Why are lenders being drawn to the banking market?

Recently, Bridging & Commercial reported that both Amicus Finance and peer-to-peer lender Zopa had applied for banking licences, while Masthaven Bank, which was granted its retail banking licence in April, is expected to launch in the near future.

However, Rishi Khosla, CEO and co-founder of OakNorth Bank, insisted that applying for a banking licence was only the first step in what can be a difficult process.

“…Just because applying for a licence has become easier, it doesn’t mean securing a licence has become easier.

“While the Financial Conduct Authority (FCA) has acknowledged that there are 15 other players currently going through the application process, the limited number of licences that have been granted in the last six years is evidence that there are still significant barriers to entry.”

Rishi explained that increased political will, lower capital requirements and a broader variety of technology companies to provide banking infrastructure had made applying for a licence a less daunting process.

He also highlighted the New Bank Start-up Unit – a joint initiative between the FCA and the Prudential Regulation Authority (PRA) – which has been launched specifically to help applicants negotiate the application process.

Jaidev Janardana, CEO at Zopa, suggested that this unit could be a factor in why lenders are being drawn to the banking market, adding: “[This] means that there is clear structure and support [for] challengers wishing to enter the market.”

'A bank no longer needs branches’

In addition to these incentives, the material and fiscal requirements of becoming a bank have also been greatly reduced.

“A number of the new players that have entered the market recently, ourselves included, have done so on a purely digital-basis … due to the fact that consumer needs are changing,” Rishi stated.

“Advancements in technology and the increased penetration of app-banking, mobile-banking and internet-banking, mean that a bank no longer needs branches to serve customers.

“This has drastically opened up the market to more players as the overheads and start-up costs have been significantly reduced.”

With this in mind, some lenders may feel that there has never been a better time to apply for a licence, and Rishi admitted that the potential benefits of securing a banking licence were a big draw.

“…Players in this space may be attracted to the idea of obtaining a banking licence as although it will mean increased regulation and that they will have to do more in-depth underwriting, it will give them cheaper funding to continue their lending.”

‘Changing the rules and challenging convention’

Jaidev claimed that customers also stood to benefit from the firm securing a banking licence.

“[Our] decision to apply for a banking licence was customer driven.

“We believe increased competition within the banking sector will lead to more innovative customer products and ultimately customers getting more of their needs met.”

Meanwhile, Jon Hall, managing director at Masthaven explained that competition benefited the economy as a whole.

“New banks make an important economic contribution – injecting much-needed competition into the sector as they challenge the status quo with diverse business models and innovative products.

“Their impact, for example, on gross lending gave the sector a 2.9% market share [according to CML data], and they have transformed the savings market with highly competitive rates.

“This impact will only grow through more new entrants joining the banking market – changing the rules and challenging convention.”

Although Rishi agreed that more competition would be of great benefit to borrowers, he argued that more could be done to help new banks succeed.

“In order to maximise the probability of success for new players, the government should ensure that a more proportionate approach to regulation is adopted, that new players’ propositions are spread out across different target segments, and that they are established on a staggered basis.”