Graeme Sloan/Bloomberg
The U.S. financial system is at an inflection point.
Yet our regulatory architecture is stuck in the past. By forcing providers to choose between a binary approach — meaning nonbank or bank, with the insured depository institution being preferred — policymakers risk stifling innovation, concentrating risk and creating an unnecessary dichotomy in our financial system. Meanwhile, global peers are racing ahead with more adaptable licensing models, threatening U.S. leadership.
It doesn’t have to be this way — a point recently
In a dynamic market, firms can assess the model that best fits their business needs. Regulators would gain clearer oversight, while consumers would benefit from more competition. Such a system fosters innovation and trust, leveling the playing field and ensuring that no firm gains an unfair advantage.
In order to craft this framework, policymakers must recognize three fundamental truths.
First, the business of banking is not static and new approaches not predicated on taking insured deposits will be a core feature. From safe deposit boxes to ATMs to mobile wallets, financial services continually evolve. Defining “bank” too narrowly — forcing everything into the traditional insured depository institution model — creates key dangers. It limits innovation, competition and access to financial services by blocking new approaches. It over-concentrates risk by forcing diverse activities into a single depository model, making the whole system more fragile. And it forces institutions that don’t want to take insured deposits outside of the bank regulatory perimeter.
Second, tailored charters and specialized banks are not deregulatory. They are a strategic choice based on the activities the entity pursues. Firms that seek specialized charters are willing to accept higher compliance costs and regulatory requirements in return for specific privileges, such as access to payment rails. That ensures activities are supervised under fit-for-purpose rules, rather than being shoehorned into a structure designed for different risks. The result is stronger oversight and more space for specialized players to innovate and compete.
Third, charter diversity is a source of resilience and dynamism. Just as biodiversity strengthens ecosystems, model diversity makes the financial system sturdier. A sector composed of well-regulated but varied institutions is less vulnerable to shocks than one concentrated in a single model.
Alongside charter diversity, bank-fintech partnerships remain essential. Fintechs incubate ideas that may never emerge within traditional banks, while partnerships leverage a bank’s compliance infrastructure. When done right, these collaborations marry creativity with stability.
So, what could a rationalized ladder of charters look like in practice?
The first rung would recognize the role of technology firms and service providers. Clear third-party risk management and partnership requirements can support responsible innovation, competition and consumer choice.
The next rung would encompass state-licensed lending and payments companies, which already operate under clear regulatory structures, but often lack consistent access to federal systems. Policymakers should follow Governor Waller’s lead and consider whether certain state-licensed entities, namely regulated payments firms, should be granted direct access to national payments systems — such as FedNow — instead of having to work through an intermediary bank. Such direct access would reduce the cost of payments activities for both providers and consumers.
Next is a range of state and federal nondepository institutions — so called Tier 2 and 3 banks — that can handle core payments activities without taking insured deposits. Policymakers should also consider an optional federal payments charter to advance payments modernization efforts. By gaining access to Fed Master Accounts and payments systems, these entities can be empowered to use technology to offer more efficient, lower cost and more transparent services.
The next step on the ladder considers different forms of insured depositories. Industrial loan companies, or ILCs, can allow unique firms to offer banking services subject to key safeguards, including requirements that any affiliate commercial activities serve as a source of strength to the bank. In a dynamic and evolving economy, ILCs can diversify banking entities and models, while also recognizing a world where traditional lines between sectors and industries are blurring.
Finally, with respect to traditional insured depository institutions, bank regulators must open the door to novel technology-driven models and increase de novo approvals. For decades, bank regulators have delayed, obstructed, and deterred innovation and applicants — which helps explain why new bank formation in the U.S. remains stagnant. This is especially problematic for specific populations, including veterans or those in rural banking deserts, whose needs are not being met by traditional providers. Technology-driven banks must accordingly be embraced precisely because they offer alternatives to legacy banking approaches and can serve broader sets of Americans.
The stakes are high. Clinging to outdated paradigms leaves us with a brittle system that concentrates risk and cedes ground to global competitors. A ladder of licenses and charters offers a smarter path: one that matches oversight to activity, fosters innovation and competition, and ensures resilience. Modernizing charters is not about deregulation, it is about building a system that is safer, more adaptive and more competitive for the challenges of the 21st century.