The Great Fintech Plot Twist: Fintechs Want to Become Banks. Banks Better Learn to Operate Like Fintechs.

Key Takeaways from This Blog:

• Fintechs gaining bank charters could reshape competition by combining regulated banking capabilities with leaner, digitally native operating models.
• Traditional infrastructure is only an advantage when it creates value, making it critical for banks and credit unions to distinguish strategic assets from costly legacy complexity.
• Efficiency is becoming a competitive capability, not simply a cost-cutting exercise, as institutions with fewer systems, handoffs, and organizational layers can operate more effectively and compete more aggressively.

For much of the last 15 years, fintech companies built their value proposition around a simple premise: traditional banking was too slow, too complex, and too expensive.

They developed cleaner digital experiences, simplified onboarding, narrowed product sets, and designed operating models without the burden of decades of accumulated infrastructure. In many cases, they did this while relying on traditional banks for access to the financial system itself. Sponsor banks provided the foundation, aka charter, beneath the customer experience and the BaaS model was born.

Now, the BaaS model is heading toward extinction, like the middleman does eventually in most distribution models, and several fintech companies are seeking their own bank charters. Chime has announced plans to acquire Stride Bank, giving it direct ownership of a national bank charter and greater control over its product development and funding model. Revolut has received conditional approval from the OCC to establish a U.S. national bank. Mercury has received conditional FDIC approval. Block has applied to establish a national trust bank.

The obvious conclusion is that fintechs increasingly want to become banks. More importantly, they want to become banks without inheriting the traditional bank operating model, and using the charter as a protective cloak for banks and credit unions to wrap their inefficient operating models in is no longer ample protection.

The Charter Is Not the Story. The Operating Model Is.

For years, traditional financial institutions could reasonably view the charter as a meaningful competitive advantage. Fintech firms could build innovative interfaces and targeted products, but ultimately many remained dependent on banks for deposits, payment access, lending capacity, compliance infrastructure, or other elements of the regulated financial system.

As more fintechs obtain or acquire charters, that structural dependency begins to diminish. The concern is not that these firms will suddenly become better bankers simply because they own a charter. The concern is that they may combine the economics and capabilities of a regulated financial institution with an operating model that was designed from the beginning to be more streamlined, creating a very different form of competition that will cause banks and credit unions with bloated efficiency ratios to struggle to remain relevant without reinventing themselves soon.

A traditional institution may have spent decades accumulating multiple systems, duplicated workflows, organizational layers, product variations, vendor relationships, and delivery channels. Each addition may have made sense when it was introduced. Collectively, however, they can create a level of complexity that becomes increasingly difficult and expensive to either staff or unwind.

A digitally native institution does not have the same burden. It does not have to simplify a process that was designed simply in the first place. It does not have to integrate channels that were never separated. It does not have to eliminate handoffs that were never built into the operating structure.

Once Again, The Sears and Amazon Lesson Applies Here Too

There is a useful parallel in the evolution of Sears and Amazon. Sears was once one of the great distribution innovators in American commerce. It connected consumers to products in ways that existing retailers could not. Over time, however, the company became increasingly burdened by the physical and organizational infrastructure it had accumulated. When consumer behavior shifted, Sears struggled to integrate its channels and operating model into a coherent modern experience.

Amazon began from the opposite direction. It was digital by design and added physical infrastructure selectively, where that infrastructure strengthened the broader ecosystem. Banking may now be entering a similar phase.

Fintech companies spent years operating outside much of the traditional banking infrastructure because doing so allowed them to move quickly. Now, some are selectively adding that infrastructure because direct ownership of deposits, charters, payment capabilities, and regulated banking functions creates strategic value. The key is that they are adding these capabilities deliberately.

Traditional institutions already own the infrastructure. The challenge is determining which parts remain strategic assets and which parts have become structural expenses. Branches can be valuable. So can local decision-making, experienced bankers, regulatory knowledge, community presence, and long-standing customer relationships. These are real competitive advantages; however, those advantages are diminished when they sit on top of an operating model that costs materially more to run than the competitors entering the market.

Efficiency Is Becoming a Competitive Capability

Banking has often treated efficiency as a defensive management exercise. Reduce expenses. Renegotiate vendor contracts. Consolidate facilities. Slow hiring. Eliminate staff. While those are all legitimate activities, they do not represent a cohesive strategy that addresses the most significant challenge, which is how much organizational effort and expense are required to generate a dollar of revenue.

If one institution requires more systems, more manual interventions, more handoffs, and more management layers to produce the same economic result as another institution, that cost difference eventually becomes strategic.