Banking licenses in 2019: difficult for FinTech?
How fast are things changing for FinTech and banking licenses in 2019? Fast. FinTech entrepreneurs and innovators are struggling to deal with the regulatory framework that state governments and central banks have set up to deal with a new class of transfer payments and credit scheme companies.
The regulatory framework that exists now was set up to regulate and maintain the integrity of a brick and mortar banking system that has existed in more or less the same form since the industrial revolution matured. The new class of institutions coming online now seeks to throw off this old order, but how can they do this without the banking licenses and other things they need in order to operate efficiently, credibly, and legally within the international financial system?
A lot of what FinTechs need to do to become compliant depends on the jurisdiction they’re operating in, of course. Banking licenses in the UK, for example, are regulated by the Financial Conduct Authority and the Prudential Regulatory Authority of the Bank of England. Let’s discuss some resources they’ve put together that are also relevant in other jurisdictions.
First things first, do you need a bank?
The first question is, what exactly are you intending on doing? Even traditional banking activities, such as taking deposits and lending money, might be better suited for a credit union, rather than a full-fledged bank with a banking license. A credit union, for example, might just lend to one area of a country or to a specific class of people, thus a banking license might not be appropriate. If you’re going to set up an organisation to loan money to small business or non profit organisations, you may instead want to set up a community development finance institution. These alternatives are the types of institutions that you might consider instead of going through the full, costly banking license procedure.
What exactly is a bank?
Your organisation or the plans for your organisation only really need a banking license if they fall under the regulated activities required by a banking license, or in other words if you are actually doing some banking. It might be useful then to review what a bank is for the purposes of regulation.
The legal definitions are set out by the PRA rulebook as:
a firm with a Part 4A Permission to carry on the regulated activity of accepting deposits and is a credit institution, but is not a credit union, friendly society or a building society; or
an EEA bank (EAA banks are in general subject to their home regulatory regime and are therefore excluded from the definition).