There is an old saying, “if you can’t beat them, join them”. Although the players in digital banking and fintech sprang a surprise on the legacy banks and gained a very rapid and substantial foothold in the world of customer banking, there was always the sense as they grew larger that they needed to take one more step.
In their establishment, fintech operatives had several specific advantages over regular banks, mainly in their lack of capital committed to a legacy infrastructure, which meant they could develop their market presence with an innovative start-up culture. One study has shown that for fintech companies, the cost of acquiring a new customer usually ranges as low as only between $15-$35 per customer, as against between $100-$200 for legacy banks for a virtual bank account.
All of this allowed them more time to focus on the products necessary for attracting a customer base. While these advantages paid dividends for the financial services industry, there is still an advantage to having a bank license. One example of this trend is the move by Revolut, one of the most outstanding and successful UK fintech operators, to register as a regular bank, first in the USA and now in the UK.
To extend the range and depth of their services, fintech operators need the authorization that only comes with full registration as a bank. That can only come by acquiring a banking license that gets the necessary approval from regulators.
We will focus in this article on specific steps that are being taken in the UK fintech sector, mainly because this constitutes more than 70 percent of the total in the simple sense of the number of operators, and an even greater slice of the pie when the volume of business is considered.
The feature that defines a bank is that it is an entity that carries out deposit-taking.
To begin the process of applying for a license, the following are the main process steps that fintech management should be prepared to take in order to meet the regulatory qualifications:
- Risk management – evaluate the risks associated with that step-up into banking
- Capital adequacy – capital adequacy of banks is tightly regulated all over the world. By dividing a bank’s capital by its risk-weighted assets, you can calculate the capital adequacy ratio. The main steps for assessing a bank’s capital adequacy are:
- capital adequacy ratio
- tier 1 leverage ratio
- economic capital measure
- liquidity ratios
- Liquidity assessment – a Liquidity Coverage Ratio (LCR) is derived over a 30-day stress period by calculating the ratio of high-quality liquid assets (only those easily and quickly converted into cash) to net cash outflows
- Owner/controller assessment – examines the depth of spread of control and ownership
- A Regulatory Business Plan (RBP) based on relevant market research that sets out a business model explaining how the business will become profitable and self-sufficient and why this is likely.
Each application is reviewed individually and the decision is subject to supervisory judgment. The aim is to have a positive approach to the requirements for new banks in order to facilitate greater competition, in line with the authorities’ objectives.
Some of the key features are:
- A sense of risk awareness along with effective management arrangements
- A strong board, providing effective leadership by setting business strategy and managing risk. Boards should have balance, knowledge, skills and independence as well as experience.
- A comprehensive business model that includes consideration of risks to its delivery as well as the underlying rationale for setting up this specific new bank. Identifying the key competitors is also a necessity.
- An effective risk management plan that ensures that the business strategy is delivered in a controlled manner and protects the interests of the depositors and other stakeholders.
- Promoting an appropriate risk culture is essential in identifying imminent risks and reducing any likelihood of existing risks materializing.
- Senior management and the board are responsible for ensuring that a proper risk management framework is in place. It must be tailored to the nature and complexity of the business and its risk profile.
Fintech companies that feel the need to take the first step toward licensing as a regulated bank can talk to our expert team, who have the knowledge and experience that will smooth the path toward an effective conversion.