Utah: The fintech frontier

Fintechs looking to expand beyond their Bay Area or New York City headquarters have welcomed an unlikely visitor in recent years: Utah Gov. Gary Herbert. “The governor is a great salesperson,” said Val Hale, executive director for the Utah Governor’s Office of Economic Development. “We’ve done a lot of trips to Northern California, Southern California, New York. The governor will go sit down with the CEO of the company and explain the virtues of doing business in Utah,” Hale said. The Utah pitch starts with a team from the Governor’s Office gauging a far-flung company’s interest in opening an office in the state. If the company is interested, the governor will fly out to close the deal. Hale estimates Herbert does these trips about three times a year, visiting six companies a day when he’s on the road. “We’re not saying, ‘Hey, uproot your headquarters and bring them to Utah,’” Hale said. “They want to have that Silicon Valley, San Francisco address. But a lot of them want to grow, and they want to grow in a place where it’s more affordable.” But Gov. Herbert’s scrappiness doesn’t exist in a vacuum. Utah has been aggressively pursuing fintechs to open new offices in the state for years, and its regulatory framework makes it a prime destination for financial services companies looking for a bank charter. The strategy is attracting some of the biggest names in the industry, with the likes of Goldman Sachs, American Express, Ally, Brex, Square, SoFi, Galileo and Varo Money all holding ties to the state . Setting a new basecamp When San Francisco-based Varo Money was looking into a second location in 2017, Chief Operating Officer Wesley Wright had a pretty good feeling about where the company would land. “It was clear to me that the Salt Lake City area and Utah was going to be the right place,” he said. Varo, a digital banking startup founded in 2015 that had close to 2 million customers as of June , has employees working in finance, customer service, risk, product and engineering in the Salt Lake City area. Tech talent is in high demand in places like San Francisco and New York. With schools like Brigham Young University, the University of Utah and Utah Valley University nearby, fintechs can scoop up talented college graduates to stack their rosters. Goldman Sachs , meanwhile, offers summer analyst programs in Utah, grooming young professionals into appealing full-time hires for growing fintechs. Plus, the lower cost of living and cheaper real estate make for enticing expansion plans. [caption id="attachment_185766" align="alignright" width="410"] Varo's Salt Lake City team, image via Varo Money[/caption] “We looked for quite some time overall for lower cost, high pool of talent locations throughout states that are within a couple hours flight time of San Francisco,” said Carmen Collyns, head of PR and communications at Brex . The 3-year-old corporate card startup with a reported valuation of $2.6 billion opened a location in Salt Lake City last fall. According to Collyns, a lot of the Salt Lake City employees are Utah natives, but the company did send employees to help get the office started, what the company calls “seeding the office.” But it isn’t just deep talent, cheap living and beautiful scenery that make Utah so appealing to fintechs. The state offers a tax credit called the “Economic Development Tax Increment Financing (EDTIF).” Companies that move or expand into Utah and create at least 50 new jobs at a minimum of 110% of the county average annual wages are eligible for a tax credit rebate of up to 30% of new state revenues through the EDTIF, according to EDCUtah , a nonprofit dedicated to growing companies in Utah. The state also offers an Industrial Assistance Fund, which gives companies a grant based on the same stipulations, and Utah ranked third on Forbes’ Best States for Business List in 2019. But tax incentives for big business create tension in some states. Earlier this year, Seattle officials went in the opposite direction and proposed a tax on companies that have payroll expenses over $7 million, with the goal of helping low-income families and offsetting problems associated with rapid growth, like homelessness. The Seattle area hosts big names like Amazon, Microsoft and Zillow. Amazon’s planned expansion to Long Island City in New York brought concerns of gentrification and overly lucrative incentives, and imploded in the national spotlight after opposition from local officials. Utah’s business-friendly stance, meanwhile, is an appealing option for growing startups. The types of roles and projects coming out of Utah vary. Although startups like Brex and Varo have customer service employees working in the state, technology-related roles are also found in Utah. Goldman Sachs, for example, has engineering roles based in Salt Lake City; SoFi offers multiple senior engineer positions in the area, and Brex has roles in risk and compliance, according to LinkedIn. Varo’s Wright said customer service employees, for their part, are involved in new innovation projects at the startup, which has a Slack channel entirely dedicated to new ideas to improve the company and its products. Customer service agents post ideas that come to them after interacting with customers, many of which become part of the company’s project backlog. Although he didn’t give specifics, Wright said some upcoming features are a result of this idea stream, and they generally revolve around reducing friction for customers or making it easier for agents to help. As for navigating the cultural differences between San Francisco and Utah, a right-leaning state with a large Mormon population, Collyns said Salt Lake City’s culture is closely aligned with that of the West Coast. She added that the region is diverse across age groups and races. Wright, meanwhile, said a variety of backgrounds can make a company like Varo stronger, noting that the Mormon church’s missionary program molds employees that have had broad exposure to the world. “They’ve lived in other countries and learned other languages, and that’s very helpful,” Wright said. Charter-mania It isn’t just fintechs looking for a second location that make Utah a hotspot. While the state’s regulatory framework makes it an ideal landing point for banks, the beneficial banking environment comes with some controversy. Utah is one of seven states to offer an industrial bank charter. State-chartered industrial banks, often known as “industrial loan companies,” are subject to FDIC regulation and offer FDIC insurance. They do not, however, need to comply with the Bank Holding Company Act and thus are not subject to oversight from the Federal Reserve like other state-chartered banks. Utah’s industrial bank charter has become a popular route for financial services companies looking to become banks. Square received conditional approval for its industrial charter through Utah in March, while Edward Jones submitted an application through Utah earlier this month. SoFi, which last week applied for a national bank charter , initially tried getting an industrial charter through Utah in 2017 before abandoning the plan. [caption id="attachment_185760" align="alignright" width="379"] Zion National Park, image via the National Park Service[/caption] Although there are six other states that offer an industrial charter, Utah is popular because it has shown it’s receptive to chartering new institutions, according to Robert Savoie, an attorney at McGlinchey. He added that the state’s comparatively less intense regulatory structure and deregulated interest rates make it a popular chartering destination, as institutions can export those rates to other states. Industrial bank charters have faced criticism, however, for providing a loophole to nonbanks looking to gain a bank charter without facing the same scrutiny as other state-chartered banks. Walmart, for example, abandoned its plan to obtain an industrial charter in 2007 amid heavy criticism from lawmakers and bankers alike. U.S. Sen. John Kennedy (R-La.), recently proposed the “Eliminate Corporate Shadow Banking Act of 2019,” which was endorsed by the Independent Community Bankers of America, to stop nonbanks from obtaining charters. “ The issue has become increasingly relevant as nonbank technology companies such as Rakuten, Square, SoFi, and Nelnet have sought ILC charters under Utah law and filed deposit insurance applications following ICBA’s successful campaign against Walmart’s bid for an ILC charter,” the ICBA said in a statement . However, the idea that industrial charters are an unregulated free-for-all is “comically far from the truth,” Savoie said, stating that the FDIC and state regulations are still significant. “You can decide from a policy perspective whether you like it or not,” he said, but “people have been arguing about money since money was invented .” Companies looking to set up a bank through an industrial charter in Utah need approval from the Utah Department of Financial Institutions and the FDIC. The Bank Holding Company Act exemption, however, means the bank’s corporate owner doesn’t need to be a bank holding company, and an industrial bank doesn’t need Office of the Comptroller of the Currency approval. See also: Varo, with $241M Series D, plans to become a bank this summer Industrial charters aside, Salt Lake City is a popular destination for financial services companies working with traditional bank charters, as well. Varo, for example, plans to become a national bank this summer after a three-year journey that included FDIC approval in February and preliminary approval from the OCC in 2018, and its banking office is in the Salt Lake City area. Ally Financial’s bank subsidiary, Ally Bank, is regulated by the Federal Reserve and is headquartered near Salt Lake City. American Express National Bank is also based in the city. According to Wright, the expertise and talent in banking, customer service and tech make Salt Lake City attractive for banks, even those with a national charter. “The three of those things are done really well across a number of companies in the Salt Lake City area,” he said. Utah boasts some of the best outdoor recreation in the country, with the Wasatch and Oquirrh mountain ranges surrounding Salt Lake City. Between Park City, Snowbird and Alta, the state features some of the best skiing in the world, and is also home to Sundance Film Festival, Zion National Park and world-famous rafting, all of which are a draw for millennials and others across the fintech spectrum. The state of Utah, however, is keeping its message simple, according to Hale, of the Governor’s Office of Economic Development. “Our governor’s favorite motto is, ‘I want to keep the government off your backs and out of your wallets,’” he said. Bank Innovation Build , which takes place Sept. 9-10 as a virtual experience, is a must-attend industry event for professionals overseeing financial technologies, product experiences and services. Register here .

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