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Financial regulations 16 Oct 2017

ECB: Banking charters for fintech companies

For the European Central Bank, the relevance that fintech already has in the financial sector is becoming increasingly clear.  The latest example of this is the public consultation it has just launched to establish draft guides to bank licensing, not only for banks with traditional business models, but also for companies offering banking services based on innovative technologies, commonly known as fintech.

Granting licenses for credit institutions is a core activity of every supervisory authority. In order to protect savers and the economy as a whole, lending and deposit collection activities are restricted by law to bank-licensed financial companies, which in turn are subject to banking supervision.  The national competent authorities act as the first contact point for receiving licensing applications. However, the assessment of banking license applications is conducted by the ECB, which makes the final decision to grant, extend or withdraw a banking license in the euro area.

As a result of financial innovation in the financial sector, more and more entities with business models based on innovative technology, commonly known as fintech, apply for a banking license.  The ECB’s intent is to clarify supervisory criteria when assessing the license applications submitted by these companies.

To this end, the ECB has launched a public consultation on two draft guides explaining how entities can become banks and obtain a banking license.  The first document, the draft guide to assessments of license applications, sets out the general process and the requirements for the assessment of such applications.  The second document, the draft guide to assessments of fintech credit institution license applications, is directed at entities with a fintech business model which are considering applying for a banking license.

What would this imply?  A priori, greater control of their activity by the regulator.  But also, and as pointed out by the Reuters agency, could imply higher liquidity requirements and a greater capital buffer for some fintechs.  The ECB itself outlines two scenarios to illustrate this:  1) In the first scenario, due the aggressive pricing strategy defined to attract customers, the company is required to allocate more capital to cover increasing credit volumes.  2) The second scenario considers an applicant which may be forced to alter its business model as it grows, therefore constantly facing new risks. Business Insider considers that the adoption by the ECB of the fundamentals on which this guide is based would add an additional level of difficulty for new banks seeking a license.

The ECB explains that both guides aim to make the application process more transparent and help applicants in their preparations.  The consultation runs from 21 September to 2 November 2017, and the ECB will hold a public hearing on 26 October, halfway through the process.  Following the consultation the ECB will publish the comments received.

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The president of the European Central Bank (ECB), Mario Draghi. - ECB

Fintech and banks, allies

ECB President Mario Draghi already spoke in Brussels last May about the importance of financial innovation for the ECB and the euro area.  Speaking at the European Parliament, Draghi pointed to innovation in the financial sector as a way to improve efficiency.

“Fintech is a potentially transformative force.  We are closely monitoring its development for several reasons: to better understand its impact, to assess the risks and to adjust the regulatory environment and supervisory approaches where needed; and also to adapt as an institution and support innovation where justified,” he said.

In his view, fintech also gives the financial sector, more generally, a chance to provide more efficient and effective services.  In this regard, Draghi argued that it can, for example, make it easier for banks to adjust their business models, cut costs and exploit new business opportunities.

Draghi: Fintech is a transformative source. We closely monitor its development for a number of reasons: better understanding its impact, assessing risks and adjusting the regulatory environmental and monitoring approaches when necessary; and also to adapt as an institution and support innovation where justified”

A few weeks ago, it was the European Commission that established financial technology and cybersecurity as priorities of the regulatory architecture in Europe, with the aim of, as pointed out by Reuters, boosting financial innovation by strengthening its legal framework.  The EC announcement comes along with two rules that will profoundly affect the provision of financial services in the Old Continent: the revised Payment Services Directive (PSD2) and the General Data Protection Regulation (GDPR).

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