Mobile-only finance start-up Varo Money just got one step closer to becoming a full-scale bank.
After three years and multiple rounds of applications, the FDIC approved the fintech company's national bank charter application, which allows it to take customer deposits.
"We see it as a pretty big moat," Varo Money CEO Colin Walsh, told CNBC in an phone interview. "It was a long process -- for this to finally see daylight is a big deal for the industry."
Until now, fintech firms like Varo, Chime, Robinhood and Square have managed to tap into the financial system without being a bank. They partner with community banks to actually hold customers' money while the start-up handles consumer interface and app. Apple and Goldman Sachs are the most high-profile partnership with the launch of the Apple Card. Google also recently partnered with Citi for a debit card.
Varo launched its branchless bank by partnering with Bancorp. Those customer deposits will be transferred over to Varo in the second quarter, assuming it passes final regulatory tests, according to the company.
Varo was last valued at $417.8 million and is backed by TPG and Warburg Pincus, according to Pitchbook. Digital bank Chime, by comparison, was last valued at $5.8 billion.
While a handful of start-up banks such as Chime, Revolut and N26 have popped up in the U.S., new fully chartered banks are almost unheard of.
Varo is now the first consumer-focused fintech company to get approval from the FDIC. Start-up Grasshopper, which focuses on business banking, was the first new commercial bank chartered in the Northeast in more than ten years. It was the ninth bank to receive a charter since the 2008 financial crisis, according to the company.
Payments company Square has applied with the FDIC for a slightly different banking license known as a special industrial loan company license, or ILC. That allows less traditional financial firms to accept government-insured deposits. Stock-trading start-up Robinhood had applied with the Office of the Comptroller of the Currency, or OCC, for a national bank charter but pulled that application in November.
Walsh, a former American Express executive, said having a banking license would allow Varo to get into new businesses like lending and lowers costs by at least 50%. He said the economics are improved by not adding the cost of bank branches, ATMs, or "legacy infrastructure."
Fintech companies had welcomed a "special fintech" bank charter that would have cleared a quicker path to becoming a bank. But that was dealt a blow last year after a federal district court in New York decided that the Office of the Comptroller of the Currency, the regulator issuing the charters, didn't have the authority to do so.
Walsh said other fintech executives may see Varo's approval and be inspired to submit an application.
"They may be emboldened now," Walsh said. "But there are no shortcuts. This is a lengthy process."