The world of fintech is constantly evolving, introducing new and exciting products, ideas and other financial improvements. As it grows though, more regulation is being put in place to make sure everything is done above board. While further regulation and guidance can be beneficial to help start-ups in fintech stay on the right track. As such, it’s important that the right fintech lending licences are acquired before operating, but this can be quite a complicated area and process.
Two Types of Lenders
Generally there are two types of lenders, bank lenders and non-bank lenders. To make things more complicated, bank lenders aren’t always banks either, sometimes they just partner with banks who originate a loan and then they fund it via the bank. This means it is the bank lender’s asset and liability, yet the bank is the lender of record.
An additional lending licence is needed in some cases, usually depending on what the exact nature of the fintech company is and where they are based. First it’s essential to check whether your company falls into the bank lender or non-bank lender category to make things clearer. For all sorts of online lenders such as Liberis and the many more that exist, this can be the first step.
One aspect that makes fintech lending licences even more complicated is that the regulation varies depending on where the company is based and operating. So new is the concept of fintech that the European Central Bank (ECB) only published its official guide to assessments of fintech credit institution licence applications in March 2018.
There was also a general guide to assessments of licence applications produced but this version complements that and is aimed at fintech entities. This gives an overview of the application process and assessment requirements regarding governance, risk management and capital. However, it also details the supervisory assessment of licence applications that are relevant to banks with fintech business models. For any fintech lending company based and operating within Europe, this should be your first port of call when it comes to lending licences.
Licence Requirements in the USA
Across the USA the lending licence requirements vary depending on the state. Therefore any new or existing fintech business should consult the banking regulation for the state it’s based in first. This is where the two-tier banking system mentioned above is most relevant, as with bank lenders that aren’t banks, their loans are governed by the state charter.
Some states require an extra lending licence where there is no reciprocal relationship with the bank of record. This will govern underwriting, rates, terms and policies and more, which the loan must conform to within that state.
Fintech lending licences aren’t completely clear and are still developing, so it’s best to check with the local or national governing body and any existing fintech lenders to make sure you’re meeting all the required regulation.