‘Big boys games, big boys rules’, is an SAS saying based on the idea that if you want to step up to the top league, then you have to play by the rules of the top league.
Start Ups and FinTech firms have been venting their frustration at the scale of the perceived “over the top” due diligence to which they are subject and the apparent risk aversion of the banks that they are pitching to, both to provide and receive services. Is this just youthful frustration or is there more to it?
The release this week of the FCA’s report Drivers and Impacts of Derisking, a study by John Howell & Co Ltd on behalf of the FCA, published 24th May 2016, gives an excellent insight into both why and how the banks are systematically derisking their client portfolios. The report focuses on the banks’ tendencies to decline or terminate the accounts of smaller entrepreneurial businesses, among others, for lots of very proper and prudent reasons in order to reduce their risk. This then begs the question – if entrepreneurial firms are genuinely at a disadvantage as potential customers are they also disadvantaged as potential suppliers when they deal with the banks?
The world of Start Ups and FinTech is all about amazing ideas, creating disruption and running ahead of the pack. However, when pitching to banks their services are expected to be near 100% reliable and resilient and when they aren’t they don’t get a look in.
A bank is expected to know and oversee its suppliers because the bank is still responsible for what they outsource to suppliers. They have to be sure that customer data is safe and resilient, protected from financial crime and that any supplier will not cause detriment or harm to their customer base. The Compliance Foundation has seen good Start Up services, that provide 95% plus availability and resiliency, turned down by banks, sometimes with regret. Why? Well, if you have to report to regulators for even the most minor breakdowns in service, 95% is not nearly good enough. This makes it very difficult for the banks to play constructively with Start Up and FinTech firms. As a consumer, could you tolerate a 5% failure rate on payments?
The banks know they will not get a free pass on doing their due diligence and senior bankers tell us that, while the Treasury and regulators extol innovation, the bank won’t get credit for using an innovative Tech company if things go wrong.
This may sound like a sob story for the banks, but talk to a senior banker and they will tell you that the hard time they give Start Ups who approach them is nothing like the hard time they are getting from the regulators.
And then there is regulatory concern about shadow banking. The day after the FCA published its paper on the Drivers and Impacts of Derisking, the Financial Stability Board published a review of Shadow Banking Entities which details the growing concerns of regulators about FinTech in two key risk areas – financial crime and financial instability through shadow banking. And we know this concern is increasingly shared at EU level.
So what is this shadow banking thing?
It is banking type services being offered by nonbanks. But what’s the problem in that? Isn’t that competition in action?
Having been badly stung by the 2008 Financial Crisis, the regulators are concerned that risks can build up, out of direct sight of regulators, outside the banking sector and then materialise causing systemic chaos. This is the bitter experience of the financial crisis where risks which were thought to have been offloaded, suddenly came back to haunt the financial system. Exotic mortgage securities anyone?
What this adds up to is a concern in some quarters that FinTech could inadvertently be the soft, unprotected underbelly of the financial system – reducing resilience to financial crime and multiplying financial stability risks.
So, if you are an entrepreneur who wants to deal with the banks then what can you do?
First thing is to recognise these are real concerns.
Second, look hard at your systems and controls, build and prove your resilience at the levels a bank requires.
Third, rather than constantly talking about the disruption your product is going to deliver (it makes banks and regulators nervous) talk about how your product will benefit customers and bring greater transparency and stability to the market.
Or as a senior banker told us, “Big boy’s games, big boy’s rules’.