Becoming a challenger bank – a worthwhile challenge?

Rich Wagner, APS Financial – is becoming a challenger bank really worth it?

Advanced Payment Solutions (APS) has secured a credit licence from the UK’s regulator, Financial Conduct Authority (FCA). And whilst APS is not a bank, it competes with them. So is going through the pains for getting a banking licence really worth it, asks Rich Wagner, CEO and founder APS.

We regularly see news of challenger finance companies battling to secure a banking licence. Sometimes these enterprises spend years trying to knock down the door of the FCA, hoping for the “golden ticket” that will let them operate as a regulated bank.

However the beauty of the fintech revolution is that it has shown us that you don’t need to be a “bank” to provide banking services. The nature of the regulatory system today is such that companies can piece together regulation to provide a full suite of financial services to customers, all through a digital platform – without wasting resources on applying for a banking licence that may never be granted.

At APS financial, the approval of our full consumer credit licence has enabled us to carry out credit lending services to our customer base of micro companies, sole traders, and consumers. These capabilities range from traditional credit cards, account overdrafts and loans, to specific innovative credit products, such as Direct Protect and iAdvance credit. Not only does that mean we’re offering services typically reserved for traditional banks, we’re going above and beyond.

While many high-street banks hit customers with unexpected fees when they go into their overdraft, we warn customers and can now offer instant one-off loans to those who are about to go overdrawn the next day – so there are no nasty surprises and no bills left unpaid.

This marks another piece in the puzzle for our quest to offer the services of a bank, without being dragged into actually being one. It sits alongside our e-money licence, which enables us to hold money on behalf of customers and provide current account facilities – with acceptance in minutes, rather than weeks.

It also comes just over a year after we became the only non-bank to partner with the Post Office – a relationship which enables us to offer real-time banking services and over-the-counter services, just like a bank. We’ve always prided ourselves on being a company of firsts.

Alongside the Post Office achievement, we became the first non-issuer to gain MasterCard membership in 2007. But it has never been our goal to seek these achievements as pure ego-boosters – a collection of accomplishments purely for show. Each and every one of these battles has been fought for a real purpose – to further our business and ensure we are providing the best alternative banking service to our customers.

In my personal view, seeking to become a regulated bank somewhat misses the point of fintech. The key advantage of being a “bank” is that you can leverage deposits for credit. The ability to leverage £200,000 deposits does not bring all that much value – by way of trade-off for the significant time investment and administrative burden of becoming a bank. If you have £1 billion in deposits however, it’s a very different story. With this in mind, I’d argue that many of the challenger banks we see today don’t really have the scale to justify going through the painful task of seeking a licence.

Don’t get me wrong, partnering with big players like the Post Office and seeking numerous FCA licences is no simple task either. Only the strongest financial firms will pass the FCA’s rigorous compliance process – a process from which over 5,000 firms have reportedly already dropped out.

My point is that it’s about picking your battles. Fintech firms should stop chasing the dream of being a bank purely for the sake of it. If it’s possible to provide the same – and better services – to customers by thinking more creatively about the possibilities that exist in today’s digital landscape, that’s common sense to me.