💠 Bank approvals, the holy grail of FinTechs?

by Geoffroy Guigou, co-founder and COO of Younited Credit, member of the management committee of France FinTech

On April 10, 2018, at Station F, France Fintech will bring together the main players in Fintech: regulators, entrepreneurs, investors. This is the unique opportunity to listen and discuss with those who will be part of the revolution that has affected the financial industry for 5 years.

Fintechs are experiencing rapid growth and are courted by investors: according to KPMG, in 2017, $ 31 billion was invested in these companies that are revolutionizing the banking industry. These strengthened financial resources increase the ambition of these new entrants, who are more and more numerous to apply for their own banking license. Is obtaining a banking or credit institution license the new holy grail of FinTechs?

A bank is a category of credit institution (and not the other way around!)

The approval of a credit institution is certainly the most complex to obtain, in particular because of the minimum regulatory capital (5 million €) that it requires. It is nevertheless necessary for any actor who wishes to collect savings from the general public and grant loans to individuals. Something sometimes unrecognized: Bank approval is only a sub-category of Credit Institution, that which brings together the players who have requested authorization to carry out all banking transactions (including current account maintenance, issuance of means of payment, etc.). On the other hand, the approval of a Credit Institution is not necessary for most Fintechs, many of which can carry out their activities with lighter approvals, which require less significant regulatory capital: this is the case. payment institutions, or electronic money issuers. It is even possible to grant loans to companies using the relaxed regulatory provisions following legislative changes concerning crowdfunding, which have created the statutes of Crowdfunding Intermediary (IFP) and Participatory Investment Advisor (CIP).

Why this frantic race for approvals among global FinTechs?

Why then do we observe many FinTechs, whose main activity is not the reception of funds from the public nor the granting of loans to individuals, request the approval of a credit institution of which they do not have , apparently, no need? Likewise, why do we see certain personal loan platforms active in countries such as the United Kingdom or the United States, where it is not necessary to have such an authorization to grant loans to households? , embark on the process of obtaining this approval?

Our scale-up experience having obtained the approval of a credit institution allows us to illustrate four explanations for this frantic race for banking approvals. The first is that to get Approval of a Credit Institution is the most important factor of reinsurance for the customers of a FinTech. A study carried out by Younited Credit recently showed that for 92% of credit applicants, the fact that we are approved was an essential reassurance factor; in comparison, only 76% of them said they were reassured by seeing our ads on television, and 88% by knowing that more than 100 customers had trusted us. These figures are surprising and sometimes counter-intuitive, because one would have thought that the applicant for a loan attaches little importance to the nature of the platform that grants it, and that only the fact of receiving the amount requested on his bank account! The second explanation is strategic: having your own license avoids creating dependency strong to a banking partner who would be approved, and who would play a central role in FinTech processes. This is what the leading consumer credit platforms in the United States and Germany are seeing at their expense, countries where there are medium-sized credit institutions that “rent” them a license. Third explanation: thanks to the European Banking Union and its "passport" mechanism, the approval of a Credit Institution obtained in a European country is passportable to nearly 30 countries. IIt is as complex to obtain this approval in a first European country as it is simple to transpose it to the rest of the continent. This is a major point because FinTech then has'' a playground that represents a market of more than 500 million inhabitants, significantly larger than the United States ! Finally, the last reason relates to the development of new products: the authorization of a credit institution becomes necessary when one wants to extend its range of products to other banking services.

Difficulty for a FinTech to transform into a Bank or a Credit Institution ... 

The approval of a credit institution (or a bank) is thus a real development accelerator for the FinTechs who have obtained it. It nevertheless seems extremely complex to us to obtain it if the procedures are not initiated before the commercial launch of the company. Indeed, being a regulated actor requires a structuring of the processes, the setting up of a dedicated organization (to comply with all the regulations), as well as an internal culture of risk management. It is difficult to put these elements in place, if the company has not developed on these healthy foundations from day one. Moreover, at this stage, several “unicorns” - or aspiring to become so in the very short term - of global FinTech (such as Sofi in the United States, Zopa and Revolut in the United Kingdom) have recently indicated that they have entered in the process of obtaining the approval of a Credit Institution ... without one of them having so far obtained the precious sesame!

France can and must take back the leadership on the allocation of heavy banking licenses, to create future unicorns!

These attempts to obtain the approval of a credit institution or a bank, on the part of foreign FinTechs, remind us that it is also in this area that France must act if it wants to become the leading European place in the world. Fintech. Germany and the United Kingdom have started to allocate - certainly in a trickle! - full licenses of Bank or Credit Institution for new entrants. In France, Younited Credit in the field of personal credit has been authorized since 2011, and Margo Bank in the field of business banking services wishes to obtain this authorization.

But two Bank / Credit Institution approvals per decade is not enough!

It will take many other new licensed entrants to really disrupt traditional players, and provide consumers with the new credit and savings services they expect. Entrepreneurs, investors, regulators and public authorities must work hand in hand to increase the number of FinTechs obtaining this precious approval in France. 

This article is part of a series of posts published as part of the annual event organized by France Fintech: Fintech R: Evolution 2018, which will be held April 10 at Station F in Paris, on the theme “Data Liberation”. To share, comment and like on LinkedIn with the hashtag # FFT18.