3 challenges that pre-regulated banks have to overcome
There have been 54 banks that have gone through the bank regulation process in the UK since 2013, according to The Bank of England. We're clearly seeing that number increasing rapidly given that more financial services businesses are seeking a banking license. Two factors contribute to this increase: (a) lower barriers to authorisation as the FCA and PRA are accepting and approving more applications, and (b) there’s more investment capital available in the market. This second point is incredibly important given the fact that launching a bank is a very capital-intensive exercise.
As the market becomes increasingly saturated, the need for businesses to provide differentiated and in-demand services and products that are compliant with stringent regulatory requirements is a top priority. The strength of a prospective bank’s license application to the regulator often relies on the business’ quality of service and commitment to protect the customer, coupled with a clear, future-proofed plan.
In recent years, the regulator has used innovation to foster a new approach where customer needs are always at the forefront. For example, Regulatory Technology (RegTech) innovations such as the world-first FCA regulatory sandbox, have facilitated a faster, more refined and client-focused authorisation process. This supports the advancements in technology (including cloud computing and open banking) that prospective bank founding teams often rely on to distinguish themselves from existing legacy banks.
But with innovation comes new considerations and challenges that pre-regulated UK banks need to navigate. I’ve seen first-hand three major challenges that pre-regulated banks face as they prepare to launch their proposition.
Most businesses at the pre-regulated stage find immense value in having conversations with account and payments specialists when developing their proposition. At ClearBank, we engage with pre-regulated banks as they start to think about embarking on the application journey. By working together early on, we’re able to identify what products are the right fit for each business to meet their customer needs. With our agency banking product, we underpin the modernisation of new-age banks, allowing each future bank to provide a frictionless customer experience that is always expected.
Let's look at an example. If you’re a UK-based pre-regulated retail bank looking to enter the SME lending space, how do you transfer funds to your customers? Considering the functionality and limitations of each UK payment scheme, you must decide which scheme best suits your business, customer and overall operational needs. These decisions can have commercial and operational implications as the sending bank and can affect the customer experience. That’s why it’s important to look at all your options and choose what’s best for your business.
But from an inbound perspective, would you choose to use BACS Direct Debit Originations to collect loan repayments? You’d need to consider implications such as service user numbers (SUNs), mandate management and reporting. But if you select a bureau instead, the relationship must be subjected to careful outsourcing risk assessments and approvals. All these considerations are fundamental to your business offering – from customer experience to key operational risk factors such as payments settling.
After discussing the movement of funds in and out of the business, this naturally leads to a conversation around whether or not your business should be a direct or indirect participant in the UK payment schemes. On the one hand, you could decide to become a direct participant of the payment schemes to promote data control and a level of autonomy over the business’ payments capabilities. This means a much larger initial capital investment to (a) build the integration and (b) uphold the regulatory and testing requirements. I find this option can often slow your business down as you prepare to launch in the market.
The alternative is indirect participation in the UK payment schemes, which means partnering with an agency banking provider such as ClearBank. As an agency bank, your business can integrate with our API (via an internal build or tech partner) to gain access to the UK payment schemes. I find this option is comparatively far less burdensome because ClearBank clients don’t need to build and uphold their direct participation, allowing businesses to focus on building more value-added products or services for their customers.
Indirect participation is especially well-suited for businesses just starting out and planning to offer specialised products with specific payment requirements where they’re processing lower volumes every month. Given the average 3-year process from first engagement through to existing mobilisation, speed to market is a key priority as an extended mobilisation period places undue strain on cash and capital.
Pre-regulated banks that are going through the initial stages of their application and authorisation journey often meet challenges as they launch. It’s difficult to access banking services via a partner that will support them in the long term as their business scales and grows post-regulation. Access to an operational bank account with a bank that will also provide agency banking services post-regulation seems to be a rare partnership to establish in the market.
I often see international banks looking to secure a domestic footprint in the UK by becoming regulated as an Electronic Money Institution (EMI) in advance of obtaining their full bank license. These international banks and new domestic banks require operating accounts to facilitate the transactions relating to starting a business. These operational accounts can be opened at any number of banks with ease. But the challenge arises later, once the applicant bank gets its full banking license and wants to launch its proposition. By onboarding as a pre-regulated firm with ClearBank, you do not need to change providers once your full license has been granted to access the full suite of agency banking services.
Because the authorisation process with the FCA seeks to understand what services and partners will be in place before authorised with restrictions (AWR), an agency banking provider must be selected early. There’s a clear argument for selecting an agency banking provider that can also provide the operational account services at the outset to reduce the need to change banking partners post-authorisation, keeping it less expensive and less time-intensive for the business.
Whilst these three challenges are certainly not exhaustive of all that a pre-regulated bank must navigate on its route to market, it gives a whistle-stop tour of what a business has to think about as they secure a banking license.
Through ClearBank, you can gain direct access to the UK payment schemes (BACS, CHAPS and Faster Payments), alongside a suite of client safeguarding capabilities ranging from segregated accounts to virtual account solutions delivered via a single API. Of course, we’d work together along your regulatory journey and help identify which products we can offer your future bank to create a seamless experience for your customers.
We also allow a pre-regulated bank to hold its operating capital within a UK bank account that is fully equipped to deal with inbound and outbound business payments. This offering allows a prospective bank to onboard with an agency bank in advance of entering the AWR stage. This means that your business can benefit from a seamless transition into mobilisation which, in my experience, has contributed positively to exiting mobilisation smoothly. Businesses can also utilise our API-sandbox environment to begin building their offering and testing infrastructure in advance of their launch.
ClearBank provides pre-regulated banks with quick access to an operational account that can be used for all domestic payment needs plus early access to our API-sandbox environment. Engineering teams, core banking providers and/or systems integrators can build the platform in preparation for launch. Once granted AWR, ClearBank enables the full client-money functionality and the new bank has immediate access to the full scope of payment and account capabilities. This approach ensures that the payments products and account services are all in place at launch, therefore, helping the bank open on time and as planned.
If you’re a pre-regulated bank and interested in learning more about how we can support you along your regulatory journey, email George Brookes, Relationship Manager, at [email protected].