Moving The Goalposts: U.K. And U.S. Trends In Fintech Bank Licensing

The dominant fintech narrative for the Canadian banking industry shifted in 2016 from a new entrant versus incumbent storyline to one of collaboration, as major Canadian banks continued to partner with new technology entrants. The intent of these partnerships varies but they generally aim to expand the incumbent bank's customer service offerings, improve its customer/user experience (or UX) or accelerate its learning curve in a specific technology.

In the meantime, other jurisdictions, notably the U.K. and the U.S., have made it (or are proposing to make it) easier to obtain a banking licence, likely leading to more direct competition in the retail banking space between new technology entrants and incumbents. Below, we look at what banking regulators are doing in the U.K. and the U.S. to move the goalposts for fintech banking entrants and conclude with some thoughts on how this might impact the competitive landscape.

UNITED KINGDOM: REGULATIONS USHER IN NEW ERA OF DIGITAL BANKS

In 2013, the U.K. Prudential Regulation Authority (PRA), which is in charge of granting deposit-taking bank licences, lowered entry barriers for certain types of new entrants, which included reducing initial minimum capital and liquidity requirements, and streamlining ongoing reporting requirements, among other changes. In particular, the minimum amount of initial capital required by new applicant banks was reduced from £5-million to £1-million. Aditionally, certain new entrant banks have been granted "mobilization," an authorized banking licence with restrictions. These banks can accept aggregate deposits up to £50,000 for an initial period until additional capital has been raised. Further amendments were introduced in January 2016 when the PRA and the Financial Conduct Authority, launched a New Bank Start-up Unit to assist applicants with the authorization process.

These policy changes have resulted in a significant increase in deposit-taking licence applications and grants. In 2016, four new "digital" banks were granted U.K. banking licences including Atom Bank, which offers savings accounts that are accessed exclusively through a smartphone. Several more have applied for licences such as Zopa, an online peer-to-peer lender and according to published reports, up to 20 banks are presently in talks with the Bank of England and the PRA about receiving a licence. The PRA's 2013 amendment was not enacted for fintech companies exclusively, but to generally "enable...