When CivilisedBank announced it had gained a licence in 2017, the small business lender appeared to be the latest in a wave of start-ups attempting to disrupt the UK banking market.
More than two years later, however, it has turned out to be part of a less positive trend — a spike in delays for authorising new lenders and a steep drop in the number of bank launches.
Only two new banks gained licences in 2019, and neither of them have started taking customer deposits. CivilisedBank — now renamed Allica — was one of them, having had to hand back its original licence last year because its IT systems were not ready in time to meet Bank of England requirements.
Several other would-be banks had been expecting to open their doors this year but all ran into delays, including Zopa, an early peer-to-peer lender, Distribution Finance Capital, Recognise Financial Services, and LQID.
Some of the delays were caused by idiosyncratic issues — DF Capital’s application process was extended last month when its chief executive left after an “investigation into his personal conduct”. But the company was already months behind its original target.
Recent applicants and others familiar with the application process said the trend was partly owing to increasing scrutiny and stretched resources, as regulators juggle competing priorities such as Brexit and supervision of bigger companies.
While people close to the Bank of England stressed it had not changed any of its standards for new lenders, three applicants said they felt increased pressure to demonstrate the safety of their businesses in light of recent warnings about challenger banks’ risk modelling and questions over the sustainability of their business models.
“We have the same set of requirements, but we do think the regulators are putting slightly more emphasis around making sure these new entrants are resilient than a few years ago when there were no challenger banks and there was a lack of competition,” said one person briefed on the process.
Regulators were keen to encourage new lenders in the aftermath of the financial crisis to increase competition in the UK’s retail and business banking markets, which are dominated by a few large lenders. However, the BoE’s Prudential Regulation Authority, which supervises large banks and insurers, warned this year that many challenger banks were cutting corners in their pursuit of growth.
Rich Wagner, chief executive of Cashplus, a 14 year-old fintech that is aiming to secure a banking licence next year, said: “Of course we would like to get our licence as quickly as possible because we’re excited about the opportunities it opens up, but we appreciate how important it is for the PRA and the FCA to protect customers and ensure the safety of the financial system.”
There is likely to be a rebound in license awards in 2020 as the companies that ran into delays this year complete the process, along with new applicants such as Cashplus, which already lends and offers current accounts using a more limited e-money licence.
However, experts suggested it was unlikely there would be a longer-term return to the surging numbers of new banks seen between 2015 and 2017, when companies such as OakNorth, Monzo and Starling launched.
“There’s been a lot of reflection from people who’ve been through the process about whether they’d do it all again,” said Tom Graham, managing director at Accenture and programme director at its London-based Fintech accelerator.
“A lot of companies have realised you don’t need to go to the trouble of raising massive amounts of capital, you don’t need the overheads of a bank to help people with managing their money.”
Regulators have also shifted their focus away from encouraging a proliferation of new banks to ensuring existing small- and midsized lenders are able to safely grow. At the annual regulators’ banquet at the City of London’s Mansion House in October, PRA chief executive Sam Woods said he had tasked the regulator’s competition experts with “digging up whatever they can find on the barriers to growth issue”.
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“We’ve done a lot to lower prudential barriers to entry into the banking sector, with the result that we’ve got a lot of new banks. But have we done enough to lower the equivalent barriers to growth, given no little bank has recently become a really big bank?,” he asked.
Zopa, DF Capital, LQID, Recognise and the Bank of England all declined to comment. Mark Stephens, chief executive of Allica, said: “Following receipt of our regulatory permissions from the PRA and FCA on September 5, we have launched as planned and continue to enhance our proposition for SME businesses.”
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