🔒CT revives long-dormant banking charter to woo fintech companies

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When Banking Circle US opened its new Stamford headquarters in February, it was no small coup for the state’s Department of Banking, welcoming the first new bank in Connecticut in a decade.

But it’s one that the department hopes to repeat in short order, according to Commissioner Jorge Perez, who says he’s fielding new inquiries every week from financial technology companies interested in what the state has to offer.

“Some of these companies have thousands of employees. The economic impact to the state is going to be unbelievable,” Perez said in a recent interview.

The game changer for the Land of Steady Habits is a new banking charter — or rather the repurposing of an old one that’s lain dormant on the department’s books for two decades.

When it was first written back in the 1990s it was called an uninsured bank charter — intended for institutions that wanted to offer some financial services but would not take federally insured deposits from the general public. The only company that ever used it back then, according to the department, was UPS.

But the seemingly obsolete tool caught the attention of Perez not long after he took over as commissioner in 2015, a time when the fintech industry could not have been hotter.

“Even though our primary role is to be a regulator and examiner and make sure that people follow the law,” he said, “part of the strategic plan was increased economic opportunities through charter and licensing innovations.”

And as the industry began to mature, Perez says, it was also looking to engage with regulators like him.

“Some of those fintech companies started to realize that it’d be in their best interest if they were regulated because it gave consumers and other people some comfort level that they wouldn’t have if there was no regulation,” he said.

Enter the uninsured bank charter. Its existence doesn’t make Connecticut wholly unique — several states, including Wyoming, Georgia, Nebraska and Vermont, are using novel charters or other regulatory innovations to woo fintechs — but Perez says he believes Connecticut’s is one of the most apt.

So far, four fintechs — Banking Circle US, Numisma Bank (formerly Currency Reserve Bank), TNB USA Inc. and Moneycorp Bank US — have formally applied for the charter, Perez said, while others have expressed interest.

The process of obtaining and holding the charter includes third-party review, capital requirements, regular examination and compliance with Bank Secrecy Act or money laundering laws.

Favorable geography

The other huge factor in Connecticut’s favor when attracting fintechs is its proximity to New York.

“As a startup it’s important to keep the costs down,” said Kjeld Olson, CEO of Banking Circle US. “So, having an office in Stamford will give us access to talent, but also keep our cost at a decent level.”

Banking Circle US is an independent sister company of the Luxembourg-based Banking Circle, which has been in business since 2013. Its technology supports real-time, global clearing and settlement for payment services and foreign exchange.

“We are not targeting consumers, the retail business,” Olson said. “And that’s why this license, from Connecticut, was a perfect match for us.”

Their clients are payment service providers, non-bank financial institutions, or medium-sized banks that need to make domestic or cross-border payments.

Banking Circle US sees its role as smoothing the process of global trade and contributing to the modernization of payment infrastructure.

“All of the banks in the U.S. right now are operating with largely outdated platforms,” said Banking Circle’s Chief Compliance Officer Megan Silvia. “Very few of them are cloud based, so it is another reason why we can operate so quickly — because it’s new technology from the ground up.”

Being regulated as a bank in Connecticut should also allow the company to operate in other states without additional paperwork, something Silvia says was a big draw.

Currently, Banking Circle has 25 employees in Stamford, but its plans are much bigger.

“If you look at our venture in Europe, we started with a handful of employees and now there’s 600 in the bank alone and 1,200 in the group,” Olson said. “And we have high expectations for our business model in the U.S. So, I would not be surprised that in a few years there will be several hundred employees.”

Master account

A state charter is one thing, but the bigger objective for fintechs is the coveted Federal Reserve master account, which would allow them to transfer money directly to other entities with master accounts, cutting out the need to use a third party for transactions.

In 2022, after a long debate, the Federal Reserve issued guidance for fintechs using novel charters like Connecticut’s that want to apply for a federal master account. But since those new guidelines were passed, no fintech that doesn’t already have a federal regulator has been issued a master account.

In February, right around the time Banking Circle was cutting the ribbon on its Stamford digs, TNB, another Connecticut fintech startup, was appealing the Fed’s denial of its master account application.

Banking Circle is one of three fintech companies in Connecticut currently applying to the Federal Reserve for such an account. The Department of Banking says one of those three already has conditional approval, and it’s confident that Connecticut will be among the first states in the nation to host a state-regulated fintech approved for a federal master account.

For Moneycorp CEO Velizar Tarashev, potential federal membership is a key draw of the Connecticut charter.

His company offers international money transfer and online foreign exchange services.

“There is a lot of friction in correspondent banking and international payments at the moment,” he said. “What we’re trying to do is to eliminate that friction through creating direct payment-rail connections.”

Moneycorp was founded in London in 1979, and now has a global reach. It has bank licenses in Gibraltar and Brazil, and establishing one in the U.S. is central to its growth strategy.

Moneycorp is already licensed as a money transmitter in all 50 states, with a U.S. head office in Providence, Rhode Island. Tarashev says the company has been researching uninsured charters and other regulatory instruments for the better part of two years — he describes Connecticut’s charter as “unique.”

“It allows us to cover exactly the sector that we’re looking for,” he said.

The company has identified office space in Stamford where it expects to sign a lease within weeks. Initially it will locate between 20 and 30 employees there.

Regulatory creep

Bruce Adams is scrutinizing these developments from his seat as the president of the Credit Union League of Connecticut. And he has an insider perspective as a former state Department of Banking general counsel.

He says his concern over the evolution of the fintech industry is what he calls “regulatory creep.”

“If we can use an uninsured bank charter right now to stimulate business and to give legitimacy to a legitimate business, I think that’s great,” he said. “But, I think we should probably, in the final analysis, reserve the charter for its traditional purpose.”

He would rather see the department create a wholly new regulatory instrument to cover fintechs.

On the positive side, he thinks Connecticut’s aggressive stance does put it in a great position to be a leader on regulatory innovation.

“Frankly, now Connecticut has an opportunity to build its regulations on its real-world experience regulating a business like this,” he said.

It’s a job that Commissioner Perez is clearly relishing.

In fact, his office has been pushing the legislature to change the name of the charter from uninsured to innovation bank charter, a move Perez says better reflects its future potential.

With the increased interest, his staff is scrambling to keep up with inquiries — creating term sheets to make the charter application process clearer and more efficient. Perez says he expects his next challenge to be hiring and training enough people to keep up with the demand for this novel method of regulation.

“Nobody has anything compared to us that the feds feel very comfortable with,” he said. “We’re that much ahead of everybody else.”