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The future of FinTech might be affected due to rules being set up by the ECB on the authorization process to be followed by Fintech banks.
There is no doubt that the reaction from the banking industry to the growth of FinTech has been the call for regulations in order to limit their “freedom” to operate. This has been recently seen with the upcoming Payment Services Directive 2 that will introduce obligations for some previously unregulated payment providers, but at the same time will push for more competitionin the financial services sector with the obligation to keep APIs open.
As part of this process, the European Central Bank (ECB) now launched a consultation on, among others, a Guide to assessments of fintech credit institution licence applications.
What is a FinTech bank?
According to the ECB, a FinTech bank is an entity having
“a business model in which the production and delivery of banking products and services are based on technology-enabled innovation“
The definition applies therefore to both existing banks that decide to follow a more technology oriented approach, also by means of partnerships with third parties, and new comers into the market which rely on technology to compete with established banks as well as payment providers that extend their services to cover also banking related services.
What are the main contents of the guide on FinTech credit institution license applications?
The ECB aims to allow scope for innovative market participants to contribute positively to the financial sector and seeks to achieve this by maintaining adequate prudential standards for newly licensed banks. In this respect, the backbone of the guide is that ECB policies that apply to the licensing of any bank are also extended to the licensing of FinTech banks.
The criteria for the assessment in the licensing process according to the guide will cover four areas:
1. Governance
Given that FinTech banks are tecnology driven, the management and the shareholders shall have not only knowledge, skills and practical and theoretical experience in banking and/or financial business, but also technical knowledge.
2. Internal organisation
Internal organization shall rely on 4 pillars:
- Credit risk approval and organization: applicants shall have a clear established process for loan approvals and for demonstrating what type of data is used in the process of granting a loan and how data quality is assured with a country specific credit scoring process;
- IT related risks: cybersecurity is important for any business, but the ability to react to cyber attacks is fundamental for banks that are technology driven and therefore an additional layer of cybersecurity shall be adopted by FinTech companies;
- Outsourcing, including cloud services: applicants shall be able to exercise contractual rights to audit outsourced activities, which for instance is compulsory under the terms of the new EU General Data Protection Regulation, and avoid to be locked in with specific IT suppliers which might impact business continuity;
- Data governance: the risk of loss of data and data breaches, also as a consequence of cyber attacks, and therefore the ability track and monitor both personal and financial data shall be a priority for FinTech banks running a business esponentially based on data and becomes an obligation under the terms of the GDPR.
3. Programme of operations
In a new business, it is difficult to identify benchmarks. But Fintech banks shall have an exit plan outiling how it can cease its business operations on its own initiative, in an orderly and solvent manner, without harming consumers, causing disruption to the financial system or requiring regulatory intervention
4. Capital, liquidity and solvency
The entrance into a new market might be expensive and require aggressive pricing which might lead to reduced available funds. Likewise, liquidity might be impacted by customers’ behaviour that tend to withdraw funds and change bank more frequently than with traditional banks and by the lack of profitability which might make refinancing more difficult. Applicants shall be able to deal with both issues in a proper manner.
Is this the right route to foster the FinTech marker?
Identifying the right balance between consumers’ protection and the need to foster competition is always difficult to handle. Compliance cost has esponentially increased for banks during the last year and an excessive light approach towards the FinTech sector might risk to grant a competitive advantage to such entities. At the same time, the list of requirements outlined above considerably reduces the entities that can be suitable for a banking license.
The consultation of the ECB will end on 2 November 2017 and no much time is left to contribute to the future of FinTech!
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