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Banking licenses in 2019: difficult for FinTech?

 
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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:

  1. 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 

  2. an EEA bank (EAA banks are in general subject to their home regulatory regime and are therefore excluded from the definition).

The FCA, of course, has another definition you should mind, and that is according to the Financial Services and Market Act of 2000. This definition stipulates that the taking of deposits and the lending of money is the main requirement for an entity to be regulated or to qualify as a bank, and thus require a banking license. Do you plan on having activities that fall within these definitions? If so, you might be in need of a banking license. Take a look at this great resource from the bank of England regarding whether or not you might need a banking license. They also have put together a sheet on the alternatives to becoming a bank and receiving a banking license, which you can take a look at here.

Do you need a new banking license?

Geography and previous operating history are the biggest determinants of whether or not you need a new banking license. Firstly, if your new organisation is going to be headquartered in the UK, then you’ll need a new banking license. A new entity headquartered in any country will probably fall under the banking regulations (or any other kind of regulations). If you’re already operating in the European Economic Area, then you can “passport” into the UK, but if you want to operate a wholly-owned subsidiary, then you’ll need a banking license. If you’re operating outside of the EEA as an international bank or if you’re operating in another country already as a bank, your organisation will still new a new banking license. The authorisation process will be the same as if you were starting up a new bank in the UK, even though you’re already operating internationally as a bank.

What types of things are the regulators looking for? 

Initially, the banking license will be looked at for qualified entities based on criteria and documents that range from business to the background of the founders. However, initially, they will be interested in your business plan, who you are (your board of governors and officers), your planned capital investment or financial resources, your IT strategy (which is especially important for FinTech firms), and your plans for any outsourcing. 

Consider also whether or not you’ll be undertaking any other regulated activities as part of your normal, everyday business. Lending money for mortgages or insurance purposes requires additional licensing other than banking licensing. 

What are the phases of authorisation for the banking license process?

The PRA defines three distinct stages, Pre-application, Application and Mobilisation. In the first phase, you work with your organisation, the PRA and other stakeholders to determine your needs and to prepare your application. This is where traditionally consultancies like Sorq can be a great help to you. The application phase is defined as when your application has been submitted for review, and the Mobilisation phase is the optional phase that, after approval, your organisation enters into when it begins to prepare for its operations.

When can you access payment systems?

Start thinking about this early on, and compare the options. You’re going to be working with one or another payment system operator no matter what happens, so you should be aware of which one will work best for you. 

There are three levels of access once you’ve received your banking license. Full Direct Access allows you to have both the direct technical and settlement relationship with the PSP. Direct technical access is when you have a settlement partner or sponsor for the settlement portion, but still handle the technical part. Indirect access is when both the technical and the settlement portions of transactions are settled by an Indirect Access Provider. Your firm's needs, operations, and level of operating capital all play into the decision over what level of access you should seek and will be able to get. 

The payment schemes are well known to you, though you might not realize it. Internationally, they are the SWIFT scheme, and within the UK, there is LINK, Bacs, C&CCC, CHAPS, Faster Payments, and Paym. Card schemes are Visa, Mastercard and American Express. Each scheme has a different special use case, although some overlap, so it is up to your organisation to determine which one is best for your business operations. 

Is my FinTech a bank now?

Be careful about this, calling yourself a bank or even using words such as bank in your domain name is protected by legislation. The use of words like “banking” and “bank” within your official documents or other marketing materials without receiving the proper authorisation first, even during the application process - is strictly regulated and prohibited, in order to not mislead the public.

Once you’ve received your authorisation from the PRA and the FCA, and you’ve received your banking license, then you can truly begin to operate as a bank. 

 

 

Sorq provides consultation services for companies on these and many other issues related to finance, banking, and payment schemes. Contact us today if you need help navigating the regulatory waters surrounding the international financial system.