4 Reasons the ILC May Not Be the Best Charter for Fintech

Last week, I wrote about how the Industrial Bank Loan Charter or ILC impacts fintech now and could going forward. Some of the advantages include a federal charter, the ability to accept deposits and a known path of regulation to navigate.

But it’s not all rainbows and unicorns. There are downsides to the ILC Charter. It may still be the best banking path for fintech firms but it is not without its own concerns and worries. So let’s take a look at what those concerns are…..

The Charter is Dormant-ish

The charter has been dormant, sorta, or at least infrequently used. Unlike the OCC or the Federal Reserve, the agency that regulates ILCs is the FDIC as taking deposits and needing deposit insurance is one of the reasons firms choose this option. This chart here from the Milken Institute describes the role of the different agencies in banking

The FDIC has not approved a deposit insurance application since 2008. Until the recent fintech filings, I mentioned last week, none had been approved by the FDIC since 2009. The FRB (Federal Reserve Bank) or the OCC is the primary agency for state or national charter banks, but the ILC goes through the FDIC.

Unknown Regulatory Stance from FDIC

The other reason ILCs answer to the FDIC is bullet points 2 and 4: supervising chartered institutions who are not members of the Federal Reserve system and ‘may be appointed to resolve non-bank financial companies’ since non-bank financial companies like a fintech can own an ILC.

One interesting example of the FDIC’s influence in the ILC model comes from Walmart (Milken Study, p.27). Back in 2005, Walmart filed with the Utah Dept of FI for an ILC charter and their application was approved. Although Utah approved the charter, the FDIC did not approve them for deposit insurance and placed a 6-month moratorium on all ILC applications back in 2006.

Now you may think, so what? Walmart is not just the farthest thing from a fintech you have in business, but they are a retailer. A retailer, or more generally, a commercial firm using their advantages gained in their field to go into banking. You know who else is a retailer but just happens to have a marketplace to sell like many in fintech? Amazon. Does this mean Amazon would not get approved for insurance? It could. The point is we don’t know. No one does. The withdrawals of the most recent ILC applications before an FDIC decision on insurance means we don’t know what they will do.

And that’s the point. The door seems open. But maybe it’s only slightly open, ajar, and not all the way open for a fintech to get an approved banking charter. The FDIC gives us no sign of what it will do or even what it might do.

Uses the Existing Charter in a New Way

One of the advantages of the ILC is the known regulatory path that banking gives a fintech. Yet, that may not be exactly true because some of the ways a fintech may use this charter are a new adaptation. A fintech’s use of this charter as a bank to accept deposits for funding loans or for a marketplace to issue its own loans instead of partnering with a bank to use their license are both new uses of this charter.

The truth is that between the Utah Dept of Financial Institutions and the FDIC, no one knows what additional requirements if any, the fintech firms will need to get approval of their charter.

Affiliate and Inter-Company Unit Issues

The White & Case white paper I referenced last week and partly here describes this better than I can and if you like this topic of ILCs then you should read their paper. White & Case say ILCs are still subject to federal banking laws regarding ‘anti-tying and affiliate transactions’ where some relationships an ILC has with certain affiliates could be ‘limited or prohibited’. Fintechs may find their inter-company service agreements disrupted, like between the unit that issues the loan and the unit that securitizes a package of loans. Some of these agreements are vital to the business model and success of the fintech so the risk here is very real.

There’s a chance that the type of fintech seeking a charter will have these agreements and the need to keep the current agreements in force could prevent their charter approval.


We’ve looked at the 3 reasons why ILCs may not be the best route for a fintech to get a banking charter after examining why I think it is the best way for a fintech to get into banking. The tradeoffs of a better-known path of regulatory compliance and better costs of capital outweigh these risks but the risks are there. There is no sure thing for a banking charter whether a fintech goes the OCC fintech charter route or an ILC or a state or federally chartered bank.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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