We are planning on establishing a “virtual” branch where we will take online loan applications and allow individuals to submit applications to open deposit accounts. Accounts opened at the virtual branch will be transactional accounts capable of accepting deposits and making loan payments. All accounts opened online will be associated with the virtual branch, whereas all other accounts opened at our physical branches are associated with the branch at which they were opened. Does this “virtual” branch fit the definition of a “branch” under the FDIC rules and regulations pertaining to establishing a domestic branch, and do we need to apply for approval pursuant to the Federal Deposit Insurance Act to open this branch? Also, do we need to file an FR Y-10 report for changes in organizational structure?

Whether the “virtual branch” you described would be considered a branch by the FDIC depends on whether the virtual branch is performing an online banking function, which would not be considered a branch, or performing the functions of an interactive teller machine (ITM), which would be considered a branch.

The Federal Deposit Insurance Act requires the FDIC’s consent whenever establishing a new “branch.” The term “branch” includes any location “at which deposits are received or checks paid or money lent,” with the exception of an automated teller machine (ATM), automated loan machine (ALM), or remote service unit (RSU) (described in an FDIC advisory opinion as “a remote, electronic or automated, facility that provides one or more of the core banking functions”). FDIC guidance has also clarified that an interactive teller machine (ITM) is a branch. An ITM is described as a machine providing direct, real-time access to a bank teller via a video link.

We discussed the issue of a virtual branch with an FDIC attorney, who commented that “virtual branches” are not a type of facility currently contemplated by FDIC regulation. She explained that a customer conducting banking activities through your website on their own without any input from bank personnel would be considered online banking, not a branch and a customer’s device is not a “branch” just because it is used to conduct banking activities. On the other hand, if bank staff are controlling the operations taking place on the virtual branch and facilitating the customer’s activities by interacting with them, then that is more like an ITM, which is considered a branch.

Based on the FDIC attorney’s informal analysis, it appears that whether your bank’s “virtual branch” is a branch for FDIC purposes depends on whether the platform is staffed with remote employees who interact with customers and facilitate their banking activities.

Note that FDIC guidance also states that the question of whether a facility is considered a branch can be very technical and encourages banks to contact FDIC regional and Washington office staff for guidance on the issue.

Additionally, we do not believe your bank will need to file an FR Y-10 to report changes in organizational structure, even if the proposed “virtual branch” is considered a branch according to the FDIC. Your bank is not a member of the Federal Reserve System, and we do not believe that state non-member banks are required to file FR Y-10s.

For resources related to our guidance, please see:

Federal Deposit Insurance Act, 12 USC 1828(d)(1) (“No State nonmember insured bank shall establish and operate any new domestic branch unless it shall have the prior written consent of the Corporation.”)

FDIC Regulations, 12 CFR 303.41 (“Branch, except as provided in this paragraph, includes any branch bank, branch office, additional office, or any branch place of business located in any State of the United States or in any territory of the United States, Puerto Rico, Guam, American Samoa, the Trust Territory of the Pacific Islands, the Virgin Islands, and the Northern Mariana Islands at which deposits are received or checks paid or money lent. A branch does not include an automated teller machine, an automated loan machine, a remote service unit, or a facility described in section 303.46 [for certain financial education programs].”)

FDIC, Applications Procedures Manual – Section 7: Establish a Domestic Branch, pages 2, 5 (“A branch does not include an automated teller machine (ATM), automated loan machine (ALM), remote service unit (RSU), or a facility used for financial education programs. Facilities that are remotely staffed and incorporate interactive features are often referred to as interactive teller machines (ITMs). When considering the appropriate classification of an ITM or similar facility, Case Managers should ascertain the capabilities of the facility and as appropriate, consult RMAS [Risk Management Applications Section] staff, as well as RO [Regional Office] and WO [Washington Office] Legal. . . . Evaluating whether a facility is a branch can be very technical, and any questions should be referred to the applicable WO staff (RMAS, LBS [Large Bank Supervision Branch], or CISR [Division of Complex Institution Supervision and Resolution]) and Legal for a determination.”)

FDIC Community Banking Report (2020), Chapter 6: Technology in Community Banks, page 3 (“Interactive teller machines – machines that provide customers with direct, real-time access to a bank teller via a video link.”)

FDIC Advisory Opinion, FDIC-97-5 (July 8, 1997) (“In excluding ATMs and RSUs from the definition of ‘domestic branch’ it is unlikely that Congress meant to exclude staffed banking facilities that engage in one or more of the core banking functions. Otherwise, such an interpretation could be read to exclude traditional ‘brick-and-mortar’ branches. Furthermore, the term ‘remote service unit’ is very similar in name to the term ‘remote service facility,’ and ‘remote service facility’ is defined in the FDIC regulations as an electronic facility. In sum, based upon the above analysis, it is reasonable to conclude that a ‘remote service unit’ includes a remote, electronic or automated, facility that provides one or more of the core banking functions.”) [The FDIC has informed the IBA that it has removed all of its advisory opinions from its website due to a high risk of staleness. We have provided links to archived versions of the advisory opinions for your convenience. If you have a question about an advisory opinion, the FDIC recommends that you contact your FDIC Field Office, which you can find by clicking here.]

Federal Reserve, Instructions for Preparation of Report of Changes in Organizational Structure: Reporting Form FR Y-10, page 2 (“Use the FR Y-10 to report changes to the worldwide organizational structure of . . . member banks. . . . Such changes include . . . establishment in the United States of branches, agencies, and representative offices of FBOs and activities through managed non-U.S. branches. . . .”)

Federal Reserve, Instructions for Preparation of Report of Changes in Organizational Structure: Reporting Form FR Y-10 , page 54 (“State Member Bank (SMB): A state-chartered bank that is a member of the Federal Reserve System.”)