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With the number of open banking products increasing, just how straightforward is it to become a licensed provider? VIXIO talks through the application process with fintech’s Crezco and Currensea to find out the regulatory hurdles they faced.
Since its genesis, open banking has targeted a revolution in the way payments are made, opening the market to a new tranche of innovators and offering fast, cheap and secure payments. Alongside this revolution has come necessary regulation to ensure creators of these open banking platforms are held accountable for their business conduct, and the services they provide users.
Whatever individual’s views are on regulation, the process is not an option for open banking providers that want to receive certification from regulators such as the Financial Conduct Authority (FCA) and gain the trust of consumers. There is most certainly a case for compliance and that does not just stop at its mandatory nature.
Both Crezco CEO and co-founder Ralph Rogge and Currensea co-founder James Lynn agreed that the process, although very in depth and full of continuous clarifications with the FCA, was not overall very difficult.
Although both businesses are start-ups, they had different entry points when it came to regulation. Currensea was supported in the process through an FCA sandbox initiative, whereas Crezco did things the old-fashioned way and registered with the FCA. Despite the differences, both said the regulatory process was straightforward.
On the face of it, there could be a perception that a regulator sandbox would be an easier route to market. Although it has some advantages, Currensea’s Lynn told VIXIO that it was not without its challenges. Lynn gave the regulatory process a six out of ten, ten being very challenging, but did say that the process was aided by the support of the sandbox team.
“We are a regulated payment institution. We have a licence for AISP, PISP and CBPII. The sandbox helped us understand regulations. Where there was ambiguity in what we were doing the FCA were able to work with us and we were able to come up with a joint decision on what we should be doing and how we should be doing it. This was hugely valuable because you don’t want to implement something only to find out it needs to be changed because it doesn’t adhere to regulations,” said Lynn.
Rogge said: “In our case we had a very friendly empathetic relationship with the FCA. If they had a problem with anything we were producing for them they didn’t just send us to the back of the queue, so to speak. It was: ‘Let’s have a call. Can you explain this to me?’ I think the FCA is the best regulatory body in the EU.”
Rogge balanced his recognition of the FCA's commendable collaborative working style with open banking businesses, by saying they were not lenient and were certainly not handing out licences left, right and centre.
Lynn talks about the sheer amount of reporting that is required on an ongoing basis, which Currensea did not anticipate.
Reporting was a given but the volume and the “broad-brush” style of reporting, as he put it, was the surprise.
He explains that some warning ahead of time from regulators about this reality would have allowed Currensea to better prepare and commit itself to some compliance forward planning. Lynn said that the business’ head of compliance spends most of their working year doing reports and it was a huge overhead. According to Lynn, considering the FCA takes a risk-based approach to business generally, he was not entirely sure this approach translated to their reporting style.
There were also challenges in terms of keeping up with the specifics and nuances of regulation. “The smallest thing can make a massive difference and sometimes it is keeping an eye on those things that can be challenging,” said Lynn.
When asked if the volume of compliance stifled creativity and the pace of innovation within the open banking business, Lynn said: “Ultimately you want your compliance team to be innovating as well; you either employ a bigger team or if the persons in charge of compliance aren’t spending much time reporting, they could be finding solutions to improve the running of some of the compliance issues internally.”
Essentially, there were things that could be done to keep innovation going at a steady pace without the interference of heavy compliance workloads.
One of the other challenges to compliance is Brexit, which is currently still a work in progress. It has added steps and geographies to the process that would otherwise not be factors of consideration.
Rogge said Crezco now has an office in Lithuania and as CEO of the business, based in England, if he wanted to get a document signed he could no longer do it online. He explained that there is a requirement to hand in some papers with a wet signature that have been stamped by a notary. When comparing this process to something like DocuSign, it suddenly becomes a very inefficient process.
He also gave the hypothetical scenario in which important documents get stuck in the postal system, waiting to get through customs, further perpetuating the frustrating situation.
By contrast, Rogge mentioned the FCA's “really good online reporting portals”, which he was unfortunately not able to use for some aspects of business anymore.
Although overall the regulatory process was relatively simple to follow, the Crezco and Currensea experience shows there are always unforeseen challenges. Some can be addressed by regulatory bodies themselves, others are simply external, political circumstances.
To further drive home the point that being regulated is not a difficult process on the whole, Lynn mentioned that Currensea simultaneously acquired another licence at the same time as getting FCA approval. Currensea received its Mastercard principal licence. The FCA process must give open banking some breathing space if businesses are able to work towards other licences simultaneously.
The ease with which regulation is introduced to fintech start-ups and can be responded to is good news for those that are still in the development process and looking to go through the regulation process, especially because both Lynn and Rogge believe that the surface of fintech innovation has yet to be scratched.
“Open banking penetration of the market is tiny — version 0.1. I am hoping it has about 20 years of innovation and improvement ahead of it. The pandemic has been more influential on contactless card payments finally becoming universal,” said Rogge.
Lynn added: "At the moment fintech is only just beginning. We are so far from saturation. The drop-off rate for those who interact with open banking has reduced over time. People are getting more used to the idea and it is becoming more widely accepted. The fact that HMRC are now offering it as an option to pay tax bills has definitely helped. There is more acceptance of it and it is still such early days. There will be more and more exciting things which customers can benefit from.”
The future appears to be bright for open banking: the regulations that run parallel also appear to support the ambition of open banking legislation, which is to improve competition and innovation. This bodes well for the future considering how good the FCA, for example, engages and interacts with start-ups.
Although some improvements could help the regulatory process, and regulations will need updating as technology advances, it has made a good start and made a good impression on at least some of the current open banking market.
