AUTHOR: Aaron Byrne, L.E.K
PayPal’s pursuit of a banking charter is the latest move in a broader migration of non-bank institutions into the regulated financial core. Following in the footsteps of Block (Square) and SoFi—both of which have operated under Industrial Loan Company (ILC) charters since 2021—a diverse array of players is now seeking entry. From automotive OEMs like Ford and GM to crypto-native firms like Circle and Ripple, if the filings for bank charters move toward approval, the limitations on non-bank lenders will quickly become a relic of the past.
This shift has been accelerated by the current administration’s focus on competition. Policies, such as the August 2025 executive order, “Guaranteeing Fair Banking for All Americans,” have opened the door for non-traditional players to spur economic growth and challenge the status quo. While traditional banks often view the ILC path as a regulatory loophole, the reality is simpler: increased charter diversity spurs innovation and intensifies competition.
The Strategic Shift: Capital and Distribution. For these new entrants, a charter unlocks two primary strategic advantages:
- Normalized access to lower-cost capital.
- The elimination of intermediaries through direct and embedded distribution.
Critics argue that this expansion risks over-leveraged balance sheets and increased credit exposure. However, this overlooks the reality of the last decade. Non-banks have utilized “sponsor bank” relationships to indirectly extend credit for years, while the shadow banking sector, or non-bank financial intermediation, has grown to exceed $250 trillion globally. Bringing these players into the regulatory fold doesn’t create new risk so much as it formalizes existing activity.
What This Means for SMBs: From Concentration to Competition. Currently, traditional banks hold a formidable $2 trillion-plus in Small and Medium Business (SMB) deposits. While the lending market for SMBs is fragmented, deposit concentration remains high. As non-banks secure charters, this “fuel for lending” will migrate, giving CEOs and CFOs legitimate alternatives for where they hold their funds.
Historically, the SMB lending landscape has forced leaders into undesirable trade-offs. Traditional banks often lack the speed, ability, or willingness to underwrite short-term needs, while alternative lenders provide speed only at a premium. In response, FinTechs have spent years integrating into the SMB “stack”—offering accounting, cash management, and inventory tools. By owning the data and the deposit, these new banks can offer rates based on an intimate, real-time understanding of a business’s cash flow.
The Bottom Line for Leaders The disparity between where an SMB holds its cash and where it receives its best services could finally be narrowing. For the modern CEO, this means increased leverage. The most significant risk to the 44% of US GDP driven by SMBs is not “unfettered lending,” but rather the continued inefficiency of a legacy model that no longer fits the modern digital landscape.
As the boundary between “tech company” and “bank” dissolves, SMB leaders should welcome the shift. However, maximizing this new landscape will require a willingness to invest in deeper diligence. The “best-of-breed” financial stack is here; the challenge now is choosing the right partners to build it.
