Competing with Incumbent Banks with a Stacked Deck

In a very interesting piece about a financial services conference, I found out about Victoria Raffe, a former bank regulator in the UK, now an independent consultant, talking about the process of getting approval for new banks in the UK.

As someone following closely fintech startups like Moven (and Simple before that) and others that deliver a “banking experience” without a banking license, I have always accepted that getting a banking license is not worth the trouble. Recently, we have seen efforts from Atom and others trying to get one and still deliver on the promise of fintech. So, why not get one, and not have to rely on a partner bank? Why not control your own destiny, if you want to revolutionize banking as we know it?

Victoria Raffe’s short presentation shows a process that, I think, is fundamentally flawed. I will not go through the details here, they are publicly available, but here are my thoughts.

Regulation’s purpose is to protect the consumer, using the power of the state to enforce rules that benefit everyone. It can go all the way from rules for commercialization of cabbage, to rules for getting a banking license. For a bank, the essence of the protection is, since the state will allow the new bank to take deposits, that the state does not want the new bank owners or staff to run away with the deposits. And because of fractional banking, the new bank can give loans as a multiple of deposits, and if those loans are not repaid the deposits are gone. In summary, make sure the new bank is not a vehicle for stealing money from customers. Of course I am simplifying, but that’s the essence.

And now come the banking regulators, and want to see the new bank business plan, and how it is going to implement it’s IT systems, how is it going to be tested, how will the bank operate, how it is going to grow, how will it hire staff, and it goes on and on… It all looks sensible, until you realize that the regulators are checking that any new bank conforms to existing “best practice” about running a bank, and assess all new proposals against a template cloned from existing banking models. Maybe the new bank plans to make money in a different way than traditional banks, come with new innovative ways of running and testing IT systems (core banking in the cloud?), may not want to grow too much, and will “hire” in a non-traditional way (think Uber drivers for example). May be all good ideas, or bad ideas, and the new bank will discover which is which by actually trying them out in the market place. But they never get to, because regulators need 24 months to make sure that no new ideas get out of the process, and all new banks are clones of existing banks.

We will never get new ideas out for the benefit of everyone if the purpose of regulation is to ascertain the level of cloning. Allow new financial services ideas to spring in the market through fintech startups, and use regulation to protect the consumer, not to enforce old templates.


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