Two Reasons Why Challenger Banks Are Disadvantaged And How To Deal With Them
The fintech industry has been in the ascendancy for years now, and hundreds of small businesses have taken the sector by storm.
Countless challenger banks have sprung up over recent years, many of them offering different services.
However, there are still a number of challenges that fintechs face as they look to scale up and grow their business.
Here are two of the most common issues encountered by challenger banks, and some potential ways to solve them.
1). Access To Payments Networks:
Up to now there have only been four clearing banks, offering clearing services for banks and fintechs.
However, these four banks, namely Barclays, HSBC, Lloyds and RBS also operate in the commercial sector and deal with customers as well.
With these incumbents acting as gatekeepers it results in charges that make new entrants to the market, including challenger banks, uncompetitive.
Whilst these charges are a potential stumbling block, there is a much larger one.
The payments systems provided by these four clearing banks was built for the traditional financial services industry, so while challenger banks and new entrants can offer new and innovative products it still relies on old systems of work.
These two issues could be solved however, with the launch of ClearBank at the end of February.
The new bank, founded by Nick Ogden, the founder of Worldpay, has become the UK’s fifth clearing bank, and the first for 250 years.
It seeks to address the two aforementioned issues of access to payments networks because it will not offer retail banking and it has also been designed with the new financial services environment in mind.
By not offering retail banking it will mean that it does not represent competition for any of its potential customers, so has no need to introduce unreasonable charges for its users.
Additionally, because the ClearBank platform has been built with the new environment in mind, it will offer a more robust service that will be able to compliment the new fintech environment.
However, because services will not be offered until the third quarter of 2017 it remains to be seen how effective the new platform will be.
2). Unlevel Playing Fields On Capital Requirements:
The Prudential Regulation Authority (PRA) Pillar 2A rules on capital have been criticised as creating an unlevel playing field between incumbents and challenger banks.
While traditional banks are able to use their own models to calculate the riskiness of their loans, challenger banks are forced to use the regulators’ standardised models.
This means that because the traditional banks can use models based on the historical performance of their loans, whereas challengers only have a few years of data, the variations between the levels of mortgages and other loans can be staggering, providing an inbuilt advantage for the incumbents.
A potential solution to this issue was highlighted by the BBA in 2014, which would have meant that challengers would be allowed access to an average of the model-based weights of the larger banks.
More recently the PRA has announced that supervisors will now take a more flexible approach to the capital requirements, so there seems to be some movement in the regulatory approach.
It is clear that challenger banks face some large stumbling blocks as they look to scale up and take on more customers, and much is still needed from the government and regulators to ensure the market conditions are competitive for both traditional and new entrant financial institutions.
If you are looking to expand your challenger bank you must bear these potential issues in mind, and work your way around them. You will also need a backend platform to base your business on.
You can choose to either build or buy this platform, but as the sector faces these challenges, businesses need to ensure their fintech solution is proven and rigid enough to withstand any potential threats, but also flexible enough to respond to regulatory changes, so buying a bespoke platform is becoming more popular.
If you are looking to hear more about how a built, but bespoke, backend platform can help your business, email us at email@example.com or call us on 020 7048 0470.