FINTECH IN BANKING
There is no standard definition of banking Fintechs, and we will include ‘neobanks’ and ‘digital challengers’ that offer banking, payments, and other similar services within our definition. They may or may not have a full banking licence and may have another form of approval from their regulator to offer and conduct their services. In the Regulatory Changes section, we discuss these options.
Consumer benefits
The product model is aimed at tech-savvy and enabled consumers and offers a simpler, more accessible way to manage their money, often providing free budgeting tools that help financial education.
A slimmer business model allows higher rates of credit interest, lower debit interest rates and lower fees. Most offer a debit card-led product, with some offering credit cards. Most do not offer credit, helping keep their costs down, and limit risks, and also avoid having to be fully licenced.
They also, because of their more modern technology, offer a more consistent experience for customers compared to the more complex journeys of traditional banks with legacy systems.
Regulatory Changes
Relaxation of financial services regulations, especially in banking, play an important part in the ‘Fintech Revolution’. Regulators across the world have taken different approaches to relaxing regulations to promote competition, innovation, and better consumer outcomes.
The biggest area of Fintech is banking. This summary shows some of the differences between the three tiers. As the UK was one of the first countries to relax the rules, we will discuss why there are different approaches.
Because of the systemic risk to the financial system of the failure of an organisation with a banking licence, the regulations are far more rigorous.
What’s the difference between a full banking licence, an eMoney licence, and a payments licence?
Whilst traditional banks have always operated under a full banking licence granted by their regulator, new eMoney licences remove the capital and liquidity barriers to market entry that encourage challengers to offer innovative products and services.
From the later 2000s, changes in the regulations governing banking, payments and other financial services allowed new businesses to offer financial services.
Usually, for consumer protection, a Fintech that doesn’t have a full banking licence is not allowed to call itself a ‘bank’. Confusingly, some Fintechs with a full banking licence drop the word ‘bank’ to differentiate themselves in consumers’ eyes.
Using the example of the UK, using local and EU-wide regulations, the banking regulator took an active approach to lower barriers to entry, and introduced a three-tier regulatory system. The result is a very active and competitive market, where new entrants can enter and work towards a full banking licence if they wish.
| Banking | Electronic Money | Payment Institution | |
| Primary Legislation | Regulated by Financial Services and Markets Act (Regulated Activities) Order 2001. | EU Electronic Money Institution Directive 2009/110/EC | PSD2 Directive 2015/2336/EU |
| Regulators | Bank of England Prudential Regulation Authority and Financial Conduct Authority. | Financial Conduct Authority. | Financial Conduct Authority. |
| Purpose | Fully licenced banks can offer a wide range of services such as checking (current) accounts, overdrafts, mortgages, loans, debit cards and credit cards, direct debits, payment services, insurance, investments, and asset management. | All the things a payment Institution can do, plus issue electronic money (digital equivalent of cash stored on an electronic device), provide IBAN accounts, debit and credit cards and e-wallets. | Execution of payment transactions, including credit transfers, card issuing, or card acquiring payment instruments, money remittances, foreign exchange services. |
| Type of business | Fintech that wants to be a fully fledged bank and offer its customers a wide range of products and services. | Fintech that wishes to go to market quickly and offer simple banking services to an underserved segment of the market. | Credit card processors, payment account operators, remittance businesses, foreign exchange businesses and payment initiation companies. |
| Capital requirements | Large capital base of at least €10m. Banks are required to report to the central authorities at least quarterly and must keep a predetermined level of liquidity – the ratio of cash and short-term assets to liabilities. | €350,000. | €125,000. |
| Consumer protection | €100,000 (£85,000 FSCS) per individual. | Consumer’s money ring-fenced at Tier 1 bank, who has full banking licence. | Consumer’s money ring-fenced at Tier 1 bank, who has full banking licence. |
Fintechs don’t need a banking licence
It is notable that many of the largest Fintechs in the world, with millions of customers and multi-billion-dollar valuations don’t have a full banking licence, for example, Chime, SoFi, upgrade and Dave in the US, NuBank (despite its name!) in Brasil and Mexico and Ualá in Argentina and Mexico. Other Fintechs, such as N26 and Revolut in Europe, Monzo, Starling Bank and OakNorth in the UK have taken the full banking licence route.