• About 20 new banks said to seek British banking licenses
  • Cash depositors seen to provide stable funding after Brexit

As Europe’s largest banks discourage new deposits, a score of British startup lenders see them as more crucial than ever.

Banks in talks with regulators for bank licenses in Britain are reworking their plans to rely even more on funding from deposits than from wholesale markets after the country voted to leave the European Union in June, according to a person familiar with the matter. That’s in contrast with Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which are discouraging some depositors as low and negative interest rates across Europe squeeze profitability.

The potential for whipsawing markets and wider spreads post-Brexit is convincing banking startups that the stickiness of deposit funding is worth the cost and effort needed to convince customers to move their money. British regulators are in talks with about 20 new firms seeking to take deposits, more than the total approved in the past three years, said the person, who asked not to be identified because the details are private. 

New banks are "looking to break into the retail deposit market and this means a big slug of retail deposits will help meet their funding requirements," said Stephen Morse, a financial services partner and adviser to startup lenders at PricewaterhouseCoopers. After Brexit, “regulators will be tough on funding as part of testing the business model,” he said.

Traditional Methods

A mixture of U.K. firms and others from Europe, China, South Africa and the Americas are looking to invest about 200 million pounds ($263 million) in British banking startups, PwC wrote in a report last month. Startups seeking British banking licenses include those looking to offer checking accounts via smartphones, as well as firms wanting to sell mortgages and business loans. The firms include Civilised Bank, which will focus on business lending, and the Services Family, which will offer consumer banking to military personnel.

The move toward customers’ deposits would reinforce a return to traditional methods of funding, commonplace for centuries before deregulation in recent decades enabled firms to grow lending with the help of financial engineering and capital markets. An over-reliance on wholesale market funding forced some British banks to the brink during the credit crunch eight years ago, pushing lenders to focus on funding operations from consumer and commercial deposits.

Wholesale borrowing markets could become more volatile after Brexit, leading to an increase in the cost of debt funding for some lenders, analysts at Moody’s Investors Service led by Riccardo Rinaldini wrote in a report to clients earlier this month. The difference between the rate banks charge each other for sterling loans in London and the overnight index swap rate, a measure of banks’ funding stress known as the Libor-OIS spread, spiked after the referendum vote.

Reliance on wholesale funding may drop because lenders probably see slower loan growth going forward, the analysts wrote. Cheaper funding will also now come available from the Bank of England’s Term Funding Scheme, which offers financing in exchange for eligible collateral pledged with the central bank.

“Markets are not closed, but they have become more volatile,” said Carlos Suarez Duarte, a senior analyst at Moody’s. “It’s become more unpredictable rather than expensive, and when you want to go to the wholesale funding markets, you want predictability of what your costs will be.”

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