Fintech's License to Fail

Control of your own product comes with a hefty price tag.

Who would want to be a bank these days? Quite a few technology startups, it seems.

Value Destruction

European bank stocks have plunged over the last decade

Source: Bloomberg

Mondo received a commercial banking license in the U.K. this month and plans to offer checking accounts next year. Atom Bank, backed by Spain's BBVA, and Starling now have U.K. licenses. Germany's Number26, received its own permit last month.

The apparent rush to enter a business that has destroyed shareholder capital and jobs over the past decade reflects a certain confidence that incumbent lenders are stuck in a rut.

It also reflects a desire to fully control the back-end plumbing of their offerings rather than just the funky user interface. Instead of teaming up with existing banks, these startups want to secure their own deposits, control credit risk themselves and grow at their own speed.

But that comes at a price: Mondo will need to raise as much as 20 million pounds ($26 million) of additional funding to make the transition to a full-fledged bank. That may sound like small beer for a startup that once crowd-funded 1 million pounds in 96 seconds. But the long-term picture is more troubling: with a license, these firms will have a larger cost base and a higher barrier to profit.

Skinny Margins

Global banks' net interest margins have taken a tumble as interest rates go lower for longer

Source: Federal Reserve Bank of St. Louis/World Bank

The bigger problem is that making money as a fully-fledged bank is hard. Lending is an expensive trade with high capital costs. For every 100 pounds of mortgage lending in the U.K., a new bank would have to have about 2.80 pounds of capital, according to regulators. 1 Interest rates are at a record low, squeezing margins. Banks are also easy targets for cash-strapped governments: U.K. lenders are subject to an additional 8 percent tax surcharge.

Capital Costs

Back-of-the-envelope estimates of a new bank's capital requirements for a 100-pound loan

Source: Competition & Markets Authority, using standardized risk weights, 8% capital ratio and 70%-80% loan to value where applicable

Present an entrepreneur with these realities and you'll likely be told that their new banking model will involve less balance sheet and more data. The new breed of lender wants to cross-sell financial products and unlock new revenue streams through lucrative consumer spending data.

That's fair enough, but even incumbents have shown the regulatory pitfalls involved. Britain's costliest banking scandal, payment protection insurance, was the result of cross-selling. U.K. banks have taken $41.8 billion in cumulative charges since 2011, according to Bloomberg data.

It's no surprise then that some new entrants have sought to rid themselves of their banking licenses after only a few years.

Revolving Door

E-invoicing specialist Tungsten failed to deliver on its banking bet and agreed to sell its license in 2015

Source: Bloomberg

Tungsten, a U.K. electronic-invoicing specialist, sold its banking arm last year, saying regulatory approval was "incompatible with profitable growth". Japanese network operator NTTDoCoMo sold its stake in a German private bank back in May.

Doubtless, a startup somewhere will find a way to profit from its banking license -- but in the absence of a proven business model this will look less like a one-way street and more like a revolving door.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Assuming a loan-to-value ratio of between 70 and 80 percent.

To contact the author of this story:
Lionel Laurent in London at

To contact the editor responsible for this story:
Edward Evans at

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