New challenger banks drive third-party provider collaborations
Recently emerged challenger banks are taking advantage of new regulations to team up with multiple third-party payment service providers (TPPs) to gain a slice of the customer’s business they would otherwise not have access to.
The UK’s online-only Starling Bank received a banking licence in 2016 to provide current accounts, and is in beta phase. Earlier this year it released its marketplace, which will allow TPPs to offer their services to the bank’s account holders.
Megan Caywood, chief platform officer at Starling Bank, says when bringing new providers in to the marketplace they have to be aware of the rigorous due diligence that needs to be completed.
“When deciding on the utilities, we talk to customers around what they want and which services they need in conjunction with the bank," she says. "We will decide which partners to integrate and do the appropriate due-diligence checks.
"We will work with any partner as long as they can display they are mature, have stability and integrity. We need to maintain the level of bank security checks we have.”
Nancy Kalogeropoulou, UK country manager at Germany's Fidor Bank, says the bank has developed a marketplace in its home country, but is putting together a new marketplace for the UK, where its products were first launched in September 2015.
“In Germany, we currently have a full portfolio of fintech companies including peer-to-peer lending, investments, crowdfunding and precious metals," she says. "In the UK, we’ll soon be adding more services in an effort to optimize the overall online banking experience.”
Fidor announced earlier this month it was adding equity platforms Seedrs and Nutmeg to the marketplace.
Recognizing that the onus of responsibility falls on the TPPs as much as the banks, Rich Mason, business development director at Seedrs, says it also needed to comply with know your customer (KYC) regulations, both with Fidor and the bank’s customers.
|Rich Mason, Seedrs
“As regulated financial service companies, Seedrs and Fidor were both subject to a range of due-diligence checks before confirming and progressing the partnership,” he says.
And customers coming on board with Seedrs through Fidor Bank have to meet the requirement of both institutions.
Says Mason: “All investors on Seedrs are required to verify as a sophisticated or high-net-worth investor, or alternatively, complete a FCA [Financial Conduct Authority]-approved quiz to ensure they understand the risks of early stage equity investing, and certify they will not invest more they can afford to lose through our platform.
"Further to this, all investors on Seedrs must be cleared through KYC checks before making any investment.”
The development of the marketplaces has been enabled through the implementation of Payment Services Directive II (PSD2). To some degree this makes due diligence easier, as the bank can aggregate and share the customer’s information with their permission. It gives the customer the power to choose the best product, with minimum hassle of creating new accounts with multiple providers.
Starling's Caywood says: “We have a strong belief the customer owns their data and should be able to use that data when they choose to do so.”
What Starling and Fidor have in common is both offer their marketplaces free to access for their customers. As the banks are not offering the products themselves, they cannot charge their customers a fee. Instead, they need to look to the TPPs for their income.
For Starling, Caywood explains: “The bank charges a referral fee to the companies that the customer has chosen to partner with, but none of these costs are passed on to the customers themselves.
“We do not charge for access to the marketplace – for the customers it is a completely free add-on service. It is the benefit of having the open API – it gives them control of their data. But the decision on the products chosen always comes down to the customers.”
Fidor's Kalogeropoulou adds: “This fintech marketplace helps partners promote their products to our customers and in return increase Fidor Bank’s revenues by adopting a commission-based model. It has always been a key focus to ensure we continue to innovate and develop services to our customers’ expectations.”
It has been the meeting of the new banks and the regulation that has enabled the marketplaces to be developed.
Caywood says: “To understand the utility as a marketplace it is important to know how the market has evolved. In recent years there has been an influx of capital into London fintechs. This has seen a lot of services being built, and these services have started to do one thing very well. The aim is to integrate these pieces of functionality, and to them collaborate with others.”
Due to the breadth of TPP platforms available, and the relative ease with which they can link to the marketplaces, Caywood says it is unlikely they bank’s model will change.
“At some point we might look to develop products, but now we are more or less choosing to outsource," she says. "There is a huge number of options available now in fintech that can change the user experience.”
Getting these TPPs on board removes them from the market as potential competition.
Caywood says: “Banks can’t be the best at everything, and need to recognize that these companies are working to do their own specialties really well. They can also compete for business, can access data securely, and give customers choice and clarity around what their options are.”
Rather than creating an international one-size-fits-all marketplace, it is looking to personalize the selection available in response to the individual countries.
Says Kalogeropoulou: “Fidor assesses which products and services are appealing to bring to each market, and which partner can deliver on quality and on customer’s expectations and demands.
“We treat our customers as co-managers of the process. We frequently gather all product suggestions from our community members and evaluate which ones can be developed or the ones that can be provided through new partnerships. That’s how the idea of the fintech partner integration started.”