In order to take customer deposits in the United States, a company needs federal deposit insurance. It's an elite club that is not eagerly looking for members.
"It's very difficult, if not impossible for a nonbank to get an account with the Fed," said Amias Gerety, partner at QED Investors and a former acting assistant secretary at the U.S. Department of the Treasury. "Through that you can get access to the payment system the Fed controls."
That gives the community banks that work with fintechs some breathing room for now, but competition looms. The Office of the Comptroller of the Currency is accepting applications for a national fintech charter, which would give the agency more direct oversight instead of regulating their partner banks.
"It's awkward to regulate these fintech companies indirectly, so the thought is, if we give them a charter we can regulate them directly with a bit more clarity," Gerety said.
Companies can also apply to be an industrial loan company, or ILC, which allows nonbanks to lend money, issue consumer and commercial loans, and accept federally insured deposits. Wal-Mart fought hard for the designation in the early 2000's but dropped its application following a backlash from banking officials, watchdog groups and lawmakers.
More recently, fintech payments company Square refiledwith the FDIC for a special ILC license that among other things would allow it to accept government-insured deposits. It pulled its first application in July, but the company was clear back then that it intended to refile after it could "amend and strengthen" the application.
Square, run by Twitter founder Jack Dorsey, already has a small-business lending arm through Square Capital, which operates through Celtic Bank in Salt Lake City, Utah.
Varo Money, a mobile-only banking start-up, made history as the first fintech to receive preliminary approval for a national bank charter from the OCC. They still need full approval from the agency, as well as FDIC approval, according to the CEO.
Varo's co-founder and CEO Colin Walsh led Europe's largest consumer credit and charge card business at American Express. He said he knew the process wasn't going to be easy, and it still relies on its bank partnership until the approvals are completed. But it wanted to go out on its own.
"With a partnership, you're beholden to the success of the bank, anything that they could do right or wrong that could limit your success," said Walsh, who was also a managing director at Lloyd's Banking Group in London. "I think that's the No. 1 thing here, is to control your own destiny — we wanted a broader set of permissions."
Other fintechs are less eager to leave their banking relationships. Chime, an online-only bank, said it may consider going the banking route eventually. But for now, CEO Chris Britt said it can focus on building the platform and customer experience.
"Becoming a bank right now hasn't been a top priority for us," said Britt, a former executive at Green Dot and Visa before co-founding Chime. "I could imagine over time it's something we might want to explore and we're seeing other companies exploring that notion."
This is completely new territory for most regulators. With the financial crisis fresh in the mind of most Americans, they are careful not to open the floodgates too quickly. The bar is especially high in the U.S., and fintechs that want to become a bank need to prove they can provide the safety and soundness.
"Regulators are going to take a long look at this and ask, 'Who's running this thing?'" said Donald Powell, a former FDIC chairman. "You need to go in the front door, and not the back door or the side door."
The United Kingdom is more open to "challenger banks." The Competition and Markets Authority, or CMA, made it easier for these start-ups to enter the retail banking market after 2008, allowing firms such as Revolut to pass the billion-dollar valuation mark. The mobile-based bank said earlier this year it plans to expand into the United States and Canada.