global blockchain leader.  

While stablecoins and their issuers have been around for a number of years, larger incumbents or entities “need more than just that the other companies aren't being prosecuted” to participate in the space, Brody said. “They need some kind of green light.”

Raising the bar

The act, passed in a 68-30 vote, aims to tackle some of the historic murkiness that has marked the digital asset space and the use of stablecoins — which have their value pegged to another asset, typically a fiat currency like the U.S. dollar.

“With the GENIUS Act, we’re bringing clarity to a sector that’s been clouded by uncertainty and pro.ving that bipartisan, principled leadership can still deliver real results for the American people,” Sen. Tim Scott, R-SC, the chair of the Senate Banking Committee and a co-sponsor of the bill, said in a statement.

For instance, the bill, as its stands, notes that “permitted payment stablecoins are not considered securities under securities law,” a classification that aims to ease previous contention between certain industry players and the Securities and Exchange Commission — which, under previous Chair Gary Gensler, pursued several cases against crypto firms for what the regulator deemed the illegal sale of securities.  

The GENIUS Act also lays out potential requirements for “permitted issuers” of stablecoins, including the need to keep reserves and to publicly disclose their redemption policies, according to a summary of the bill.

The framework the legislation aims to put in place can help ease some of the concerns that may be holding back risk-averse CFOs and finance chiefs from making use of stablecoins — which, as the Trump administration looks to create a friendlier relationship with the digital asset space, have fallen under increased scrutiny by business leaders for use cases such as cross-border payments.

The establishment of a clear regulatory framework will also help to drive up the “quality of competition” inside the stablecoin industry, Brody said.

“It's going to raise the quality bar in the marketplace, and it's going to make it much easier for people to benchmark what a reasonable value proposition looks like,” Brody said.

Sharpening the controls

The Senate’s passage of the GENIUS Act comes amid a broader swell of interest in stablecoins by businesses and regulators. Among other initiatives, the Trump administration has issued plans to set up a national digital asset reserve and created working groups for stablecoins.

Advocates and players in the crypto industry have lauded such attempts as key steps that can help enmesh digital assets further into the mainstream financial fold.

Trade organizations have also weighed in on the need for clear guidelines in the space. The American Institute of Certified Public Accountants, for example, issued a call for comment ahead of the Senate’s vote on the GENIUS Act on proposed criteria for stablecoins, aimed at creating greater trust and transparency surrounding their use for investors, regulators, and shareholders, according to a recent press release.

“Because controls surrounding digital asset operations are an integral part and foundation for the reliability of information presented by those entities, it is vital that those controls are implemented, operated and monitored,” the AICPA said in the release.

As businesses examine the potential uses of stablecoins, keeping a careful watch on the regulatory environment is crucial. For CFOs looking at how to use stablecoins for cross-border payments, particularly, their usage has “got to be legal on both sides of the transaction,” Brody said.

A wider shift to stablecoin usage for international payments will be dependent on those regulatory approvals, he said. As that space slowly matures, “I think you'll see CFOs in these supply chain ecosystems start to do surveys of their business partners: ‘Who's on the networks, who's got stable coins?’” he said.

Stock trading platform Robinhood seeks to dive deeper into financial services with the launch of a banking product this year.

Robinhood Banking, set to be rolled out this fall, will offer checking and savings accounts for its gold members featuring services that aim to solve some of the challenges with legacy bank accounts, said Deepak Rao, vice president and general manager of Robinhood Money.

“We want to have the full wallet share with customers,” Rao told Banking Dive, “but we wanted to do it in our style and make sure that we build something that's no longer reserved for ultra-wealthy individuals.”

While announcing the banking product, Vlad Tenev, Robinhood’s CEO, said the firm is adding two other new features, Robinhood Strategies and Cortex. 

Strategies is an advanced investing service that offers expert-managed goal-aligned portfolios and personalized insights with a cost cap of $250 per year for gold members and no management fees on amounts over $100,000.

Cortex is an upcoming artificial investment tool that will provide real-time market analysis, investment opportunity identification, and market news updates. 

Robinhood’s credit card, rolled out last year, has around 200,000 cardholders and 3 million people on the waitlist. Following that, the fintech wanted to build an accessible product that members would use to invest and manage their wealth and handle all of their financial transactions.

“Bank account is still, by far, the center of gravity of most financial transactions,” Rao noted.

The Menlo Park, California-based fintech aims to bring a “private banking experience” to its members, including offering the option to apply for a bank account from the app, send money across the world in over 100 currencies and access private banking services like estate planning and professional tax advice. 

Robinhood’s new feature of getting cash delivered to the doorstep physically within an hour will be a differentiating factor and eliminate the need for an ATM, Rao asserted, since bigger banks typically take several days to give money. 

The fintech plans to have an app dashboard where a customer can get a money order and have it sent to a recipient or order foreign currency to be delivered to their doorstep, the executive added.

He said the banking product will be available to current Robinhood gold customers.

Robinhood is offering a 4% annual percentage rate on savings and up to $2.5 million in Federal Deposit Insurance Corp. insurance. 

The fintech has partnered with Coastal Community Bank to offer its banking products. The lender has recently teamed up with fintechs like Dave to facilitate their banking services.

Robinhood, which has nearly $200 billion in assets under custody, will use the same security system it uses now to ensure the safety of its customer money, according to Rao.

Robinhood eventually wants the banking product to reach worldwide, but first Rao wants to figure out the best way to pursue what he sees as missing from it — personal loans, mortgages and home equity lines of credit.

The banking app can help members get an idea of their entire net worth when they open the app, including their liabilities not on Robinhood’s platform. All liabilities like mortgages, student loans, personal loans, credit card debt, and assets appear on the screen. Members can connect to other accounts through Plaid, Rao said.

This isn’t Robinhood's first venture into banking. In October 2019, the fintech announced plans for a high-yield cash management account — a second attempt after a previous failed launch in December 2018. The fintech's first savings account initiative was halted since it had failed to notify the Securities and Exchange Commission and Securities Investor Protection Corporation before launching. Robinhood announced plans to rebrand the product into a cash management service following regulatory pushback.

In April 2019, Robinhood applied for a bank charter with the Office of the Comptroller of the Currency but chose to withdraw it that December.

Rao says he’s not worried about the proliferation of neobanks in the space. He argued that neobanks have failed to gain significant market share from traditional banks because neobanks lack “backward compatibility” with essential banking features, such as physical checks or comprehensive services like bill pay, mortgage payments, and auto payments that traditional banks offer.

“I think they looked too forward without making it backward compatible,” Rao said. “They have done good for a niche segment, but they haven't taken business away from legacy banks; that's where most of their market has stopped.”

Revolut U.S. CFO Max Lapin can sum up the fintech’s ambitions in one line: “Revolut wants to become a bank in the United States.”  

A three-year wait finally ended with the London-based fintech securing a banking license in its native U.K. last July. Now the company is focusing its attention on growth in the U.S., with CEO Nik Storonsky highlighting Revolut’s plans to pursue a U.S. banking license in November, according to Bloomberg.

Lapin declined to share a specific time frame, but stressed Revolut’s aim to provide financial products to U.S. consumers as a fully fledged institution — with perhaps one immediate exception.

“We wouldn't be able to offer mortgages and car loans on the spot,” Lapin told CFO Dive. “They are way too capital intensive.”

Bank, take two

This is far from the first time Revolut has announced its intent to become a fully fledged bank in the U.S. — doing so has been a longtime goal for the company.

Revolut submitted a draft application with the Federal Deposit Insurance Corp. and the California Department of Financial Protection and Innovation in 2021.

By 2023, however, such plans had fizzled to a halt amid several financial hiccups for the fintech; an audit of its 2021 financial results led to delayed filings of its next few annual reports and an overhaul of its leadership structure. Presently, the company operates in the U.S. through its banking partner and card issuer, Lead Bank, according to its website. 

But over the past year, the wind has appeared to shift. The approval of its U.K. banking license by the Prudential Regulation Authority now means the fintech can accept deposits and offer financial products such as credit cards and loans within the market. In August 2024, just a month after it received its license, Revolut conducted a secondary share sale that brought its valuation to $45 billion — a 36% rise from its 2021 valuation.

“We’ve grown,” Lapin said, when asked what was different about Revolut’s most recent attempt to become a bank in the U.S. “And by grown, I mean not only [in terms of the] size of the company. I'm talking about maturity.”

Lapin has served as finance chief for Revolut U.S. since July 2022, according to his LinkedIn profile. His past experience includes serving as interim CFO for Russian classified ads site Avito, as an independent director and audit committee chair for SFI Investment Holdings, and CFO for the Moscow Exchange.

Revolut — like many of its fellow players in the wider fintech ecosystem — has matured since its founding a decade ago, Lapin said, putting more of a focus on compliance as it expands.

“We have upgraded our internal compliance systems, our controls, our reporting in general, our processes” to fall in line with guidelines from the European Central Bank, Lapin said. Revolut has also been put under another “robust test” by the PRA as it seeks to complete what is known as the “mobilization” or “authorization with restrictions,” period in the U.K., he said.

While Lapin did not comment on when the PRA’s review will be complete, it provides evidence that Revolut has matured, he said — making its goal of becoming a bank in the U.S. a more tangible opportunity.

Staying nimble

As CFO, Lapin is approaching the proposed shift from fintech to fully fledged bank with care — the goal is to retain some of the nimbleness that makes neobanks or fintechs attractive to customers, while still ensuring the company is meeting compliance standards.

As Revolut pursues its banking ambition, Lapin is proposing the term “banktech” to help describe the shift; “banktech,” as Lapin defines it, is “a fully regulated bank, but [one] that is keeping [its] agility as a tech company,” he said.

That balance between compliance and agility is “the biggest challenge for the CFO of a regulated company that would like to grow faster than others,” Lapin said. As such, Lapin is also taking a close look at Revolut’s talent and hiring practices, as well as compliance, he said.

To have the coveted dexterity needed to launch new products quickly while remaining compliant, a number of key roles need to be filled: Lapin needs to have salespeople, tax and technical accounts experts on the team, he said.

“There’s got to be boots on the ground with expertise, because eventually it's about responsibility,” Lapin said.

Varo Bank is pursuing faster growth by integrating machine learning models into various aspects of the customer life cycle, said incoming CEO Gavin Michael.

Varo’s strategy includes leveraging artificial intelligence and ML in underwriting for the neobank’s low-dollar loan offerings, fraud prevention and detection, and in data-driven customer experiences with enhanced personalization. He also sees the bank using it in app curation to help customers better manage their finances and enhanced customer service. 

AI and ML can “help make sure the great experience that our customers are seeing on the way in and through our app is reflected in every touch point they have — simple, human, personalized experiences that happen across all of our channels,” Michael told Banking Dive.

Michael, the former CEO of Bakkt, was instrumental in taking the cryptocurrency exchange public in 2021. He joined Varo in November, according to his LinkedIn profile. Michael’s prior stints include head of technology for Citi’s global consumer bank, head of digital for consumer and community banking at JPMorgan Chase, chief technology innovation officer at Accenture, and IT director for Lloyds’ retail banking business. 

It was at Lloyds, in 2009, that he met Colin Walsh — the outgoing CEO of Varo, who has led the company for the past 10 years — and the two kept in touch over the years.

“When the opportunity came along to bring Gavin into Varo, I was very excited about that, and got the board excited about it, and started to put in motion what I would say is a very well planned out succession,” Walsh said, adding that Michael will help put the company in “turbocharge” mode. 

Michael’s expertise in software development will help him drive commercial success — a skillset that Varo needs right now, Walsh noted. Varo was not profitable in 2024, though its revenue grew 22%, lending rose 45% with a 38% reduction in losses, he said. Varo recently secured $55 million in funding, according to the outgoing chief. 

Walsh will remain active on the bank’s board as founder and a major shareholder and will engage in public speaking for the company. 

Michael stressed that Varo will remain focused on customer value and financial inclusion. To further those efforts,  the San Francisco-based company will practice more careful management of its expenses, align technology development with commercial goals, and implement a multi-quarter roadmap with clear priorities. 

“The next stage is scaling and just taking the business to the next level, achieving profitability, and then thinking about part of why we brought Gavin in is — he's taken a company public as well,” Walsh said. “So we'll see. We will keep all options on the table.”

Technology boosting customer experience

Varo’s “secret weapon” is its charter allowing it to offer fee-free banking and lending products, Michael said.

Varo focuses on building products that precisely match its target customer needs, like high-interest savings accounts, deposit products, evolving cash back offerings, free banking access through a partnership with drugstore chain CVS, secured credit cards and low-dollar loans.

Varo’s products are typically created in-house, and Michael believes this suite serves Varo’s target market well. That group includes low-to-middle income customers, financial beginners, and those with thin or no credit files. 

The lender has undergone a major upgrade of its app, moving from iOS, Android and web platforms into a single React Native app. Walsh underscored Michael’s contribution to the change and he believes that Varo will begin to see the benefits this year with a clearer path toward profitability.

Rather than expanding to new product categories, Varo plans to refine its existing offerings, Michael said. While the lender is open to building, buying, or partnering as customer needs evolve, the current focus is on scaling the company’s existing products.

“And it's the charter that enables how our business operates. And that's something that is the secret weapon that allows us to be able to serve everyday Americans,” Michael said.

Customer acquisition, crypto

Last year, Varo’s customer acquisition cost fell 31%. Walsh credited the company’s new chief marketing officer, Hussein Kalaoui, for improving efficiency through disciplined marketing. Varo has about 5 million customers, he noted.

Walsh said there’s potential to bring back customers who left Varo, by leveraging customized product offerings. Michael also emphasized the importance of customer acquisition and retention in Varo's growth strategy.

Although he has a background in crypto and aims to leverage his experience in technology and banking, Michael underscored that Varo will not rush into new technologies unless they provide meaningful impact.

Walsh noted that he sees digital finance opening up new avenues for financial inclusion.

“Gavin has been very much a practitioner in the space, having run Bakkt. So, I think it's a matter of, how do some of these things intersect at some point, as we think about our technologies and our product offerings over time?” he said.

Neobank Chime has rolled out instant loans, offering customers access to up to $500 at a fixed interest rate, without having to go through a credit check, the company said.

The product, launched in March, will offer three-month installment loans to pre-approved Chime customers who use the fintech’s checking account for direct deposits. Chime will tap its technology and data sources to determine loan eligibility, and customers pre-approved for a loan will be notified through the Chime app.

The product “is the latest way Chime is helping to unlock financial progress for everyday Americans,” Madhu Muthukumar, chief product officer at Chime, said via email.

“Early feedback on Instant Loans has been overwhelmingly positive, with extremely high customer satisfaction. We believe this reflects our members’ trust in Chime’s transparent, helpful, and fair financial tools that meet their day-to-day needs,” he added.

Chime has been testing the product for quite some time, and it takes seconds to get a loan, a Chime spokesperson said.

The loan offering carries no fees for origination, prepayment, or late payment but comes with a fixed rate of $5 for every $100 borrowed, which can be paid back in three monthly installments of $35 for each $100 – roughly a 29.76% annual percentage rate. Since loans are disbursed in $100 increments, the minimum amount to apply for is $100, the spokesperson noted. 

Customers can opt in for automated monthly repayments, which have been built to not exceed 10% of monthly cash inflows, the company said. Chime reports on-time payments to credit reporting agencies.

“As members take an Instant Loan, we clearly explain what they are signing up for, and when payments are due — with no hidden costs or compounding interest traps,” Muthukumar said.

Founded in 2012 by Chris Britt and Ryan King, Chime touts itself as a digital banking alternative offering fee-free banking. The firm has around 7 million customers, who use its cards for $8 billion in monthly transactions, Forbes reported. According to a survey by Cornerstone Advisors, half of Chime customers consider the neobank their primary checking account provider. The survey compared this to fintechs like SoFi, MoneyLion, Cash App and Current, which typically see about 25% of their customers treating them as a primary banking or payment solution.

Chime’s instant loan offering follows the neobank’s launch of a suite of products last year. Chime unveiled MyPay in May 2024, offering early access to up to $500 of customer’s paycheck, including government benefits, without interest, credit checks, or mandatory fees. In August, the firm expanded its SpotMe feature, a fee-free overdraft service Chime launched in 2019. The new integration allows members to access up to $200 in overdraft coverage when using their credit builder Visa credit card. SpotMe surpassed $30 billion in transactions last year, according to the company. 

The Bancorp Bank is Chime’s banking partner, providing instant loans. Chime also partners with Stride Bank to offer its other banking products.

Chime has been exploring options for its initial public offering and had tapped Morgan Stanley for the process, Bloomberg reported in September 2024, citing people familiar with the matter. In December, the publication reported the fintech submitted a confidential filing with the U.S. government for its IPO, aiming to go public this year.

Chime declined to comment on its IPO status.  

Fintech competitors such as Dave have been eager to offer instant loans to give customers access to convenient financing. Dave promised its customers $500 in five minutes or less, a cash advance that customers can receive without credit checks, interest or late fees through its ExtraCash account. 

However, the Federal Trade Commission sued the Los Angeles-based firm, claiming Dave misled consumers and “lured” them to its cash advance application, guaranteeing them up to $500 in loans, which they failed to receive. The FTC also noted that the online platform charged consumers who needed financial assistance with undisclosed fees and “tips” without their consent.

Newly relaxed oversight on how banks deal in cryptocurrency has already inspired some activity between the two realms.

Brian Foster, global head of wholesale at Coinbase, said his team has been “very busy meeting demand for banks, brokers and fintechs” now that federal banking regulators have walked back on the more skeptical bank-crypto guidance put forth under the Biden administration.

“Pretty much all of the large banks in the US are now doing something [to move forward with crypto] and we're either behind the scenes with [or] live with pretty much all of them,” Foster told Banking Dive. “Our [Request for Proposal] team is hard at work fielding all of these RFPs, so it’s definitely an all-out sprint.”

Since January, federal bank regulators have done an about-face on crypto guidance. The Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. have all withdrawn guidance that required banks to seek prior approval from regulators before dabbling in cryptocurrency. Regulators will instead monitor such activities through the normal supervisory process.

What’s changed, Foster said, isn’t banks’ intent to do something in crypto to meet customer demand. That’s “been there all along.”

“What's changing now is that the demand side has just been more pronounced as the market’s grown, coupled with the changing regulatory climate, which has just made the aperture for what's possible a little bit wider and made the risk committees feel more comfortable,” Foster said.

Brad Rustin, chair of law firm Nelson Mullins’ financial services regulatory practice in Greenville, South Carolina, said he knows that “lots and lots and lots of banks” are talking about getting in on crypto amid the Trump administration’s regulatory shifts.

The interest is largely coming from two verticals, Rustin said: fintech-forward banks that have long had an understanding of crypto assets, and large banks that have sizable securities custodial programs.

“[The latter] are banks that did securities lending, that did margin lending, that did traditional custody services for stocks and bonds. They're saying, ‘Well, look, this is no different than custodying a stock or a bond. It’s just how you actually control it and how you maintain it that’s different,’” Rustin said.

Rustin’s firm has represented a number of banks that have tried, over time, to gain permission from regulators to explore crypto. Many of those requests went unanswered, he said, except for one: Vast Bank, which in 2021 became one of the first banks in the U.S. offering crypto services. Vast exited the crypto business last year following regulatory challenges.

SoFi Technologies CEO Anthony Noto credited the “fundamental shift” in the regulatory landscape when he told CNBC of his company’s plans to re-enter the crypto business by the end of the year. It exited the space in 2023 as a condition of receiving its bank charter.

“We’ll re-enter the business of allowing our members to invest in cryptocurrency,” Noto told CNBC. “We want to actually make a bigger, more comprehensive push into cryptocurrency [this time], to include really providing crypto or blockchain capabilities in each product area that we have.”

Digital native bank Green Dot announced a partnership with Crypto.com in April, offering banking and money management tools to the crypto exchange’s U.S. customers through Arc, the bank’s embedded finance platform.

Green Dot will also soon offer an interest-bearing savings account for Crypto.com users, which will allow them to earn interest on the money funding their Crypto.com accounts before they purchase digital assets.

But Renata Caine, senior vice president of embedded finance at Green Dot, told Banking Dive that the launch closely following regulatory shifts was purely coincidental, and that the changes in guidance had no bearing on the partnership timing.

“We were part of this long before, and we work really closely with our regulators to consider and bring on new partners. It's a really good, respectful dialogue we have with them to make sure they understand our role within these relationships,” Caine said, noting Green Dot’s role is money movement, and that the partnership “provides a practical link between cash services and digital assets.”

“We're committed to maintaining that strong connection with the regulators, and I think that Crypto.com is a really good example of a partner that has a very similar discipline and rigor when it comes to compliance and regulatory,” she said.

When Synapse Financial Technologies declared bankruptcy in April 2024, the financial industry was still reeling from the Silicon Valley Bank failure the year before and the subsequent run on some banks.

Synapse’s failure highlighted some of the key risks inherent in fintech programs that rely on a “for the benefit of” account. These are a type of custodial deposit account where a third party (which can be the bank itself) opens and maintains the account at a bank for the benefit of another party. 

Fintech platforms offering deposit accounts often open FBO accounts at partner banks to hold their end customer funds, which are reflected as a single account on the bank’s records but hold a pool of funds for many end users. Typically, a third party maintains detailed customer and transaction records in its systems.

When a bank fails, access to deposit accounts is usually frozen until the Federal Deposit Insurance Corp. can assess the insurance requirements. The agency needs quick access to detailed and accurate end-customer account information from the third party’s systems. 

However, the Synapse turmoil brought the other side of the coin to the forefront – what happens when the third party managing an FBO account fails and its records become irreconcilable or unavailable? This scenario has created significant challenges at Synapse’s partner banks, leaving some end customers without access to their funds even months later.

On April 22, 2024, Synapse filed for Chapter 11. By May 11, its four partner banks lost access to middleware provider Synapse’s records, unable to identify end-users for fund withdrawals. According to the Sept. 12 trustee report, of the $219 million in custodial FBO accounts, $165 million, or 75%, has been distributed to end-users, with $54 million, or 25%, remaining. A recent report from law firm Troutman Pepper identified a $65 million to $95 million shortfall between bank-held funds and amounts owed to fintech end users, with unclear responsibility for making customers whole.

“FBO accounts are not inherently the problem. They have been used for years to support critical banking services and should remain a feature of our banking landscape,” Patrick Haggerty, senior director at financial services advisory firm Klaros Group, said in an email. “That said, as use cases have proliferated, so have risks. Banks offering FBO accounts should expect to face enhanced regulatory scrutiny. Expectations are rising, particularly with respect to contingency planning and financial controls.”

Amid the Synapse ordeal, the FDIC proposed a recordkeeping rule to bolster recordkeeping for bank deposits received from third-party or non-bank entities that accept those deposits on behalf of consumers and businesses. The proposal aims to address the risks related to these third-party arrangements, like faulty account ledgering, and protect depositors. 

Troutman Pepper’s report analyzed the root causes of Synapse’s collapse and the lessons learned that can be kept in mind to avoid future failures.

Multiple entities, account types

Synapse operated from multiple entities and accounts, including Synapse Brokerage, after acquiring a small broker-dealer firm. The new modular banking product opened cash brokerage accounts for its over 100 fintech partners at four banks. Synapse encouraged fintechs to use the product as it facilitated funds to move freely between the different banks.

The middleware provider assured that it knew where money was and that its strategy to segment and distribute services across multiple banks was to keep each partner bank oblivious to what fraction of the whole deposit base the bank held, according to the report. Synapse pushed for modular banking even to the existing fintechs, which signed up for the direct model and reportedly moved some fintechs’ end-users’ funds into its brokerage unit without authorization.

“The money is in the bank,” Matthew Bornfreund, partner at Troutman Pepper, told Banking Dive, adding that banks are responsible for keeping track of who owns that money. 

“Banks have long been allowed to outsource responsibilities and hire vendors,” Bornfreund said. “But the bank is also the party that's insured by the FDIC, and so if the FDIC is wanting to make sure that they know whose deposits are connected, it makes sense that the party that's the assured party is the one that's responsible for keeping those records.”

When a bank and fintech team up, it is essential that both adhere to the third-party risk management guidance issued last month while understanding the account agreements governing the partnership, compliance with the FDIC’s false advertising rule, and each party seeking ways to evaluate and improve account ledgering practices consistent with the final FDIC recordkeeping rule.

Since partnership agreements are foundational, they should clearly delineate respective roles and responsibilities – banks should ensure that the agreements detail their robust oversight mechanisms to monitor the fintech partner’s activities, specify the frequency and scope of reporting to the bank, periodic audits and the criteria for evaluating the partner’s performance and the process to be followed in case of discrepancies or violations, the report recommended

Account ledgering irregularities

Another important lesson learned: fintech relationships involve a wide range of account types and structures and access to FBO account ledgers is necessary, but FBO account ledgers are not adequate to identify and correct ledgering irregularities. 

In response to the ledgering issues, the FDIC has proposed new reconciliation requirements for “custodial deposit accounts with transactional features.” The recordkeeping proposed rule mandates the bank maintain “direct, continuous, and unrestricted access to the records” of any third-party maintaining ledgers for CDAWTFs. 

However, the Troutman Pepper report argues that third-party ledger accounts are a better term because the term captures more accurately the risks involved when the bank does not directly maintain its ledgers and can be applied to any type of account, not limiting it to custodial accounts.

Banks also need to focus on “ledgering hygiene,” requiring fintechs to have separate accounts that more clearly define funds for customers, operations, payment fees to third parties, contingency reserves, and network settlement. 

Banks should distinguish individually identified sub-accounts from general pooled accounts, especially when middleware companies like Synapse are involved, the report recommended. However, the report found that the FDIC’s recordkeeping rule does not consider sub-accounts, a common feature of fintech partnerships. Middleware providers help bridge the gap between legacy banks and fintechs using the latest technology.

Partner bank lapses

Banks and fintechs should have a contingency plan in case the partnerships fail. Those plans should anticipate the operational risk related to an account ledger outage, identify ways to mitigate risk, and deploy reserves to make end-users whole in such an emergency.

After Synapse failed, Evolve Bank & Trust was issued a cease-and-desist order by the Federal Reserve around two months after Synapse declared bankruptcy stemming from a review conducted in early 2023, while another partner bank, Lineage Bank, was issued a consent order by the FDIC in January 2024. Though the timing of the earlier exam was not specified in both cases, it was apparent that the partner banks knew about the compliance issues related to its middleware provider, Synapse.

The consent orders against two of Synapse’s partner banks related to their board governance and BSA/AML issues without detailing the underlying issues, which might cloud those partner banks’ relationships with other parties apart from Synapse.

A different ledgering solution is needed to track the flow of funds throughout any multi-party bank-fintech partnership ecosystem, the report said. 

Regulatory lapses

Regulators must prioritize the most critical risks when handing over a consent order to a bank, move away from a “check-the-box” supervision model, and lean toward a “risk-based” supervision model, the report said

Regulators have highlighted the complexity of banking-as-a-service arrangements and disclaimed supervisory responsibility for regulating the nonbanks involved. To address this issue, supervisory processes could be updated to more directly engage with the banks' fintech partners, enabling earlier identification of risks using technology and allowing the bank and fintech to take corrective action, the report indicated

Another question the report raised, pointing to over 300 days’ delay between an actual reported exam and issuance of a consent order, was whether supervisors need additional resources to work more efficiently.

“How do the [Financial Industry Regulatory Authority] and the banking regulator teams work together?” Alexandra Steinberg Barrage, partner at Troutman Pepper, noted. In the case of Synapse, there was a broker, “but was there coordination about what the broker was actually doing, or what their modular banking business model really was?” she said, adding that it’s hard to know since there’s not much information available. 

Gross mismanagement

Qualified staff are crucial to effective bank-fintech partnerships, and fintechs’ priority of speed to market might conflict with compliance requirements, the report found. In bank-fintech partnerships, fintechs need leadership with deep risk management and bank supervision expertise with a strong compliance focus, regular and adequate training programs, and the need for interdisciplinary teams, the report said. 

Interagency guidance, too, requires banks to assess fintech partners' staffing depth and expertise, ensure their own staff has the necessary knowledge for risk management, and evaluate the qualifications of key personnel. 

“Right now, the industry is already taking really important steps to create standards that would bind them, because right now they don't get supervised or examined by the banking regulators; yet, they're so integral to the bank's functioning of these programs,” Steinberg Barrage said. 

“So as the next step … we are working with people on the bank side and the tech side that are very focused on best practices, developing this ultimately with a view toward keeping the industry accountable,” she said, “and I think it is absolutely the right time for it to be happening.”