A little over a year ago, Funding Circle boss Samir Desai kicked off an industry conference with a presentation entitled: To be or not to be a bank. That no longer seems to be the question.
Fulfilling customer needs, making money, cheap capital – it’s easy to see the pros of becoming a bank. But do they outweigh the cons?
Perhaps the biggest single drawback to becoming a bank is the associated regulation. But Jaidev Janardana, CEO of Zopa, says that it isn't a huge leap for Zopa to become a bank, because consumer credit is already a highly regulated area, especially when compared to, say, small business lending.
He also suggested that there is a certain familiarity to banking regulation. “The good thing about banking regulation is that after a reasonable amount of change post-crisis, it has settled down,” he said. “The likelihood that one could be surprised by it is less.” He sees the possibility of regulatory shock as far higher in more innovative sectors, such as blockchain.
Jonathan Segal, a partner at Fox Williams, agrees. “I would have thought it would be the smaller vehicles, the smaller platforms, that simply can’t absorb the cost of regulatory change,” he said.
On how things might change in a downturn, Janardana said: “If there was a shock to the system, I think regulation can change and it would depend on what happens. But I think that’s true not just for banking but for all [of financial services].”
Peer-to-peer lenders have capital requirements under the FCA's existing regulatory framework, but these are miniscule in relation to the amount of money banks must hold. For newly-licensed banks, sudden changes to capital requirements could prove challenging.
Janardana said that regulators could ‘of course’ ask banks to hold more capital, but seems largely unfazed by the possibility. “We have had positive interactions with the regulators where they have spent the time understanding the business,” he said.
He went on to stress that the process for setting capital requirements is bespoke to each business: “The capital itself is set at the business level. There are a few inputs into it. One is what is the business you’re in and how volatile is that business.”
“The other is your own track record. If you’re a business that has performed reasonably well against expectations… Then you have to hold less capital than a business that has had trouble.”
In essence, a good track record on risk can become a competitive advantage, reducing the amount of capital that a bank – or even a neo-bank – must hold. This is where Zopa’s thirteen-year track record could come in handy. Janardana also stressed that Zopa’s executive team features a number of seasoned banking professionals who have ‘been there, done that’.
For newcomers to the banking game, he preached caution: “For people who’re new into it, there’s a lot of learning to be done and you should be careful.”
The Zopa boss would not comment on how close the firm is to getting its licence, but he did say that the average time from application (late 2016, in Zopa’s case) is around 30 months – and that Zopa hopes to complete the process in ‘something less than that’.
“Yes, there are huge regulatory demands that come along with being a bank – and being a bank such as us that actually provides day-to-day retail banking services is not easy.” She claimed that, even now, Starling and ‘one other’ (Monzo, presumably) are the ‘only real current account alternatives’.
Her answer to why it’s worth the trouble comes back to product. Starling is already engaged in retail banking, business banking and payment services for other firms, despite only having launched in 2017. “If you invest in having a banking licence, you have to do a lot of banking,” said Boden.
Segal pointed out that, for the time being, becoming a bank also has implications for senior management – thanks to the Senior Managers and Certification Regime (SMCR).
These rules were brought into effect in the wake of the last financial crisis to ensure that chief executives are responsible for the actions of their employees. Initially, the rules applied primarily to banks and insurers, but Segal says they'll soon apply to fintechs and P2P firms as well.
“The results of the consultation paper come in in the summer,” he said. At that point, banks and non-banks both will have to contend with the SMCR.
Not all non-banks are becoming banks, of course. Leading peer-to-peer lender Funding Circle – rumoured to be staging an IPO later this year – set out its stall very clearly at last year’s AltFi London Summit.
“We at Funding Circle have no plans to launch a bank,” said its chief executive Samir Desai.
What do the new wave of licensed banks make of this position? Do they see a future for non-banks?
“Yes, I think there’s room for lots of players in this ecosystem, and we have a business providing services to those fintechs. We have a number of payment institutions that use our payment services business. It doesn’t make sense for everyone to have the same model. We have invested in our technology. We have invested in a banking licence and that is where we sit,” said Boden.
For Janardana, it’s a question of pragmatism: firms must simply assess how a banking licence could help them.
“I don’t think you should be ideological about it,” he said.