FinTech companies are offering services similar to or even seamlessly identical to the services offered by traditional banks.
You can store money on your digital account, get your own debit card, transfer money to and from another account, etc. From the outside, these FinTech companies look like banks. But you may be surprised to find out that the majority of these ‘online banks’ are not banks at all.
What is a bank?
A bank is a financial institution that receives deposits and extends credit. Deposits are invested as loans including credit cards, auto loans, mortgages and business loans. Banks earn a profit by charging an interest rate on the loans. In the United States, banks must obtain a banking charter. The charter may be issued by individual states or the bank can apply as a national bank and receive approval from the federal government. In order to receive a banking charter, the bank must meet several requirements such as having a specified amount of capital assets, obtain banking insurance, etc. After a bank has been chartered, the bank must comply with extensive regulatory requirements such as complying with the Federal Reserve Requirement. The Federal Reserve Requirement mandates the percentage of deposits that can be lent out as loans and the percentage that must remain as liquid assets in the bank’s vault.
What is a FinTech company?
The majority of FinTech companies offer services similar to those of a bank, but they are not banks themselves. Obtaining a banking charter requires the company to meet minimum capital requirements that most startup FinTech companies cannot fulfill. Instead, FinTech companies have partnered with established banks to offer both unique and familiar financial services. One company offers to round up your credit card transactions and invest your spare change. Other companies make it easy to exchange currency and offers a debit card that can be used in almost any country.
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