Varo Money has been striving to get a banking charter for three years. On Aug. 31, 2018, the digital-only challenger bank finally received conditional approval from the Office of the Comptroller of the Currency. It’s still unclear, however, if the Federal Deposit Insurance Corporation will grant the final approval.

Julie Hill, a financial institutions regulation professor at the Alabama School of Law, told Bank Innovation that the OCC has shown it’s open to fintechs. “Whether the FDIC also is interested in fintechs I think is a pretty open question at this point,” she said. “The FDIC traditionally has not been all that keen on all-online business models because they think they’re risky.”

The main points of contention for the FDIC revolve around how to regulate a digital-only financial institution, something the FDIC hasn’t grappled with before. For example, the Community Reinvestment Act of 1977 (CRA) requires banks to help provide credit to low- and moderate-income communities in the bank’s geographic footprint. The FDIC must figure out how to ensure a digital-only bank with no geographic footprint can reinvest in its community. Digital-only banks also must prove to the FDIC they have robust anti-money laundering systems in place despite being a business model the FDIC isn’t used to regulating.

In the OCC’s conditional approval of Varo’s banking license, it states Varo should consider the Salt Lake City area, where Varo is headquartered, its assessment area for the CRA. The OCC said Varo needs a finalized CRA plan in order to gain final approval.

Colin Walsh, CEO and co-founder of Varo, told Bank Innovation that Varo is discussing different options for its CRA plan with regulators. He is determined to get final approval despite the hurdles involved, adding that the company is working to meet all the conditions of the OCC’s preliminary approval and is planning to file the application with the FDIC soon.

Varo had pulled its initial FDIC application earlier in 2018, Walsh said in September. The challenger bank wanted to focus on the OCC approval and hire the right people in advance of FDIC approval. In April, it hired two former OCC officials, Amy Friend and Deven Bhatt, to ease concerns.

For Walsh, a banking charter means more freedom. “If you’re a bank, you control your own destiny and own the customer relationship,” he said. “You’re not dependent on a third-party sponsor bank. You can offer a wide range of products, and you can innovate around those products.” 

Walsh believes Varo is well on its way to a final charter, and the FDIC is more open to new charters than it was when he founded the fintech in 2015 and first brought up the goal. “People looked at me like I was completely nuts,” he said.

According to Hill, new FDIC chairman Jelena McWilliams is open to new bank charters, and the landscape is much brighter than it was even three years ago. She also pointed out that Varo hasn’t been in trouble for lying about insured accounts like Robinhood, which also happens to be applying for a banking charter.

Hill couldn’t say if she thought Varo would get a banking license because it’s such new territory for the FDIC. Whatever happens, however, there will be a lot of people keeping a close eye on the situation. “Some of the fintechs that are in this process think one or two banks will figure it out and then people coming along later can just do the same thing,” she said.

Until then, digital-only banks will face challenges. “They don’t know exactly how to comply, and regulators don’t know exactly how to regulate,” Hill said.