It is a mystery why the UK has an ultra-innovation-keen regulator and a reticent banking system.
The Financial Conduct Authority (FCA) could not do more to welcome fintech and bolster that economy, but most fintech startups either struggle to get accounts in the UK or are banking offshore.
It is a perplexing situation, although the UK is not alone. Hong Kong, like many other jurisdictions advocating the rise of fintech, have an intransigent banking system as the backdrop.
Ultimately, becoming the fintech 'promised land' is about a mix of elements: it requires easy access to the market (visas to bring the talent in, no bureaucracy, cheap/fast/digital incorporations), easy access to banking for startups, pragmatic regulations and strong/real government endorsement of the sector.
Banks in the UK have been systematically uncooperative to the fintech sector. But you can’t blame them.
The reality is that Fintech, unfortunately, bears the brunt of a post-financial-crisis ‘deleverage’ (see report this week on ‘derisking’ from FCA) by a banking sector having to up their capital reserves and yet remain profitable. This is an irony of sorts considering it was the financial crisis that gave birth to fintech (alternative finance, P2P, digital currency) in the first place.
So, in a climate of increasing capital reserves, keeping afloat and exponential anti-money laundering (AML) fines, would it ever make sense for a bank to onboard a fintech unless the fintech was going to make the bank a shed load of money and that the fintech did better compliance than the bank itself? If you look at the fintech market supported by UK banks those two (quite commonsensical) elements will be present.
So what is the fix?
The FCA has a few recommendations or reminders for the banks:
The FCA recommends that banks do not use “AML as an excuse for closing accounts when they are closing them for other reasons”.
The FCA reminds banks that they too are subject to competition law. Banks should be mindful of competition obligations “when deciding to terminate existing relationships or decline new relationships”. This is an indirect way of saying that a bank risks breaching such rules if it refuses to open an account for a fintech that will do a better job than the bank and eat up its market share.
Lastly, the FCA seems to agree there is no question that the 2nd Payment Services Directive (PSD2) is going to shake things up. As said by the FCA: “payment institutions [will] have access to credit institutions’ payment account services on an objective, non-discriminatory and proportionate basis.” In essence, this means a payment institution will have write access on a banking API, a massive game changer as fintechs become the face the customer sees and the banks the engine.
Although PSD2 is going to shape-shift the financial payments market beyond recognition, it doesn’t mean it will be easier for a fintech to open a bank account with a bank, it is just that the fintech may not need one anymore. But we are not waiting for PSD2 to solve, in one fell swoop, this intractable global miasma called 'de-risking'.
What else can be done?
I suggest on the policy side a radically different approach.
The UK government effectively owns a few banks in the UK (Lloyds/RBS).
Would it be so odd if the government were to create their own bank that will be the bank-of-last-resort for all the dejected fintech startups chasing their tails in Level 39?
And why not, if we are talking about a bank-of-last-resort, just have the government’s bank itself - the Bank of England - open accounts for startups?
Now that would be a material (and mindblowing) commitment from the UK government to fintech.
However, it may not be as pioneering as one thinks.
Taken from a different view, if private banks shy away from a particular sector, then isn’t that when you need government to pick up the tab? By analogy, if the private prison managers said managing prisons is too unprofitable then do we just let the prisoners free?
Banking is now unequivocally a utility, like the water in your tap, like the electricity powering your iphone. You could even go as far that banking is a human right, but let’s not go there.
A government genuinely committed to fintech with visions of building the fintech Temple of Solomon in the middle of the City of London, might want to consider stepping in now to deliver a bold vision that will be the last missing piece for London to potentially become the living, breathing, incarnation of fintech.
It is a small cost for the government to provide banking as a utility not as a service, especially when the government already owns banks and the fintech market means jobs, growth - everything a government should want. I appreciate the State Aid specialists will cry 'foul play' governments can't be active in the economy, but the point is that those specialists are assuming that the market is functioning normally when it isn't. It is broken and underserved. In any event, this article suggests that the government steps in as a bank of last resort when everything else fails for startups, and only then.
I appreciate that you may be thinking what an impractical idea, but what other real solutions are there? If you look deeper, the root of de-risking correlates to AML liability; it doesn’t make sense for banks to take on a startup fintech if the bank is going to be fined for the conduct of that fintech. If banks have to continue to share AML liability with their fintech customers then you’ll never solve the problem.
But the Bank of England can’t be fined for AML failures right; maybe it can but the result would be circular? Food for thought.
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