The UK has seen a large influx of new organisations wanting a banking licence. Some, such as Monzo Bank, Starling Bank, and Tandem Bank, have succeeded. Others are still trying, but some newer players see a licence as surplus to requirements. Patrick Brusnahan writes
Customers having more than one bank account are nothing new. A savings account with one bank, a current account with another. According to research firm Bain, as many as 40% of customers experiencing a branch closure take their business to rival banks. 29% on average globally said they would move if it was easy.
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Open banking is expected to increase the amount of financial accounts consumers have. Third party providers are set to work within a more level playing field.
In addition, a wealth of firms has received banking licences in the UK. Brexit may increase this. The Bank of England expects at least 130 applications for licences before the UK leaves the European Union.
However, not everybody believes a banking licence is required to provide banking services.
Do you need a banking licence?
Monese is a 100% mobile current account provider without a banking licence. While it is licensed and regulated by the FCA, it is as an electronic money institute and not as a bank.
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By GlobalDataNorriss Koppel, CEO and founder of Monese, tells RBI that his goal was to make “banking accessibly and inclusive for everyone”.
The company has two accounts, Starter (which is free) and Plus, which costs £4.95 ($7) a month.
Koppel says: “When we launched, we decided we should make it very clear to customers about what free banking actually means and as a concept, it doesn’t exist. It’s a huge lie that we all believe.
“Big banks are selling the concept of free banking in that you get a current account and a card, but banks pay for your services and if you don’t take credit with the bank, they lose money and banks don’t want to lose money.
“We wanted to tell customers that free banking doesn’t exist and they are being ripped off by hidden fees and charges associated with a free product. So we wanted to be transparent.”
Koppel “strongly believes” that not having a banking licence is an advantage.
“Bank licences typically need more ongoing capital and we require less capital in order to operate,” he explains.
“We don’t do credit and savings accounts. That is one of the key reasons we don’t need that much cash on our balance sheet. We can move faster across jurisdictions and provide our banking and account services easier and quicker.”
Not having a banking licence may work for some, but not for others. Alex Letts, chief unbanking officer at current account provider Ffrees, which is not itself regulated by the FCA, says: “A senior banker said to me ‘why on Earth would anyone setting up these days want to get a banking licence?’ I saw his viewpoint, but I don’t actually agree and think it was more a cry of pain than a rationalised opinion.
“I think the answer is it all depends on which customers you want to serve. Those (i.e. the regulated banks) who are wedded to a charging model which uses credit to subsidise the customer’s current need to be able to offer overdraft and other forms of credit. That requires a customer with an acceptable credit record. Their model can therefore be to use deposits for lending. Tht requires a banking licence.
“But, those who seek to serve the 10-14 million of UK credit impaired, as well as all those without credit footprints, lending and overdrafts is a very specialise game, by and large needing individual risk-based pricing and with high delinquency rates. It is a separate and specialised business with lots of established operators.”
Do consumers care about banking licences?
David Parker, director at Polymath Consulting, doesn’t think that consumers care too much about banking licences.
He states: “Consumers look at functionality, not the regulatory status of the organisation offering the solution. Many of the new Lite Banking solutions offers product as good as, or in many cases better than, traditional banks. It is little surprise that consumers are starting to adopt them in larger numbers.”
Even without the typical regulatory status, that doesn’t necessarily make the platform less secure for customers.
Koppel adds: “In terms of customer identity checks and KYC, the rules apply to us the same as banks. We have to ensure customers are who they say they are, so there are some of the same rules.”
Monese has goals outside of the UK and not having a banking licence has aided it in this respect. The account has the ability to give users an account to bank locally anywhere in the Eurozone with an IBAN number. Koppel believed that this can be done “on a global scale”.
“By the end of this year, I am confidence that we will have more than one million users,” Koppel concludes.
