What is a Fintech Application Programming Interface (API)?  

Navigating the transition from agent to fully licensed without the complexity

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Bringing a new financial product or service to market is complex. Fintechs are at the forefront of delivering software that is rapidly decreasing the technical challenges, but regulatory challenges are equally important. Here we explain the best approach for your business – whether that’s an agent model or fully licensed and what to take into consideration as your business grow

An agent model, whereby a Fintech company provides payment and e-money services on behalf of an authorised electronic non-bank financial institution (NFBI), has long been seen as the most viable option for start-ups to accelerate their speed to market. It manages the complexities and costs of qualifying for a full EMI licence and removes the lengthy time span of the application process.

Due to Brexit, the demand for EMI licence applications to provide digital payment services in countries across Europe and the UK has grown exponentially, resulting in the licence application process taking up to 24 months.

Agent or fully licensed model: understanding the best model for your business

For any start-up, delays to operation are potentially existential problems. And for Fintechs, regulatory approval whilst vital for the protection of the consumer can amount to commercial viability abruptly coming to an end for smaller players.

The agent model provides a much quicker route to market. It also alleviates the requirement to have a team in place to manage the complex and costly application process. Although there are many benefits of the agent model approach, it’s not without its drawbacks. As an agent of an EMI licence holder, you have to adhere to the rules and regulations imposed by the NBFI and the umbrella banking authority, as they would be held accountable for any breaches in compliance caused by your activity.

It is the adherence to others’ rules that could create a constant friction between the needs of your business and the constraints of the licence holder. For example, there may be limitations on providing certain types of services or operating in particular markets due to perceived risk factors by the bank imposed on the NBFI, even if these services are legal. But what if that is a market or service that your business growth is based on? You need to have a very clear business model and strategy to negotiate these pitfalls, and this doesn’t take into account responding to unplanned growth opportunities. You are also required to get your customers to sign a contract with a NBFI, which is jarring from a customer experience as this contract is not directly with the business they have chosen for the specific product or service they have paid for.

In comparison, the fully licensed approach means you are the master of your own destiny. You have the freedom to roll out your business based on your plan or even opportunities, rather than being held accountable to the rules imposed by the NBFI. Yet for most start-ups, this is just not achievable in the early stages of business growth. The transition to fully licensed often comes when it’s no longer commercially attractive to pay the fees to the NBFI or perhaps you need the strategic flexibility to operate outside of the restrictions placed on your business.

What about safeguarding customers’ funds?

If you are granted an agency licence from a regulated financial institution, it is possible for that firm to safeguard your customers’ funds themselves under what is sometimes called a ‘reliance model’.

Practically, this means they are holding your client funds at their own credit institution on your behalf. If you are not an agent of a financial institution and you are running on your own licence, you cannot use the ‘reliance model’ to safeguard your client funds. This means that if you are using an EMI for account and payment services, you must also have an account at a bank/credit institution to ensure these funds are safeguarded.

At Integrated Finance, we understand the benefits and challenges of each model from first-hand experience and support both approaches, whatever stage your business is at.

When the time comes for your business to make the transition to a full EMI licence, it doesn’t need to cause the same complexity and resource pressures as if you go it alone. Key to this is having the right partner to help you navigate the ever-changing financial rules and governance in whichever market you operate in.

We not only support the cross-over to a fully licensed model and aid with technical integration, but we are able to offer commercial and regulatory direction on what the impact of such models might have on your business model, operational demands and technical nuances, including safeguarding and the related practices and regulations of protecting your customers’ money.

Talk to one of our experts to find out more.