Bank Start-Up Unit: Will the floodgates open?

By Nihar Mehta

Today marked the launch event for the Bank Start-Up Unit, hosted by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) in London. As I explained in a blog at the time, the Unit, which was launched in January, provides support to newly-authorised banks and those thinking of becoming a new bank in the UK, with the aim of breaking down the barriers to entry to the market.

It’s a testament to the level of interest in the subject that well over 100 people representing more than 50 organisations attended the conference, a record number for a PRA event. When the Financial Services Authority (FSA) ran a similar event in 2011, between 20 and 30 people came – which just goes to show how much the challenger banking landscape has changed over the past few years.

So why the sudden interest in new bank start-ups? We have several clients going through the process and the driving force is a perfect storm of three main drivers:

Technology: There’s been a real step-change in terms of the availability and cost of technology designed for new start-up banks. These systems are also available as a service, which drives down set up costs even further.

Opportunity: With the banks focusing on safer assets, some new entrants are focused on markets that are less well served. These niche plays are collectively beginning to provide a threat to the incumbents, along with other Fintech players.

The Global Economy: As the world economy grapples various challenges, banks from developing countries want exposure to the UK market for more stable funding and balanced performance. This last point is likely to be truly tested as the UK goes through the EU referendum.

While these points are important, a key catalyst has been the willingness for the regulator and the Government to signal that the UK is “open for business” for new bank entrants. Despite a lack of any major policy changes since the desire to lower the barriers to entry for new banks was announced by the FSA in 2013, the queue of aspiring new banks is long and growing.

What became clear during the event, however, was that the regulators are themselves very keen to move the needle even further. I feel the new rules coming in through the Payment Services Directive and the Chancellor’s desire to negotiate more favourable rules for challenger banks at the European level will be welcome steps. Beyond these, further radical rule changes and process changes would also help, especially as the Fintech movement gathers further pace. These changes will make the new Bank Start-up Unit more effective.

With more transparency on the current process and the potential hint of more changes to come, the event today is a huge step in the right direction. The 90 or so organisations that are focused on introducing new challenger banks should feel very optimistic.

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