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Banking licenses are the new operational headache for fintechs amid US bank collapses
Early-stage fintechs rely on banks for their licence access while US banks rely on fintech as high-growth customers, but a regulatory wrinkle could sour plans.
While the opportunity for fintechs to steal market share in the wake of US bank collapses appeared hopeful, companies in the lending space could soon be in for a licensing headache without traditional bank support.
It’s been 8 weeks since the collapse of SVB. One and a half since First Republic was sold to JP Morgan. To say the globally linked American finance community is experiencing a banking hangover, induced by major meltdowns, is an understatement.
On the fintech event circuit, meetings on the topic have popped up left and right. A panel with fintech experts sharing projections could be found a few weeks ago at NY Fintech Week. They can also be found this week at Fintech Nexus with an opening day keynote titled “Fintechs Shouldn’t Become Banks, and Other Lessons and Opportunities in a Post-SVB World.”
But what problems could really be at hand for fintechs? At a high level, securing partnerships and potential customers in banks could be harder to come by, Philip Kelvin, CEO and co-founder of Tranch previously told AltFi.
Yet unlike the 2008 banking crisis, this isn’t fintech’s first rodeo—Paypal has been around since 1998, Square since 2009, and Stripe since 2011. Perhaps banks aren’t as vital for the tech-infused finance sector as the doomsayers believe, and maybe new opportunities could be found.
For early-stage companies in the lending stage, there’s a wrinkle in that opportunistic plan, Roi Ben Daniel, CEO of Received, an accounts receivables and invoicing platform told AltFi.
“Banks give their licenses to fintechs to provide financial services,” Daniel said. “Any fintech that issues a credit or debit card, needs to have a license with Visa [or Mastercard], with the state and country they are operating in. No fintech wants to set that up from scratch.”
Daniel said he's now seeing other founders flocking to the big banks like JP Morgan, but they're finding many bankers don’t want to take that risk that comes with fintechs.
Time To Become A Bank?
In the life-cycle of “grown-up fintechs”, there becomes a common path to follow: get funding, grow the product, and then build a bank to have cheaper access to capital, recategorise into a known regulatory model, and be more of a reputable entity in the eyes of investors and customers.
With a banking license, large fintech players have cheaper access to capital, enter a more developed regulatory landscape, and have a competitive advantage over their rivals, all potentially serving as a confidence builders in the eyes of investors and customers.
Square opened its bank, Square Financial Services, in 2021. SoFi opened a bank in February due to loan demand and saying they could even underwrite IPOs. Fintech Varo Money created a wholly-owned subsidiary bank named, with the creativity only corporations can muster, Varo Bank. Across the pond, Revolut is trying its best to do the same in the UK.
For later-stage fintechs, they may be able to look into the creating-a-bank path to weather the traditional banks avoiding risk, but for earlier-stage firms but it might not be as simple if the regulatory environment adds insult to injury.
Bigger sharks, outside of the later-stage fintech world, have also entered the waters in the 8 weeks since SVB collapse—Apple, a tech giant, looks like it's going for traditional banking’s lunch, attracting nearly $1bn in deposits within 4 days of offering a savings account.
“Banking licenses, no one wants to do that — the compliance department, the risk department, you don’t want the liability,” Daniel said. But, fintechs might be forced to look into the licensing path, the CEO remarked, at least as a short-term solution.