When my startup, Figure, recently withdrew our OCC bank application, many in the media took it as a sign that fintechs like us need to become a bank to survive—but that the process is simply too hard. They got it wrong. Figure didn’t withdraw its application because it couldn’t become a bank, we did it because we no longer have interest in being one. And I don’t think we are alone.
There are many compelling reasons for a fintech to become a bank, starting with the simplicity this would provide when it comes to licensing. Today, Figure has over 200 state licenses for lending, servicing, and money transmission. If we were a bank, we’d operate as a state or national bank, and export that banking license to all of the states we do business in. Having one regulator has the potential to generate significant operational and compliance savings, while ensuring a consistent product offering to all customers.
Banks also have the ability (and the requirement) to take in deposits insured by the FDIC. While some banks have suffered runs on deposits recently, deposits and other funding backstops that go with accepting them—such as the FHLB and the Fed Window—provide for lower costs and more predictable financing than wholesale capital markets.
So why wouldn’t a fintech want to be a bank? There are several reasons, starting with capital requirements. Most mortgages today are originated by non-banks, in part because the punitive capital treatment banks receive on mortgages and mortgage-servicing rights make originating these loans uneconomical. The recent bank failures have driven a new regulatory push to increase the capital held by larger banks and how they measure risk. If approved, these rules will drive more lending out of banks and toward non-bank lenders, including fintechs.
The issue of capital requirements also creates incentives to remain a fintech when it comes to growth. Specifically, banks tend to trade on a multiple of book value, not earnings, which means it’s rare for a bank price to book a multiple above 2. A fintech trades on earnings and can increase market capitalization through revenue growth and/or margin improvement. A bank can generally only do this through additional equity capital.
This macro backdrop of more lending moving from banks to fintechs, and of public company valuation restrictions, contributed to Figure’s decision to withdraw our bank application. But the primary reason we withdrew was the U.S. bank regulator’s view on public blockchains.
Figure has been a pioneer of real-world asset transactions on a public blockchain, driving over $8 billion in locked value on Provenance Blockchain and using the technology to introduce significant efficiencies and economic benefits when it comes to lending, securities trading, fund administration, and more.
We also believe the opportunities for blockchain will expand as banks step back from lending and trading, and are supplanted by a deep and robust private capital market for loans and loan securities. As this market emerges, we predict it will replicate the GSE structure—with non-bank lenders adhering to a common set of underwriting standards, locking rates with TBA securities and delivering loans into rated pass-through certificates.
In time, this private capital market will benefit businesses and consumers by lowering the cost of credit and expanding access to it. Figure—along with industry peers—will drive the development of this marketplace on public blockchains, which displace trust with truth, and this market requires truth to work.
The U.S. has always been a hotbed of innovation. The technologies that have emerged over the last century from our financial system have influenced global markets in unfathomable ways. But so long as regulators, and banks themselves, stall the adoption of blockchain technologies and other fintech solutions, we believe the banking sector will increasingly find itself on the sidelines of a fundamental transformation in the way money flows. We hope that, over time, the merits of a public blockchain will gain recognition. Until then, we will continue to innovate as an independent fintech company.
Mike Cagney cofounded SoFi and later cofounded Figure, where he’s CEO. The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
