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Bank ownership: Those acquiring an LPB charter may operate a more
focused business model that allows these entities to
Been there, done 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
that – not quite 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.

To be feared and loved?
By Ken Musante Michael Scott, the regional manager for Dunder Mifflin in
Napa Payments and Consulting the NBC sitcom The Office, famously said. "Would I rather
be feared or loved? Easy. Both."
n 2007, two years before it was acquired by KKR,
First Data converted its industrial bank to a non- I believe Fiserv's motivation was greater than shaving off
depository trust. Previously, First Data had used a fraction of a basis point in sponsor fees. Fintechs have
I the bank for sponsorship, but over time, it found it continually been limited by the absence of a bank charter.
was less expensive to buy sponsorship from a traditional Ultimately, to offer a truly embedded banking solution,
bank than to carry the expense associated with having a processor needs to partner with a financial institution.
and owning its own bank. Upon the acquisition, KKR also With its own banking charter, Fiserv can become a direct
believed the capital required to own and run the bank was member (or customer) of Visa and Mastercard and not be
not efficiently deployed. beholden to sponsor banks and their platforms.

Banks are required to hold minimum levels of capital based Instead, Fiserv may own the BINs and ICAs for its clients
on their outstanding loans. Essentially, a bank's capital and, with the rising federal funds rate, take advantage of
is the difference between its assets and liabilities—its the float on funds. Better still, with its own charter, Fiserv
equity. There is no such capital requirement for non-bank may unify the act of opening both a deposit account and
entities. Consequently, return on equity (or capital) for a merchant account. A common dashboard can display total
bank is typically less than it is for non-bank companies. activity, and a single app can be established for processing,
The return First Data was making from the bank side was money transfer and merchant cash advance. Buy now, pay
muting the return it was making from the processing side. later (BNPL) becomes a feature and real-time payments
(RTP) an added benefit.
Given this backdrop, it is interesting to see that Fiserv
(which merged with First Data in 2019, four years after Be it ACH, credit card processing, RTP or push to debit,
KKR spun it off) filed to establish a limited purpose each of these solutions has required the participation of
bank charter. After all, Fiserv had a bank charter and a bank. If Fiserv wishes to develop a super-app and its
determined that strategy was suboptimal. Why is it again own on-us network, the Office of the Comptroller of the
seeking to open and run a bank? Currency has provided a potential path. Fiserv could
power other banks and ISVs seeking this capability and be
The limitation game more than just a payment processor.

First, the OCC has established a new category of bank, As founder of Humboldt Merchant Services, co-founder of Eureka
called the Limited Purpose Bank (LPB). LPB refers to Payments, and a former executive for such payments innovators as
a type of bank that is not in the business of extending WePay, a division of JPMorgan Chase, Ken Musante has experience in
loans to retail customers, except on an incidental and all aspects of successful ISO building. He currently provides consulting
accommodation basis. LPBs have a less onerous regulatory services and expert witness testimony as founder of Napa Payments
framework than other banks. The designation provides and Consulting, www.napapaymentsandconsulting.com. Contact him
regulatory clarity to accommodate evolving trends within at kenm@napapaymentsandconsulting.com 707-601-7656 or www.
the financial services industry. linkedin.com/in/ken-musante-us.

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