In the United States, financial entities that wish to make commercial loans and hold cash deposits guaranteed by the Federal Deposit Insurance Corporation are subject to a regulatory charter. A chartered bank is a business entity that follows a business model reliant on retail banking. It should be noted that American banks can be wholly owned by holding companies, but they operate in different capacities.

It does not matter whether a bank provides only provides personal, business, or institutional services; it still needs to be chartered in order for it to do business as a bank. The same goes for credit unions, which must be granted charter status by the National Credit Union Administration or a state regulatory agency in charge of financial oversight. Investment banking firms do not require charters; however, their holding companies may own chartered retail or wholesale banking operations that are fully chartered, but they must conduct business separately under the regulations set forth by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, which effectively separated investment and retail banking in the wake of the global financial crisis of 2008.

Whenever you are looking for traditional banking services such as checking accounts, certificates of deposit, commercial loans, and mortgage lendings, to name a few, charter banks or credit unions will always be your top choice. The integrity of your deposits up to $250,000 is guaranteed by the FDIC only if your funds are in a chartered bank. This brings up an interesting topic of discussion because many financial technology (FinTech) startups have shown that they can provide banking services with greater efficiency, and this has gotten the attention of many Americans for various reasons.

Chartered Banks in the Era of FinTech

When we look at certain personal banking services such as direct deposit, money transfers, purchases, and bill payment, it is safe to say that banks have not been at the top of their game ever since the FinTech explosion of the mid-1990s. FinTech giants such as PayPal routinely take care of such services, and they have perfected their operations as part of an effort to compete against banks.

While it is true that services such as PayPal generally require users to link existing accounts from charter banks in order to keep their accounts open, quite a few of these users have pretty much stopped using their checking accounts. We are talking about tech-savvy users who enjoy being able to get all their personal banking done from their smartphones; moreover, they enjoy the convenience of being able to make small cash deposits at established locations such as Walmart. In some cases, these FinTech users can also access personal lending solutions and even commercial loans if they are small business owners.

What many of these FinTech users do not know is that their deposits are not insured by the FDIC because only chartered banks can gain membership. Something else to know in this regard is that these FinTech companies rely on chartered banks to manage many of these operations; for example, salaries are sent via direct deposit through the Automated Clearing House system that serves chartered banks and credit unions across the United States. This is why American retail bank directors and managers have been improving their personal banking services, and in some cases they have established partnerships with the FinTech companies that compete against them.

Tom Gardner