Bank Charter Confusion Exposed: Trust Charters, Fed Access, and Hidden Risks

Michele Alt: 00:00:00

The bank charter now represents what it always

Michele Alt: 00:00:03

has represented, which is the keys to the financial kingdom.

Syed Raza: 00:00:08

Getting the charter and getting all the approvals and opening

Syed Raza: 00:00:11

your door is really the day one.

Syed Raza: 00:00:13

The real challenge starts after that.

Syed Raza: 00:00:15

The forward-leaning

Syed Raza: 00:00:17

Ian P. Moloney: quality of the current administration has not been

Syed Raza: 00:00:20

matched by other administrations.

Syed Raza: 00:00:23

The potential that a new Democratic administration may return to that,

Syed Raza: 00:00:28

that previous, uh, status quo.

Michele Alt: 00:00:30

These banks

Michele Alt: 00:00:32

Ian P. Moloney: are like the dogs

Michele Alt: 00:00:33

who

Michele Alt: 00:00:33

Ian P. Moloney: bought the car.

Michele Alt: 00:00:34

" Michele Alt: Okay, do we know how to drive it?

Michele Alt: 00:00:36

We're dogs."

Tedd Huff: 00:00:36

This is Inside the Vault.

Tedd Huff: 00:00:39

I'm Ted Huff, here with Steve Bishop.

Tedd Huff: 00:00:42

Let's talk about what bank charter actually means and what it doesn't.

Tedd Huff: 00:00:50

Welcome to Fintech Confidential, bringing you the people, tech, and companies

Tedd Huff: 00:00:55

that change how you pay and get paid.

Tedd Huff: 00:01:00

Welcome to Inside the Vault.

Tedd Huff: 00:01:01

I'm Ted Huff, the CEO of Fintech advisory firm Volere.

Tedd Huff: 00:01:06

Today I'm joined by Fintech Confidential informant Steve Bishop, and we're talking

Tedd Huff: 00:01:11

about bank charters today, specifically why so many people are confused about

Tedd Huff: 00:01:16

them right now, and why that confusion is starting to cost real money.

Stephen Bishop: 00:01:23

And Ted, you've been watching this play out

Stephen Bishop: 00:01:24

for a while now at Volere.

Stephen Bishop: 00:01:26

What made you want to do a full episode on it?

Tedd Huff: 00:01:28

Well, honestly, it's, it's the phone calls.

Tedd Huff: 00:01:30

Founders who just announced a charter application, bank executives trying

Tedd Huff: 00:01:35

to figure out what a competitor's trust charter actually means for

Tedd Huff: 00:01:38

them, board members who got a briefing and still couldn't explain what

Tedd Huff: 00:01:42

their company had actually done.

Tedd Huff: 00:01:45

And honestly, the word charter is doing a lot of heavy lifting right now, and

Tedd Huff: 00:01:52

it's not always earning all of it.

Stephen Bishop: 00:01:54

And we've brought some serious people to help unpack it.

Stephen Bishop: 00:01:57

We have Syed Raza, who is a chief innovation officer at the OCC

Stephen Bishop: 00:02:01

before joining FGI Consulting.

Stephen Bishop: 00:02:03

You know, he's seen how these decisions look from the

Stephen Bishop: 00:02:06

inside the regulator's office.

Tedd Huff: 00:02:07

We did.

Tedd Huff: 00:02:08

We also talked to Michelle Ault at the Claros Group, former OCC who

Tedd Huff: 00:02:13

now advises management teams on exactly these structural choices.

Stephen Bishop: 00:02:18

And Ian Maloney at the American Fintech Council, who works

Stephen Bishop: 00:02:20

with Fintech companies and their bank partners on the Hill, translating

Stephen Bishop: 00:02:24

what these regulatory shifts mean for how the programs actually operate.

Stephen Bishop: 00:02:28

Three different vantage points on the same set of questions.

Stephen Bishop: 00:02:30

And I will say a lot of what we're gonna cover today is stuff I've been

Stephen Bishop: 00:02:33

hearing in conversations that don't actually make it to a public panel.

Stephen Bishop: 00:02:36

That's kind of the whole point of what I do.

Stephen Bishop: 00:02:38

These are questions boards and examiners are asking when the cameras are off, and

Stephen Bishop: 00:02:41

a lot of the time the answers are not as clean as a press release make them sound.

Stephen Bishop: 00:02:45

Let's be honest, that gap is costing some teams real money right now.

Tedd Huff: 00:02:49

Right, and, and what's really interesting is where our featured

Tedd Huff: 00:02:54

guest agreed- And where they didn't.

Tedd Huff: 00:02:58

We're gonna work through all of this, what a bank charter actually is, why

Tedd Huff: 00:03:03

trust charters are everywhere right now, the Fed master account gap, which

Tedd Huff: 00:03:10

is the place most people are really not talking about, and not only that,

Tedd Huff: 00:03:14

but what all of this means for sponsor banking, and last but not least, what

Tedd Huff: 00:03:19

to watch over the next six to 12 months.

Tedd Huff: 00:03:22

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Tedd Huff: 00:03:27

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Tedd Huff: 00:03:31

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Tedd Huff: 00:03:33

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Stephen Bishop: 00:04:33

Ted, when someone says their company is getting a bank

Stephen Bishop: 00:04:35

charter, what are they actually saying?

Tedd Huff: 00:04:38

Well, they may be saying about seven different things all at the same

Tedd Huff: 00:04:42

time, and well, that, that's the problem.

Tedd Huff: 00:04:46

A bank charter is the legal authorization to operate as a financial institution

Tedd Huff: 00:04:52

under specific regulatory authority.

Tedd Huff: 00:04:58

It really just defines who approved you, what you can do,

Tedd Huff: 00:05:02

and who gets to examine you.

Tedd Huff: 00:05:05

And the last part, that's one that matters most and generally gets

Tedd Huff: 00:05:10

the least amount of attention.

Tedd Huff: 00:05:12

The OCC charters national banks and federal savings associations, state

Tedd Huff: 00:05:17

banking regulators charter state banks, and whether the Federal Reserve

Tedd Huff: 00:05:21

or the FDIC layers on top of that really depends on status and where the

Tedd Huff: 00:05:27

institution carries deposit insurance.

Tedd Huff: 00:05:30

You can end up chartered in one place and examined by three different agencies.

Stephen Bishop: 00:05:37

So when a fintech announces a charter, that announcement

Stephen Bishop: 00:05:39

tells you almost nothing on its own.

Tedd Huff: 00:05:42

Well, that's right, Steve.

Tedd Huff: 00:05:44

Uh, you could be a national bank, a state bank, a federal savings association,

Tedd Huff: 00:05:49

industrial loan company, a trust bank, a national trust bank- None of these

Tedd Huff: 00:05:56

things are the same, and saying we got a charter without naming the type

Tedd Huff: 00:06:01

leaves out the part that really matters.

Stephen Bishop: 00:06:05

The thing that stands out to me from conversations I've been

Stephen Bishop: 00:06:07

having is founders are treating the, the charter announcement as a finish line.

Stephen Bishop: 00:06:12

I've had a founder tell me that a board celebrated when

Stephen Bishop: 00:06:14

they had the, the announcement.

Stephen Bishop: 00:06:16

If that examiner is gonna ask about VSA staffing day one, what do you think a bank

Stephen Bishop: 00:06:21

charter actually represents, especially right now, and, and how has that changed?

Syed Raza: 00:06:25

There are two schools of thought in chartering process.

Syed Raza: 00:06:28

There's old school who saw the chartering window closed for many, many years.

Syed Raza: 00:06:33

They think it's going to be extremely difficult to go through

Syed Raza: 00:06:36

the national charter process.

Syed Raza: 00:06:38

Uh, the other school of thought is mostly new organization,

Syed Raza: 00:06:42

technology, fintech, digital assets.

Syed Raza: 00:06:44

They actually think it's very easy to get a national charter, and they think

Syed Raza: 00:06:48

it's much easier than it actually is.

Syed Raza: 00:06:51

Getting the charter and getting all the approvals and opening

Syed Raza: 00:06:54

your door, per se, the day one for the bank is really the day one.

Syed Raza: 00:06:58

Real challenge starts after that.

Stephen Bishop: 00:07:01

Yeah, that's a useful reminder that this is not just a label.

Stephen Bishop: 00:07:03

The real operating consequences depend on which box you're operating in.

Tedd Huff: 00:07:06

And people are not always reading the fine print on

Tedd Huff: 00:07:09

which box they're applying for, and that's where the OCC's recent

Tedd Huff: 00:07:13

activity really gets interesting.

Tedd Huff: 00:07:16

Because the OCC just issued a 376-page proposed rule to implement

Tedd Huff: 00:07:23

the Genius Act, what it does is create formal issuer categories.

Tedd Huff: 00:07:29

Once those categories exist, firms start positioning for the

Tedd Huff: 00:07:33

one they think serves them best.

Tedd Huff: 00:07:37

The headline is a proposed rule.

Tedd Huff: 00:07:39

The practical implication is that stablecoin policy is starting to

Tedd Huff: 00:07:43

become operating requirements.

Tedd Huff: 00:07:46

And who is the issuer?

Tedd Huff: 00:07:49

Who supervises it?

Tedd Huff: 00:07:50

What backs it?

Tedd Huff: 00:07:52

How does redemption work?

Tedd Huff: 00:07:54

And who can prove the controls?

Tedd Huff: 00:07:57

These really aren't even product questions anymore.

Tedd Huff: 00:08:00

They're compliance questions.

Stephen Bishop: 00:08:03

So what should an operator actually take away from that?

Tedd Huff: 00:08:06

Well, I mean, really there are four questions, right?

Tedd Huff: 00:08:08

So who grants the charter?

Tedd Huff: 00:08:11

What powers come with it?

Tedd Huff: 00:08:12

What activities are limited?

Tedd Huff: 00:08:15

Who examines the institution?

Tedd Huff: 00:08:18

And if a management team can't answer all four of those, they're not really done

Tedd Huff: 00:08:24

thinking about their charter strategy yet.

Tedd Huff: 00:08:26

So where do you think the biggest gaps are between what people

Tedd Huff: 00:08:32

believe about the chartering process and what it actually involves?

Michele Alt: 00:08:38

Think of applying for a bank charter as about as much fun as

Michele Alt: 00:08:44

a financial and emotional colonoscopy.

Michele Alt: 00:08:47

If you're thinking that they can do it quickly and painlessly and have an easy

Michele Alt: 00:08:54

ride, ah, you got another thing coming.

Michele Alt: 00:08:57

Still a big lift.

Stephen Bishop: 00:08:59

So what does, uh, the current regulatory activity tell

Stephen Bishop: 00:09:01

you about where oversight is headed?

Stephen Bishop: 00:09:03

Ian P. Moloney: The current regulatory activity shows that there's an opportunity

Stephen Bishop: 00:09:07

to allow bank managers to manage and to engage in their activities, whether it be

Stephen Bishop: 00:09:13

fintech companies or stablecoin providers.

Stephen Bishop: 00:09:16

There's a real opportunity within that chartering conversation, whether

Stephen Bishop: 00:09:20

it be limited purpose or, you know, more broadly for a national bank

Stephen Bishop: 00:09:24

charter.

Stephen Bishop: 00:09:25

So the OCC has drawn some lines.

Stephen Bishop: 00:09:27

What we're seeing is firms racing to get on the right side

Stephen Bishop: 00:09:29

of those lines before the final rule makes the entry cost higher.

Translation: 00:09:33

if you can't answer those four questions about your own program

Translation: 00:09:37

right now, you're not ready for the conversation your bank partner or your

Translation: 00:09:41

examiner is going to have with you.

Translation: 00:09:43

And most visible move right now is trust charters.

Translation: 00:09:46

Yeah.

Translation: 00:09:47

Paxos, BitGo, Ripple, all OCC trust charter approvals

Translation: 00:09:52

in a pretty short window.

Translation: 00:09:54

What's actually going on there?

Tedd Huff: 00:09:55

Steve, it's, it's positioning.

Tedd Huff: 00:09:57

Firms are trying to get into federal supervisory structure before the markets

Tedd Huff: 00:10:02

get more defined, before the final rules make the entry cost even higher.

Tedd Huff: 00:10:09

That is strategic logic.

Tedd Huff: 00:10:12

The timing is definitely not accidental, and what's most important

Tedd Huff: 00:10:16

to understand is that a national trust bank charter is not a full charter.

Tedd Huff: 00:10:24

It can put a company inside of the federal supervisory framework.

Tedd Huff: 00:10:28

It can support custody activities, certain payment functions, and even

Tedd Huff: 00:10:31

stablecoin positioning for them.

Tedd Huff: 00:10:35

It doesn't make them a community bank, no insured deposits, no lending

Tedd Huff: 00:10:40

authority, and it still brings real examination expectations, governance

Tedd Huff: 00:10:45

requirements, capital considerations, and compliance obligations.

Stephen Bishop: 00:10:50

So if I'm a fintech founder reading one of those headlines

Stephen Bishop: 00:10:54

and thinking we should do that next- What's the one thing you want them to slow

Stephen Bishop: 00:10:58

down on before the application goes in?

Tedd Huff: 00:11:00

What is your read on why trust charters have

Tedd Huff: 00:11:03

gotten so much attention lately?

Syed Raza: 00:11:06

Because it serves a very specific purpose for organizations who

Syed Raza: 00:11:11

are only interested in custody services.

Syed Raza: 00:11:14

Crypto wallet, crypto exchanges, and the capital requirements for trust banks

Syed Raza: 00:11:19

are a little bit lower than a full bank.

Syed Raza: 00:11:21

For them, it gives them the regulatory fiduciary authority to get involved in

Syed Raza: 00:11:26

that business, but they are not interested in maintaining deposit accounts or loans.

Syed Raza: 00:11:32

They are not interested in, uh, of- offering traditional

Syed Raza: 00:11:35

deposit accounts or loans.

Stephen Bishop: 00:11:36

What are firms actually missing when they go through this process?

Tedd Huff: 00:11:39

Well, getting a trust charter is just the start

Tedd Huff: 00:11:42

of the work, not the finish.

Tedd Huff: 00:11:45

The regulators' expectations don't wait for the press release to clear.

Stephen Bishop: 00:11:50

I wanna push on you slightly there.

Stephen Bishop: 00:11:52

Uh, there's a counterargument that I keep hearing.

Stephen Bishop: 00:11:55

A trust charter creates real credibility with bank partners

Stephen Bishop: 00:11:59

and institutional investors even before the exam gets serious.

Stephen Bishop: 00:12:02

Is that wrong or, or just incomplete?

Michele Alt: 00:12:04

A trust company, although it is a bank for purposes of state

Michele Alt: 00:12:12

and federal law, and therefore is not subject to all sorts of individual state

Michele Alt: 00:12:18

and local licensing requirements, it is not considered a bank for purposes

Michele Alt: 00:12:24

of the Bank Holding Company Act.

Michele Alt: 00:12:26

So that means you get the benefit to be a bank and conduct your

Michele Alt: 00:12:31

activities nationwide, but you're not, uh, subjecting your parent to

Michele Alt: 00:12:36

Bank Holding Company Act supervision.

Michele Alt: 00:12:39

It's huge, but here's the trade-off.

Michele Alt: 00:12:41

Conditional approval for some applicants is it makes it a lot

Michele Alt: 00:12:45

easier for them to raise money.

Michele Alt: 00:12:46

But not everybody's Coinbase.

Michele Alt: 00:12:48

Ian P. Moloney: What tends to get overlooked is the need for good timing

Michele Alt: 00:12:53

on the charter application to make sure that you get in within this

Michele Alt: 00:12:57

administration as opposed to a potential next administration, which may be less

Michele Alt: 00:13:03

favorable in the chartering space.

Stephen Bishop: 00:13:06

That Bank Holding Company Act piece is one I'd not fully appreciated

Stephen Bishop: 00:13:09

till I started having these conversations.

Stephen Bishop: 00:13:11

A trust charter gives you the bank benefits without pulling your entire

Stephen Bishop: 00:13:14

parent company into Fed supervision, and most of the founders I talk to have

Stephen Bishop: 00:13:18

no idea that trade-off even exists.

Stephen Bishop: 00:13:20

And the part that does not make the press release is the one that

Stephen Bishop: 00:13:23

may matter most operationally.

Tedd Huff: 00:13:24

Right, and the one that matters a lot more than people seem to

Tedd Huff: 00:13:28

realize is the headline says approved.

Tedd Huff: 00:13:32

The operating reality says the, you may still need some infrastructure you needed

Tedd Huff: 00:13:38

before the announcement even happened.

Tedd Huff: 00:13:41

So getting a trust charter and getting direct access to Federal Reserve payment

Tedd Huff: 00:13:46

rails are Two completely different things.

Tedd Huff: 00:13:50

Hey, Ted Huff here.

Tedd Huff: 00:13:51

Ever thought about how you could streamline your application

Tedd Huff: 00:13:54

and underwriting process?

Tedd Huff: 00:13:56

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Tedd Huff: 00:13:57

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Tedd Huff: 00:14:02

digitize them effortlessly?

Tedd Huff: 00:14:04

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Tedd Huff: 00:14:08

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Tedd Huff: 00:14:10

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Tedd Huff: 00:14:12

Head over to under.io/ftc and get started for free.

Tedd Huff: 00:14:18

It's really that simple.

Stephen Bishop: 00:14:20

Ted, walk us through what a Fed master account

Stephen Bishop: 00:14:23

actually is and why it matters here.

Tedd Huff: 00:14:25

A Fed master account is a direct account at the Federal Reserve.

Tedd Huff: 00:14:29

It gives an institution access to FedWire, FedNow, and the core

Tedd Huff: 00:14:33

payment infrastructure of the United States financial system.

Tedd Huff: 00:14:37

If you have one, you can move money directly across those rails, and if you

Tedd Huff: 00:14:43

don't have one, you need an intermediary bank or a sponsor bank to do that for you.

Stephen Bishop: 00:14:48

So... And a trust charter doesn't automatically come with one?

Stephen Bishop: 00:14:50

It doesn't.

Tedd Huff: 00:14:52

A trust charter may make a firm eligible to apply for

Tedd Huff: 00:14:55

a master account, then the Fed decides whether to approve it or not.

Tedd Huff: 00:15:01

The Tenth Circuit confirmed late in 2025 that the Fed has full

Tedd Huff: 00:15:06

discretion here, and even when an applicant is legally eligible.

Tedd Huff: 00:15:11

The first limited purpose payment account of that kind was approved in March of

Tedd Huff: 00:15:16

2026, and before that, the firms holding trust charters but without master account

Tedd Huff: 00:15:22

were still routing through partner banks to reach the Fed payment rails.

Stephen Bishop: 00:15:28

Okay, so the charter changed the supervisor relationship,

Stephen Bishop: 00:15:33

but the operating dependency on a partner bank may still be exactly

Stephen Bishop: 00:15:35

what it was before the charter.

Tedd Huff: 00:15:37

Yeah, and that's the gap.

Tedd Huff: 00:15:38

And it appears to be the same thing most management teams have not

Tedd Huff: 00:15:43

fully priced in when they treat a charter approval as the finish line.

Stephen Bishop: 00:15:49

So a trust charter gives the firm eligibility to

Stephen Bishop: 00:15:52

apply for a Fed master account.

Stephen Bishop: 00:15:53

Doesn't guarantee one though.

Stephen Bishop: 00:15:55

How significant is that gap, or what does it mean for those counting on Fed payments

Stephen Bishop: 00:15:59

as part of their, their payment strategy?

Michele Alt: 00:16:01

Don't go with a limited purpose charter if it's an absolute

Michele Alt: 00:16:06

must to have a master account.

Michele Alt: 00:16:08

That's too big a risk because there are no guarantees.

Michele Alt: 00:16:11

I would say they have a choice.

Michele Alt: 00:16:14

Either proceed now with a full service bank application, or

Michele Alt: 00:16:19

they could wait a little bit.

Michele Alt: 00:16:21

We need to wait and see how it shakes out.

Tedd Huff: 00:16:23

The shorter version, institutions without deposit

Tedd Huff: 00:16:26

insurance sit in a higher scrutiny tier, which means longer timelines

Tedd Huff: 00:16:31

and no guarantee at the end.

Stephen Bishop: 00:16:33

You know what I keep hearing from operators that have

Stephen Bishop: 00:16:35

gone through this process is timeline assumptions going in were way off,

Stephen Bishop: 00:16:40

and, and not just by a week or two.

Stephen Bishop: 00:16:42

One operator I talked to had an 18-month product roadmap built

Stephen Bishop: 00:16:47

that required FedRail access.

Stephen Bishop: 00:16:49

They're now well into that window, but the roadmap hasn't moved.

Tedd Huff: 00:16:52

A trust charter makes a firm eligible for a FedMaster

Tedd Huff: 00:16:55

account, but it doesn't guarantee one.

Tedd Huff: 00:16:58

How significant do you feel the gap is, and what it means for firms

Tedd Huff: 00:17:03

counting on Fed payment access as part of their primary strategy?

Syed Raza: 00:17:08

So I think because of all the developments recently with implementation

Syed Raza: 00:17:12

of Genius Act, there's a very good chance that they will have that access.

Syed Raza: 00:17:16

I have not heard anything otherwise.

Syed Raza: 00:17:19

I think it's a very high probability of, of and likelihood of people having

Syed Raza: 00:17:23

access to FedMaster account if they have a federally chartered banking organization.

Syed Raza: 00:17:27

Ian P. Moloney: So the current gap between getting a charter and

Syed Raza: 00:17:30

getting a FedMaster account is a fair size under the current regime.

Syed Raza: 00:17:34

However, it has every sign of shrinking directional cues of Governor

Syed Raza: 00:17:40

Waller, as well as the administration to a broader range of entities.

Syed Raza: 00:17:46

So which means everything we're about to talk about still applies.

Tedd Huff: 00:17:49

Steve, that is exactly right.

Tedd Huff: 00:17:51

The charter changes the supervision picture.

Tedd Huff: 00:17:55

It doesn't necessarily change the operating picture.

Tedd Huff: 00:17:59

And the sponsor bank conversation is where this gets very real for

Tedd Huff: 00:18:03

a lot of people in this audience.

Tedd Huff: 00:18:06

So why don't we go ahead and,

Stephen Bishop: 00:18:09

uh, go there?

Stephen Bishop: 00:18:10

Let's say you're a community bank or a fintech running a sponsor

Stephen Bishop: 00:18:13

bank program, no trust charter, no OCC application in the works.

Stephen Bishop: 00:18:17

Why does any of this matter to you right now?

Tedd Huff: 00:18:20

See, because the charter conversation and the stablecoin

Tedd Huff: 00:18:23

yield conversation are heading toward the programs, whether

Tedd Huff: 00:18:27

they're positioned for it or not.

Tedd Huff: 00:18:30

And if a fintech partner gets a charter or starts competing with

Tedd Huff: 00:18:36

financial institutions with yield, the structure of the existing programs at

Tedd Huff: 00:18:43

the sponsor banks really get tested.

Stephen Bishop: 00:18:45

Sponsor banking works on a clear division of roles.

Stephen Bishop: 00:18:48

The bank holds the regulatory accountability, and the fintech

Stephen Bishop: 00:18:51

holds the customer relationship.

Tedd Huff: 00:18:53

Well, and what's changing is that some of the fintechs are now

Tedd Huff: 00:18:56

pursuing the charter, specifically to remove that bank from the equation.

Tedd Huff: 00:19:00

And in the meantime, stablecoin yield is starting to compete

Tedd Huff: 00:19:03

directly with deposit-funded products at the same community banks

Tedd Huff: 00:19:08

running those exact same programs.

Stephen Bishop: 00:19:11

The Claravis data suggests deposit movement from

Stephen Bishop: 00:19:13

stablecoin-adjacent products is already underway at community banks.

Stephen Bishop: 00:19:18

That is not a future risk, it's a current one.

Tedd Huff: 00:19:20

How do you think the sponsor bank model is holding

Tedd Huff: 00:19:23

up under current pressure and- Where do you see it straining?

Tedd Huff: 00:19:29

Ian P. Moloney: I think generally the sponsor bank

Tedd Huff: 00:19:31

model is holding up quite well.

Tedd Huff: 00:19:34

Bank fintech partnerships rely upon ability for banks and fintech companies

Tedd Huff: 00:19:40

to leverage their core competencies, and so many fintechs will continue

Tedd Huff: 00:19:45

to do that, and that will never lead to a, a charter conversation.

Tedd Huff: 00:19:49

The yield question is where charter strategy and

Tedd Huff: 00:19:52

deposit competition converge in the most, most uncomfortable way.

Stephen Bishop: 00:19:58

A firm with a trust charter and a stablecoin product

Stephen Bishop: 00:20:01

can offer something that looks like yield without carrying deposit

Stephen Bishop: 00:20:04

insurance, CRA obligations, or the capital requirements a bank carries.

Stephen Bishop: 00:20:09

Ted, how should a community bank think about that?

Tedd Huff: 00:20:11

Well, the honest answer is that a product paying something that

Tedd Huff: 00:20:16

looks like interest on customer balances, well, Steve, you know, it's gonna draw

Tedd Huff: 00:20:21

scrutiny regardless of what it's called, and banks will flag this competitive gap.

Tedd Huff: 00:20:28

Regulators will ask who's accountable when something goes wrong, and the

Tedd Huff: 00:20:33

charter type depends on the answer to that question, which is exactly why it matters.

Tedd Huff: 00:20:41

What are the banks and fintechs getting wrong about their shared

Tedd Huff: 00:20:44

responsibilities in these programs?

Syed Raza: 00:20:46

Both the sponsor banks and the fintechs are misaligned when it

Syed Raza: 00:20:50

comes to cost sharing, uh, control ownership, uh, and data ownership.

Tedd Huff: 00:20:56

How do you think the sponsor banking model we know today is holding

Tedd Huff: 00:21:01

up under the current pressures, and where do you see it straining the most?

Michele Alt: 00:21:07

I was talking with one of my partners, Seth Ross, about this just

Michele Alt: 00:21:11

this morning, and he had a good line.

Michele Alt: 00:21:12

He said, "It's not dead. Sloppy BaaS is dead," Seth, so shout out to Seth.

Michele Alt: 00:21:18

Accountability and accurate reconciliation are absolute musts.

Stephen Bishop: 00:21:24

So for the sponsor bank that's still in the model, not chasing

Stephen Bishop: 00:21:26

a charter, not competing on yield yet, what is the one test that tells you

Stephen Bishop: 00:21:31

whether your program is actually well-ran?

Tedd Huff: 00:21:33

Steve, one question.

Tedd Huff: 00:21:35

If an examiner walked in today and asked you to walk through the program from

Tedd Huff: 00:21:40

customer onboarding to funds movement to exceptions to shutdown, could you do

Tedd Huff: 00:21:47

it without calling three vendors first?

Tedd Huff: 00:21:51

If the answer is no, that is the work that needs to happen.

Tedd Huff: 00:21:57

The program documentation, the controls, the oversight structure, that is what

Tedd Huff: 00:22:03

gets examined, not the term sheet.

Stephen Bishop: 00:22:06

The programs that are gonna hold up are the ones where both

Stephen Bishop: 00:22:08

parties can answer examiners' questions without calling three vendors first.

Stephen Bishop: 00:22:12

If you can't do that today, then that is the work.

Stephen Bishop: 00:22:15

We've covered what a charter is and why trust charters are

Stephen Bishop: 00:22:17

attracting so much attention.

Stephen Bishop: 00:22:19

Let's talk about what to actually watch.

Tedd Huff: 00:22:21

The thing I'm watching most closely is not the approvals

Tedd Huff: 00:22:26

It's the conditions attached to them, because a conditional

Tedd Huff: 00:22:29

charter approval tells you what the regulator saw in the applications.

Tedd Huff: 00:22:36

The conditions tell you what they did not trust yet.

Tedd Huff: 00:22:40

The firms that close that gap really quickly will be in a completely

Tedd Huff: 00:22:44

different position than the ones that are still working on it

Tedd Huff: 00:22:48

when the pre-opening exam lands.

Tedd Huff: 00:22:51

What are the, the one or two things you are watching most closely right now?

Syed Raza: 00:22:58

I am really closely watching the organizations that were

Syed Raza: 00:23:01

given conditional approval to see how they will fare with pre-opening

Syed Raza: 00:23:06

exam and the opening process.

Syed Raza: 00:23:08

Secondly, community banks' profit margin model, uh, because as fintechs are coming

Syed Raza: 00:23:14

into very low on overhead, very high on efficiency, so their profit margins are

Syed Raza: 00:23:20

going to be much higher in the banking service as compared to traditional banks.

Syed Raza: 00:23:24

Uh, that will add a lot of pressure to traditional banks.

Syed Raza: 00:23:28

The thing that

Stephen Bishop: 00:23:29

I keep watching is the enforcement gap on the compliance side, s-

Stephen Bishop: 00:23:32

specifically operators who built programs assuming someone downstream handled

Stephen Bishop: 00:23:36

the AML and the, the sanctions picture.

Tedd Huff: 00:23:39

The piece I think that is underpriced is the conversation at

Tedd Huff: 00:23:42

the state level and that activity.

Tedd Huff: 00:23:45

Federal charters and federal preemption gets most of the attention though,

Tedd Huff: 00:23:50

but consumer protection laws sit heavily at the state level and are

Tedd Huff: 00:23:55

not preempted by the federal law.

Stephen Bishop: 00:23:58

A fintech operating under a sponsoring model is still

Stephen Bishop: 00:24:00

reachable by states that can't regulate that bank directly.

Stephen Bishop: 00:24:04

That's where the next wave of enforcement pressure is likely to come from.

Tedd Huff: 00:24:07

A bunch of conversations that we've been having are, "Don't do de novo

Tedd Huff: 00:24:11

if you really need a Fed, Fed account. Go find a financial institution you can

Tedd Huff: 00:24:15

acquire that already has a master account and acquire them." Or, and you kinda hit

Tedd Huff: 00:24:21

on it, is, is wait to see what happens, especially after Kraken getting their Fed

Tedd Huff: 00:24:28

master account through their Wyoming LLC.

Tedd Huff: 00:24:31

What are your thoughts on those options that I've been hearing?

Michele Alt: 00:24:34

Preparing a decent application takes about four months, at

Michele Alt: 00:24:38

least four months for the regulators to approve it, and then you've 18 months

Michele Alt: 00:24:43

to build it and get final approval.

Michele Alt: 00:24:45

If you add up that math, you're getting right up and against the

Michele Alt: 00:24:48

next presidential administration.

Michele Alt: 00:24:50

Given the timeline, where you are in your thinking- Mm-hmm ... you

Michele Alt: 00:24:53

might wanna be thinking about M&A.

Tedd Huff: 00:24:56

So the through line is that the gap between announcement

Tedd Huff: 00:25:00

and operating reality is where the real risk actually lives.

Tedd Huff: 00:25:07

And now, most firms are closer to the announcement than they are to the reality

Tedd Huff: 00:25:13

Ian P. Moloney: So what I'm personally watching most closely right now is

Tedd Huff: 00:25:17

the chartering conversation, the conversation around true lender, and

Tedd Huff: 00:25:22

then also no conversation would be complete without discussion of AI.

Stephen Bishop: 00:25:26

All right, last question.

Stephen Bishop: 00:25:28

What do you actually do before the final rules land?

Tedd Huff: 00:25:31

There are three things that need to happen.

Tedd Huff: 00:25:34

One is watch the final OCC rule for how stablecoin issuer

Tedd Huff: 00:25:39

categories get conditioned.

Tedd Huff: 00:25:41

The conditions matter way more than the approval.

Tedd Huff: 00:25:44

And watch whether trust charter firms can convert this conditional approval

Tedd Huff: 00:25:49

into a full charter before this really narrow political window closes.

Tedd Huff: 00:25:57

Also, watch deposit movement at community banks and segments already

Tedd Huff: 00:26:01

using wallets or yield products, because that pressure is already

Tedd Huff: 00:26:06

showing itself present in the data.

Tedd Huff: 00:26:10

For operators, don't wait to start your documentation work now.

Tedd Huff: 00:26:15

Customer funds flow, legal authority, partner roles, controls, disclosures,

Tedd Huff: 00:26:20

exception handling, uh, have it all ready before the examiner asks.

Tedd Huff: 00:26:25

If someone were to come to you today and ask you what they should actually

Tedd Huff: 00:26:32

do, not just what to watch and... What would you tell them to do?

Michele Alt: 00:26:37

If you're thinking about doing it, you better get cracking

Michele Alt: 00:26:41

because the clock is ticking.

Stephen Bishop: 00:26:43

That is a bank charter confusion episode.

Tedd Huff: 00:26:45

A charter is a supervisory relationship.

Tedd Huff: 00:26:49

A trust charter, it's not a full bank charter.

Tedd Huff: 00:26:52

Getting one doesn't mean Fed payment rail access, and sponsor

Tedd Huff: 00:26:56

banks still need to understand what they are actually supporting.

Stephen Bishop: 00:27:01

Uh, special thanks to Syed, Michelle, and Ian, three

Stephen Bishop: 00:27:03

people with generally different views who are direct about all of it.

Stephen Bishop: 00:27:06

The thing that stayed with me is that the regulatory structure is often moving

Stephen Bishop: 00:27:10

faster than the operating structure.

Stephen Bishop: 00:27:12

The announcement is real, the readiness is still catching up.

Tedd Huff: 00:27:16

So if you're building, sponsoring, or supervising one of

Tedd Huff: 00:27:19

these programs, we're here to help.

Tedd Huff: 00:27:22

And thanks for listening to Inside the Vault.

Tedd Huff: 00:27:25

If this discussion got your attention today, there's much

Tedd Huff: 00:27:28

more where that came from.

Tedd Huff: 00:27:29

Head over to YouTube, Spotify, Apple Podcasts, or wherever

Tedd Huff: 00:27:32

you listen and hit follow.

Tedd Huff: 00:27:34

And if you wanna stay plugged in to everything we're tracking over here, go

Tedd Huff: 00:27:38

to fintechconfidential.com and sign up.

Tedd Huff: 00:27:41

Be sure to share this with someone who is serious about where fintech is going,

Tedd Huff: 00:27:46

and as always, keep moving forward.

Tedd Huff: 00:27:50

As we wrap up today's episode, I've got one last thing for you.

Tedd Huff: 00:27:54

If you're in the trenches fighting fraud and financial crime, you

Tedd Huff: 00:27:58

know it's a complex battlefield.

Tedd Huff: 00:28:00

That's where Hawk's AI tools for real-time payment screening, AML,

Tedd Huff: 00:28:05

transaction monitoring, and dynamic customer risk rating come into play.

Tedd Huff: 00:28:10

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Tedd Huff: 00:28:11

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Tedd Huff: 00:28:14

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Tedd Huff: 00:28:17

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Tedd Huff: 00:28:22

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Tedd Huff: 00:28:24

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Tedd Huff: 00:28:30

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