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Last week, Stripe applied for what’s known as a Merchant Acquirer Limited Purpose Bank (MALPB) charter in Georgia. If approved, the move would reduce the risk of service disruptions should the company’s bank partners decide to exit the fintech sector. The charter would also allow Stripe to take more control over which businesses it serves and potentially cut out the fees the company shares with bank partners on every transaction running through the platform.
“Over the past few years, as Stripe’s business has grown, we’ve significantly expanded the number of banking and other partners we work with,” Stripe said in a statement. “This application helps us ensure we have an even broader range of options to support our users — and complements the work we do directly with banking partners across the US.”
Without a banking charter, Stripe and other non-bank fintechs need to work with financial institutions that act as so-called bank identification number (BIN) sponsors to access the networks which enable them to process card payments for merchants. That can potentially put them at a competitive disadvantage to rivals like Adyen, a Dutch company that in 2021 received approval for a US foreign branch licence, allowing it to conduct the same activities it does under its European banking licence.
Stripe isn’t the only player in the payments sector moving to reduce reliance on banking partners by pursuing state charters. Last year, Fiserv, one of the largest payment service providers for US merchants, received Georgia’s MALPB charter. These specialty charters are often initiated by states looking to serve local industries or draw in new businesses. Georgia’s biggest city, Atlanta, is headquarters for six of the 10 largest US payment processors with roughly 70% of US payments flowing through the city. Meanwhile, Wyoming introduced the Special Purpose Depository Institution bank charter to draw emerging digital asset businesses to the state. Today, crypto custodian Custodia Bank and a unit of digital-asset exchange Kraken hold the SPDI charters.
These alternative state charters “were the only game in town for a while because, during the Biden administration, federal banking agencies were essentially closed for business when it came to new and innovative bank charters,” said Michele Alt, co-founder and partner at Klaros, a fintech advisory firm. “Now it is a new day in Washington, with the regulators being very clear that they are open for business.”
Under the Trump administration, there will likely be a wave of applications from fintechs seeking to own their own infrastructure by either becoming a newly chartered bank, also known as “de novo” banks, or industrial loan companies, Alt added.
The MALPB charter was enacted in 2012 and designed to allow holders to directly access payment-card networks Visa and Mastercard. The narrow charter is limited to facilitating payments acceptance for merchants and does not include retail deposit taking and lending. Fiserv has been accepted as a principal member of the Visa network and plans to be ready for processing later this month, according to a company spokesperson. Fiserv is in the final stages of securing approval to join Mastercard’s network.
Georgia’s Department of Banking and Finance will make a decision on Stripe’s application within 90 days of acceptance. If approved, Stripe would become the third business to ever hold the charter, following Fiserv and Credorax Bank North America. The charter helps businesses become eligible to apply for membership to the card networks and apply for a Federal Reserve master account, which allows businesses direct access to UA national payment systems like the Automated Clearing House, but does not guarantee either valuable perk. Caitlin Long’s Custodia Bank has been embroiled in a years-long legal battle after being denied master account access despite holding Wyoming’s SPDI charter.
The dependence on BIN sponsorship caused a temporary panic at Stripe last year when Wells Fargo, one of its primary partners, decided to step away from the business, The Information reported. If Stripe is approved for the Georgia charter, it will have a backup plan in case any of its other partners suddenly decide to exit the fintech sector. Today, Stripe works with Cross River Bank, Deutsche Bank, Goldman Sachs and PNC Financial Services Group to help its merchants accept card payments, according to the company’s legal page.
“If you’re a Stripe or a PayPal or any of these organisations requiring the banking infrastructure, you’re beholden to them waking up one day and saying ‘hey, I don’t want to be in this business,’” said Jim Magats, strategic adviser and former senior vice president of omni payments solutions at PayPal. “That’s the control your destiny side.” In addition to the risk of sudden exits, banks serving as BIN sponsors typically have “accepted industry lists” that place limits on what types of clients partners like Stripe are allowed to accept. The primary concerns for bank partners typically include reputation risk and the rate of chargebacks, which occur when a consumer disputes a transaction with a bank. Any business with chargeback rates above 1% could be deemed high-risk, according to Stripe. Since inception, Stripe’s focus has been serving novel enterprises and its track record leaves it positioned to take on clients that larger financial institutions might skip.
“We understand that businesses that have the potential to change the world often look unconventional when they begin, and we want to help ensure that innovation is not unnecessarily stifled,” Stripe wrote in a blog post. “These businesses might not meet traditional requirements, so we work closely with our financial partners to adapt their approaches and support new business models as they arise.”
Legal industries including crypto, digital content creation, or adult content are all sectors that a startup-friendly business like Stripe could service more easily with its own charter.
Crypto, in particular, has been an area of interest for Stripe, which last year acquired stablecoin startup Bridge for $1.1bn (€970m). Crypto is currently listed under Stripe’s “restricted businesses” page, meaning businesses in the sector must receive explicit approval before using the platform. The charter would allow Stripe to set its own standards for which of these businesses it wants to accept onto its platform, rather than conforming to a bank sponsor’s requirements.
“It gives them a bit more leeway in terms of the business models they can support,” said Sophia Goldberg, co-founder and CEO of payments platform Ansa and author of The Field Guide to Global Payments. “They’ll still have to abide by Visa and Mastercard rules, but it gives them more leeway in highly regulated industries that they’re able to process.”
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