Challenger Banks

Banking used to be a world defined by branches, balance sheets, and legacy cores. Increasingly, it's defined by code, charters, and stablecoins, and the latest moves from Circle and PayPal show just how fast that shift is happening. 

Over the past week, Circle, the issuer of USDC, received conditional approval from the OCC to launch a national trust bank, the First National Digital Currency Bank. The charter will let Circle bring the reserves backing USDC fully under federal banking oversight and offer digital-asset custody and related services to institutions. 

Almost simultaneously, PayPal filed applications with the Utah Department of Financial Institutions and the FDIC to create "PayPal Bank," an industrial loan company that can hold FDIC-insured deposits and expand the firm's small-business lending.

For a decade, the playbook for many fintechs and crypto firms was to sit just outside the core banking perimeter by relying on partner banks, state trust licenses, and payment networks while keeping regulatory capital and supervision at arm's length. That strategy is hitting its limits. 

Stablecoins are going mainstream. New federal rules like the GENIUS Act are pushing issuers toward bank-level oversight of reserves and risk management. Circle's trust bank is designed explicitly to park USDC reserves inside a federally supervised entity. Customers want protection, not just convenience. FDIC insurance, prudential supervision, and clear resolution regimes matter once balances get large and institutional. PayPal's proposed industrial bank would make customer deposits explicitly FDIC-insured, a big step up from today's quasi-bank wallet model. Funding costs and control matter.

Same Direction of Travel

It's important to separate what kind of bank each is becoming. Circle's national trust bank is supervised by the OCC and focused on custody and reserve management for USDC and related digital assets. Trust banks like this cannot take retail deposits or make traditional loans, but they can act as the institutional plumbing behind stablecoins, tokenized assets, and on-chain settlement. 

PayPal's Utah industrial bank is a state-chartered depository institution eligible for FDIC insurance but exempt from the Bank Holding Company Act's definition of a "bank," meaning PayPal itself doesn't have to become a full bank holding company. It can accept deposits and extend credit, with a focus on small-business lending and savings products. 

The common thread, both moves pull fintech and crypto deeper into the regulated banking stack, rather than competing entirely from the outside.

What This Means for Traditional Banks 

For traditional banks, this is both a competitive threat and a structural shift in the value chain. On one side, PayPal Bank would compete directly in deposits and small-business lending, leveraging a massive existing user base and data advantage. On the other, Circle's trust bank reinforces a world where stablecoins and tokenized deposits become core settlement rails, not fringe experiments, something we're already seeing with Visa's expansion of USDC settlement for US banks. 

Traditional banks are right to worry about regulatory arbitrage, lighter capital or liquidity constraints for new charters that still tap into the same payment and wholesale funding systems. Banking trade groups have already raised concerns about systemic risk and uneven supervision as crypto firms move into trust bank status. But there's also opportunity: many regional and community banks may end up partnering with these new entities for tokenized payments, custody, or white-label stablecoin rails rather than building everything themselves.

Banking as an Open, Modular Stack 

The Circle and PayPal moves point toward a banking sector that looks more modular. Trust banks are managing digital reserves and custody. Industrial banks are being embedded inside large platforms, focusing on lending and insured deposits. Traditional banks are specializing in relationship banking, credit underwriting, and complex balance-sheet management. Payment networks (like Visa) are increasingly settling not just in fiat, but in regulated stablecoins.

What to Watch Next

For investors and industry watchers, a few fault lines will matter: 

• Conditions on these charters: capital, liquidity, reserve, and risk-management requirements, and how closely they mirror traditional banks.
• How far trust banks go: whether they remain custody/reserve utilities or evolve into broader transaction and settlement hubs.
• Regulatory convergence: whether Congress and regulators continue to nudge stablecoin issuers and big fintechs into bank-like frameworks, narrowing today's grey areas.

Circle and PayPal aren't trying to replace banks anymore. They're trying to be banks, in new forms. How regulators shape those forms will go a long way in determining what "banking" looks like in the next decade.