By Ken Musante
Napa Payments and Consulting
In 2007, two years before it was acquired by KKR, First Data converted its industrial bank to a non-depository trust. Previously, First Data had used the bank for sponsorship, but over time, it found it was less expensive to buy sponsorship from a traditional bank than to carry the expense associated with having and owning its own bank. Upon the acquisition, KKR also believed the capital required to own and run the bank was not efficiently deployed.
Banks are required to hold minimum levels of capital based on their outstanding loans. Essentially, a bank's capital is the difference between its assets and liabilities—its equity. There is no such capital requirement for non-bank entities. Consequently, return on equity (or capital) for a bank is typically less than it is for non-bank companies. The return First Data was making from the bank side was muting the return it was making from the processing side.
Given this backdrop, it is interesting to see that Fiserv (which merged with First Data in 2019, four years after KKR spun it off) filed to establish a limited purpose bank charter. After all, Fiserv had a bank charter and determined that strategy was suboptimal. Why is it again seeking to open and run a bank?
First, the OCC has established a new category of bank, called the Limited Purpose Bank (LPB). LPB refers to a type of bank that is not in the business of extending loans to retail customers, except on an incidental and accommodation basis. LPBs have a less onerous regulatory framework than other banks. The designation provides regulatory clarity to accommodate evolving trends within the financial services industry. Those acquiring an LPB charter may operate a more focused business model that allows these entities to proceed without the full regulatory oversight that would apply if they were also engaged in lending. This designation also allows for better risk management, as the bank needs only to focus on the specific business line it supports.
LPBs may be flexible with regards to the entity's business model. An LPB, for example, may only pursue payments. Such a strategy does not require the same amount of capital or regulatory infrastructure that a full service bank allows.
Fiserv likely looked at the competitive landscape within the sponsor bank market and compared that to the return it could earn with its own LPB, including the cost of running the institution, and determined it was a good investment. This type of bank charter did not exist when KKR acquired First Data in 2009.
Michael Scott, the regional manager for Dunder Mifflin in the NBC sitcom The Office, famously said. "Would I rather be feared or loved? Easy. Both."
I believe Fiserv's motivation was greater than shaving off a fraction of a basis point in sponsor fees. Fintechs have continually been limited by the absence of a bank charter. Ultimately, to offer a truly embedded banking solution, a processor needs to partner with a financial institution. With its own banking charter, Fiserv can become a direct member (or customer) of Visa and Mastercard and not be beholden to sponsor banks and their platforms.
Instead, Fiserv may own the BINs and ICAs for its clients and, with the rising federal funds rate, take advantage of the float on funds. Better still, with its own charter, Fiserv may unify the act of opening both a deposit account and merchant account. A common dashboard can display total activity, and a single app can be established for processing, money transfer and merchant cash advance. Buy now, pay later (BNPL) becomes a feature and real-time payments (RTP) an added benefit.
Be it ACH, credit card processing, RTP or push to debit, each of these solutions has required the participation of a bank. If Fiserv wishes to develop a super-app and its own on-us network, the Office of the Comptroller of the Currency has provided a potential path. Fiserv could power other banks and ISVs seeking this capability and be more than just a payment processor. 
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at kenm@napapaymentsandconsulting.com 707-601-7656 or www.linkedin.com/in/ken-musante-us.
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