Reasons why “Classic” Banks do not accept Fintech Companies

Introduction

As many of you may know, a “Clas­sic” bank is the usu­al finan­cial ser­vices provider which offers a whole spec­trum of finan­cial ser­vices, includ­ing but not lim­it­ed to Branch Ser­vices, ATMs, Inter­net Bank­ing, the Issu­ing of VISAs and Cheque Books, amongst oth­ers.

The cur­rent sit­u­a­tion with such banks is that they seem like they are not accept­ing Fin­tech Com­pa­nies as their clients. But why?

Fin­tech Com­pa­nies, which are gain­ing pop­u­lar­i­ty in the field, are strug­gling to open a trad­ing or an oper­a­tional bank account because of their com­pa­ny activ­i­ty. Banks seems to be tak­ing an old-fash­ioned approach and are gen­er­al­ly refus­ing appli­ca­tions from com­pa­nies which are relat­ed to blockchain or DLT activ­i­ties.

Com­pa­nies and Intro­duc­ers are now faced with a sit­u­a­tion where they need to seek oth­er solu­tions out­side Mal­ta or seek­ing oth­er insti­tu­tions instead of the clas­sic banks. Oth­er insti­tu­tions seem to be drift­ing away from the tra­di­tion­al approach, but banks are show­ing their unwill­ing­ness to address this grow­ing mar­ket. One would ask whether such resis­tance from the banks will con­tin­ue.


Blockchain operators vs Cryptocurrency operators

 

Cryp­tocur­ren­cy is a plat­form for dig­i­tal cur­ren­cies, whilst Blockchain is a medi­um where infor­ma­tion is stored and record­ed, and it also includes the data of trans­ac­tions. Where­as cryp­tocur­ren­cy is a tool, blockchain is the net­work where­by a trans­ac­tion can come into effect.

There is a dis­tinc­tion between Blockchain Oper­a­tors and Cryp­tocur­ren­cy Oper­a­tors which even banks need to take into con­sid­er­a­tion. How­ev­er, banks are still not dis­tin­guish­ing between cryp­tocur­ren­cy and blockchain.

The thing is that Banks are not mak­ing such dis­tinc­tion when a Fin­tech Com­pa­ny seeks to open a bank account. Banks are con­sid­er­ing both oper­a­tors to fall with­in the same busi­ness seg­ment. Such busi­ness seg­ment is being described as risky when com­pared to oth­er seg­ments.

In the author’s opin­ion, had it been only blockchain oper­a­tors seek­ing to open­ing a bank account, the bank’s approach would have been dif­fer­ent, but since cryp­tocur­ren­cies were intro­duced the risk was high­er. The rea­son for this may be because banks see cryp­tocur­ren­cies as volatile. For such rea­son, banks should be issued with offi­cial guide­lines so they can under­stand the dif­fer­ence between oper­a­tors and to be able to under­stand bet­ter this busi­ness seg­ment.

Author­i­ties in Mal­ta seems to be strug­gling to pro­vide guide­lines to banks, so the banks may not feel com­fort­able chang­ing their approach. A good frame­work should give more com­fort to the extent that many of these oper­a­tors who want to obtain their License in Mal­ta would have already gone through the scruti­ny of author­i­ties.

A Fintech Company opening a business account?

Every com­pa­ny which has its com­mer­cial activ­i­ty in Mal­ta must have a bank account. Fin­tech com­pa­nies are in line with oth­er “tra­di­tion­al” com­pa­nies, as the pro­ce­dure is the same for all com­pa­nies.

Before, Banks were wait­ing for feed­back of the MFSA but now these clients are still not being on-board­ed by the banks. Dozens of com­pa­nies involved in blockchain and cryp­tocur­ren­cy are choos­ing Mal­ta as a result of the government’s push to be a front-run­ner in this sec­tor – but they are encoun­ter­ing resis­tance when they try to open bank accounts.

Banks might be more com­fort­able in includ­ing Fin­tech Com­pa­nies with­in their risk appetite when licens­es are issued.

Reasons!

Fin­tech Com­pa­nies are more pop­u­lar nowa­days, but the sce­nario of Fin­tech Com­pa­nies and banks does not seem to be in the equa­tion. In fact, at the moment, there is not a sin­gle clas­sic bank in Mal­ta that is specif­i­cal­ly will­ing to work with Fin­tech Com­pa­nies. When approached with a VFA Client, banks are polite­ly declin­ing such clients by say­ing that they fall out­side their risk appetite.

The main rea­son why banks are not accept­ing Blockchain/DLT Com­pa­nies is because they con­sid­er such com­pa­nies as High Risk. Thus, most of the clas­sic banks are not allow­ing these com­pa­nies with­in their Risk Appetite due to reser­va­tions and uncer­tain­ties on who maybe trans­fer­ring the mon­ey.

Cur­rent­ly, banks advise intro­duc­ers and prospec­tive clients that if they are approached with a Blockchain/DLT Com­pa­ny they will not accept them as their clients. Banks feel like there is not a struc­ture reg­u­lat­ing this sphere and thus it would be “too risky” for them to accept such clients.

Also, banks seem to be strug­gling when deal­ing with Blockchain/DLT Com­pa­nies as they are not offered with offi­cial guide­lines on how to include these clients with­in their risk appetite, and for this rea­son banks are not even con­sid­er­ing Blockchain/DLT Com­pa­nies.

Anoth­er rea­son for this is the flow of funds not show­ing and thus the banks would not be in a posi­tion of con­trol­ling it. This can be seen in as a threat to the Com­pli­ance of the bank. Due dili­gence is cost­lier to mon­i­tor when more ‘com­pli­cat­ed’ trans­ac­tions are processed. The growth and for­ma­tion of a sys­tem which is in line with reg­u­la­to­ry com­pli­ance require­ments is a very impor­tant task for banks.

A reg­u­la­to­ry com­pli­ance sys­tem is a mea­sure which ensures sound­ness and suit­abil­i­ty of an insti­tu­tion. Tighter scruti­ny is being applied across the bank­ing sec­tor, and fin­tech com­pa­nies are being con­sid­ered as a threat to the reg­u­la­to­ry com­pli­ance sys­tem.

The Banks are aware that mon­i­tor­ing the Fin­tech sec­tor would require a huge amount of resources, exper­tise and knowl­edge. This would cer­tain­ly cre­ate addi­tion­al chal­lenges for the bank, but will they accept this chal­lenge?

About Dr. Rebecca Mifsud

Dr Rebec­ca Mif­sud, born 6th May 1994, attend­ed the Uni­ver­si­ty of Mal­ta and is an LLB Hon­ours grad­u­ate. She also grad­u­at­ed in the Mas­ters in Advo­ca­cy and will be sit­ting for her Mal­ta War­rant Exam in 2019. She suc­cess­ful­ly defend­ed her dis­ser­ta­tion enti­tled: ‘Imput­ing respon­si­bil­i­ty for foot­ball injuries inflict­ed by minors in the Mal­tese sce­nario,’ in 2017.

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