Digital-focused de novos are practicing patience when it comes to seeking deposit insurance from the Federal Deposit Insurance Corp.

Since 2017, 20 digital-focused de novos have withdrawn their applications for deposit insurance at least once. Of those, only four eventually received approval, 14 never refiled and two have refiled and currently have pending applications, according to S&P Global Market Intelligence data.

Securing deposit insurance from the FDIC is required for companies seeking bank charters from either a national or state regulatory agency. Financial technology companies and digital-focused financial service providers have increasingly sought bank charters in recent years, viewing them as a more attractive route than partnering with a bank to provide services. Bank charters are also attractive because they enable the offering of deposit insurance, and retail deposits tend to be among the most affordable funding sources available.

But securing deposit insurance from the FDIC, an agency that is used to reviewing more traditional community bank business models, can be a difficult journey for those companies. Digital-focused de novos are having to educate regulators on their business models and technology, which is time-intensive now but could pave the way for other de novos down the road.

"It takes a lot of patience because it's a very long, fairly complicated process and requires a tremendous amount of back and forth with the regulators," said Marina Gracias, general counsel and corporate secretary for Varo Bank NA, one of the four to withdraw at least once and eventually receive approval. "One thing I think people may underestimate is the time that is required to go through the process."

Varo received approval for deposit insurance in February 2020 after reapplying in July 2019. The company originally filed with the FDIC in July 2017 but withdrew in April 2018.

Varo Bank's application took 206 days to secure approval. The median number of days for a digital-focused bank to receive approval from the time of application was 141 days, according to Market Intelligence data. Utah-based Square Financial Services Inc. had the longest approval processing period at 454 days.

Seeking deposit insurance like running a marathon

De novo hopeful PayServices Inc. is experiencing that long process filled with back and forth with the FDIC.

Florida-based PayServices' unique business plan aims to provide governments and businesses with auditable, end-to-end traceability in banking and financial compliance. The company has withdrawn its application for deposit insurance three times after receiving feedback from the FDIC since it first applied in March 2021.

PayServices executives in a March interview with Market Intelligence said the effort to obtain approval from the FDIC is like "trying to fit a round peg into a square hole" because the company's nontraditional business model is clashing with the regulator's perception of how a bank should operate.

In particular, PayServices executives said the company's status as an institution that does not issue loans is posing a major hurdle in its efforts to obtain approval from a regulatory body that largely functions to insure banks that take deposits and make loans.

"The FDIC, quite frankly, is an insurance company and we don't meet their particular requirement for insurance," said PayServices COO Ron Raitan in the interview. "We are trying to mold to the requirements of the FDIC even though we don't fit into that model."

Still, the company is not "afraid to have a marathon" to eventually secure approval, founder Lionel Danenberg said in the interview.

Coming to FDIC later in the process

In order to form a bank, a company must secure a bank charter with a regulatory agency at either the state or national level and also secure deposit insurance with the FDIC.

Varo received preliminary approval for its national bank charter with the Office of the Comptroller of the Currency in August 2018, a little more than a year after applying in July 2017. Varo applied for deposit insurance with the FDIC at the same time it applied for its bank charter with the OCC, but it found the FDIC process required much more patience, Gracias said.

After receiving preliminary approval from the OCC, there is a 12-month window to raise capital along with an 18-month window to open the bank and get all of the policies in place and hire employees, according to Gracias. On the other hand, the FDIC prefers that a lot of the leg work to start a bank is done before a de novo applies for deposit insurance, Gracias said.

"They actually want to see a lot of the hiring done. They want to see a lot of the policies and processes already in place. They really want you to be much closer to being ready to open the bank," Gracias said. "They don't want to see it until you're much further along in your chartering process."

As a result, Varo withdrew its original application with the FDIC and refiled after getting a lot of its processes in place.

'The Varo way'

For digital-focused de novos seeking deposit insurance, Gracias recommended "the Varo way," which is to get far along in the bank chartering process and then start the deposit insurance application process.

Gracias also recommends digital-focused de novos take advantage of the draft application process with the FDIC. When the FDIC receives an application for deposit insurance, it has 90 days to make a decision to approve or deny it, putting a time constraint on the process, Gracias said.

When Varo originally applied for deposit insurance, the FDIC did not have a process whereby a company could submit a draft application and get feedback before formally applying, Gracias said. But the agency has since moved away from that format and now allows for draft applications, a process that could prove helpful for future digital-focused de novos, Gracias said.

"This draft application process actually is very good because it allows them to work with the applicant and identify things, provide feedback, have things addressed in a more informal way so that they can get comments taken and revisions made before they get the final application," she said. "That ... allows them really to stay much more within the 90-day process."

While a nontraditional, digital-focused business plan may take more time for the regulators to understand and eventually approve for deposit insurance, the agency is very open to learning about technology, Gracias said.

At the time Varo originally sought deposit insurance, its business model — a completely digital bank — was novel to the regulators, according to Gracias. During the application process, Varo spent extensive time meeting with them and explaining the business model, specifically with regard to the company's technology and how it acquires customers as most of the business is cloud-based. Still today, the bank gets calls from the regulators interested in learning more about certain technologies, she said.

"They are really interested in learning about the new technology," Gracias said. "Quite often, we get calls from the regulators who want to just talk to some of our experts, whether it be in technology or in other areas, to learn more about something maybe they've heard about in the industry."