TheChek News Flow

Mobile banking and cryptocurrency businesses are actively exploring the possibility of buying small banks and holders of electronic money institution (EMI) licenses in an effort to avoid lengthy application processes and to widen their operations into various markets.

Greater opportunities have arisen for tech companies to displace banks as the consumer-facing front-end of choice across the payments market since the EU’s Payment Services Directive 2 (PSD2) came into force on 13 January intended to enhance competition among European payment service providers, adding a further incentive to obtain the required licenses, partner at Arma Partners Bank, John Meehan, said.

EMI licenses allow companies involving electronic money payments to operate, whereas gaining a banking license allows such platforms to operate more closely to that of a bank and permit companies to provide additional offerings such as credit services, mortgages and related products.

Operating with a banking license allows companies to gain scale and grow their customer base, with Meehan adding this consequently adds credibility.

Since the process of applying for a full bank license can be lengthy, it is often quicker and typically substantially less burdensome, to acquire a bank than to apply for a license, Partner at White & Case Guy Potel said adding that an acquirer must comply to change-in-controller requirements.

An EMI can be approved within three-to-twelve months. By contrast, a banking license can generally take up to 18 months.

In August 2017, Tandem Bank bought Harrods Bank off London’s prestigious luxury department store, Harrods, for an undetermined amount to shortcut its application process and gain regulatory status.

In February, George Basiladze, CEO of London-headquartered bitcoin wallet and prepaid card company Cryptopay told Mergermarket it was looking to acquire a “cheap bank” or an EMI as a way of gaining a license.

More fintech companies operating in the crypto-currency space are also applying for E-Money licenses to ensure part of their business operations are regulated, Tony Anderson, banking partner at Pinsent Masons said. In the UK, there is no regulation governing the issuance of crypto-currency, he said.

In June, the FCA issued “Dear CEO” letters to UK banks highlighting, in its view, the risks associated with crypto-related activities, informing banks’ on processes for on-boarding such businesses as customers, he said.

While still a substantive process, applying for an E-Money license is a far simpler process than applying to become an authourised deposit taking institution in the UK, Anderson said. Fees differ too; GBP 25,000 as opposed to GBP 5,000 for an authourised EMI, while threshold conditions, financial resources - liquidity and capital requirements - and the scrutiny of the bank’s operations including its key personnel, are all higher when operating under a banking license, Anderson said.

In the UK, any firm that wants to become a bank has to be authourised by a recently established bank start-up unit, a joint initiative from Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The unit offers such firms an alternative route to becoming authourised prior to becoming a fully operational bank. Through this route, known as Mobilisation, the PRA and the FCA limit the amount of business that can be undertaken by the firm until it is fully operational, Anderson said.

Basiladze agreed that finding cheap banks or EMI targets priced up to EUR 6m in Europe is challenging. Consequently, Cryptopay has not managed to secure any type of acquisition.

In December 2017, Managing Partner of Singapore-based venture capital firm Life.SREDA told this news service that the VC was looking to acquire a bank in the US via its new entity, Arival. Eventually, the company concluded that buying a bank would take as much time as applying for license, COO of Arival Bank Jeremy Berger said.

Arival bank applied for International Financial Entity (IFE) in Puerto Rico, which is a US territory and falls under the US banking system, he said. “The IFE allows us to serve international clients, the option to become FDIC-insured, and share the other benefits of building a bank under the US system”, he said.

Technology start-ups globally are financially restricted, and the number of affordable targets is limited, making deals difficult to conclude. The UK landscape has far fewer registered banks compared to the likes of the US, making competition tighter and more expensive. Small US banks can cost as little as USD 2.5m (EUR 2.1m), Solodkiy said. There are between 6,000 and 9,000 small banks in the US, Berger said whereas there are 300-plus registered banks in the UK, according to Corporate Finance Institute. Moreover, in the US regulators are trying to limit the amount of new banks, which effectively means they are not issuing many new banking licenses, Berger said.

US banking licenses are also in demand as ambitious European fintech businesses look towards the US, which is one of the largest single markets for financial services companies. UK challenger bank Revolut, for example, plans to use funds from its latest USD 250m Series C injection to expand into the US.

The procedure of providing a lending or payments offering across multiple US states is equally as cumbersome as a company has to find a relevant license in each individual state as well as satisfying certain federal/national registration and compliance programme requirements, Potel said.

On the other side of the coin, some European banks have established funds designed to invest into challengers, aware of the disruption they may face. Financial services institutions have long acquired fintech providers so as not to lose pace with technology companies looking to operate in the financial services space, Potel said.

ING [EPA:INGA] launched a EUR 300m fintech fund ING Ventures in October 2017. Barclays [LON:BARC] announced the establishment ofBarclays UK Ventures in April. In February 2016 BBVA announced a USD 250m increase in its financial technology fund and a partnership with Propel Venture Partners.Santander [BME:SAN] launched its USD 100m InnoVentures in July 2014.

This is a long-term trend and we will see more of these investments in the coming years, Meehan said.