Square, Nelnet, Varo, Brex – they all have something in common. Aside from being fintech companies, all four companies are chartered in Utah. The state has seen an influx of fintech companies in recent years. In the past five years companies including SoFi, Plaid, Carta, Brex, and Affirm have all opened offices in the state. In 2016, SoFi opened its regional office in Utah, adding 400 jobs to the community. Even traditional players like Goldman Sachs has an office there, and it’s not just a small post. Its Utah location is the 4th largest office globally and is also the branch behind the Apple card. The area’s startup scene has also been thriving, with large fundraising rounds and successful unicorns being generated. Utah’s startup success, particularly in fintech, can be attributed to four key factors: favorable regulations, generous tax laws, capital, and talent.
Regulations
Just like Delaware has become the hot spot for companies to incorporate, Utah has become the equivalent for banking. It is one of seven states that has an ILC (Industrial Loan Company) charter. This charter allows non-bank-owned companies to provide various deposit and lending services to customers without being subject to federal bank holding company regulations. The Federal Reserve does not regulate industrial banks under the Bank Holding Act, and instead they are regulated by the chartering state and the FDIC (Federal Deposit Insurance Corporation). Utah-headquartered industrial banks now make up two-thirds of US industrial banks and 93.5% of the U.S. total assets for industrial banks. A recent example of an industrial bank is Square. While known as a card reader and POS payment system provider, they successfully chartered an industrial bank in 2021 allowing them to create Square Financial Services, and launch business loan and deposit products. Rakuten is attempting to do the same and applied for an ILC charter for the third time in Utah early last year. They aim to provide the same business model as in Japan where e-commerce is linked directly to Rakuten credit cards and points. However, their previous two applications were withdrawn due to opposition from the banking industry. Many worry not about a foreign player entering the market, but that this may create a precedent for large e-commerce companies, most notably Amazon, to follow suit. Congress does not allow commercial companies to own industrial banks without being a bank holding company (BHC), which undergoes consolidated supervision by the Federal Reserve. The ILC chartering system is the loophole to this rule. Retail giant Walmart was forced to drop a similar application back in 2015.
Tax Laws
Utah has been generous with its tax rebates as well – handing back up to 20% of state taxes to companies willing to expand into the state. Companies like SoFi and Carta are expected to receive an average of $1.7M each over the course of 5 years for moving into the state. Additionally, following Japan’s introduction of a regulatory sandbox in 2018, Utah established one specifically for fintech. Participating companies can temporarily test innovative financial products or services for 2 years without being licensed or authorized under state laws. This May, the government signed off on the Blockchain and Digital Innovation Task Force bill to further develop policies on blockchain and fintech as well. It also passed the Digital Assets Amendment which will recognize digital assets as a property right.
Capital
Utah’s fintech ecosystem wouldn’t be complete without its healthy pool of capital. As of Nov 2021, it ranked as the 7th state for venture funding per capita and had over $3.4B in total funding. That’s almost double their 2020 figure, and slightly exceeds Japan’s total VC investment of $3.3B in 2021. This is even more impressive considering they are only the 29th largest state by GDP and the 30th largest by population.
When looking specifically at Fintech, Utah has generated multiple successful companies. 40% of the largest VC deals in 2019 went to fintech companies including the largest round for Divvy’s $200M Series C. They were later acquired by Bill.com for $2B.
Talent
The blend of being both a hub for industrial banks and fintech has naturally made Utah a machine for banking talent. Industrial banks in Utah employ 6,500 locals and the additional move of fintech companies into the area has encouraged students to prepare for finance-related careers. Universities in the area including The University of Utah and Brigham Young University (BYU) have been key institutions driving education in the state. These colleges offer cutting-edge courses such as ‘Blockchain and Cryptocurrency Law’ and ‘Fintech Projects Lab’, and their efforts seem to be paying off. BYU provides the most graduates to Goldman Sachs than any other university in the country! The University of Utah also comes into the top five. It’s good to note that living costs are significantly cheaper in Utah, hence companies can hire employees at costs significantly lower than in Silicon Valley or New York.
Utah has managed to create a fintech ecosystem that is threatening even Silicon Valley’s home state. California’s Gov. Gavin Newsom has been vocal about retaining fintech companies and proposed laws to make it easier to charter ILCs in the state, a step to keep companies from going to Utah. It will be interesting to see how technology and venture capital funding will continue to disperse into cities outside of Silicon Valley, as well as how other cities and countries model Utah to enhance their own fintech industry. I will be exploring some of Japan’s fintech regulations and market structures in a future post. If any readers are working on fintech startups reach out!
Thanks to SiliconSlopes for being a key source for this blog.
Associate @ Coral Capital
