The news: Upstart, a digital lending marketing place, applied to the OCC and the FDIC to create an insured national bank.

Zoom out: Upstart has three main reasons to seek a federal bank charter:

• Simplify licensing and expand its reach. Upstart said that in 2024, about 40,000 consumers couldn’t apply because its products weren’t available in their state.Its small-dollar loan program currently reaches only 20% of the US.
• Lend from its own balance sheet. Upstart could take consumer demand deposits and offer loans directly. “The time is right to launch the first bank built from the ground up on AI,” incoming CEO Paul Gu said in a company statement.
• Increase negotiating power. With a federal banking license, Upstart’s partnership model could compete with the loan providers that originate through its marketplace.

Trendspotting: A long list of large fintechs have applied for, and in many cases received conditional approval for, different kinds of bank charters:

• Industrial loan companies (ILCs): PayPal and Affirm have applied to become ILCs. If approved, they could offer savings accounts and loan products, but not checking accounts. That would stop them short of offering complete digital banking solutions. However, they could still use the licenses to offer savings accounts, finance BNPL loans, and connect directly to card networks.
• Federal trust charters: Circle, BitGo, Fidelity Digital Assets, and Paxos have been granted conditional approval for federal trust bank charters. Such charters would allow them to custody fiat and crypto assets, but not take deposits or provide lending services. Applications from Crypto.com, Bridge (owned by Stripe), Coinbase, and Ripple are pending.
• Federal bank charters: UK neobank Revolut and Brazilian neobank Nubank are both pursuing US banking licenses. Nubank received conditional approval for a US traditional banking charter in February, and Revolut applied in March. Both would gain direct access to US core payment infrastructure and would likely offer deposit accounts, issue cards, and originate loans.

Implications for banks: Fintechs are moving further into banking, intensifying competition, particularly in consumer and small business loans. The classic play of partnering with fintechs and marketplaces when banks cannot match their distribution isn’t as useful when those distribution channels become banks themselves. Banks will likely need to focus more on specific niches or find novel ways to reach customers.