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ECB Mulling Higher Liquidity Levels for Fintech Banks

by Thomas Ressler

The European Central Bank may ask startup financial technology banks to hold more reserves and liquidity to address their particular risk profile. The ECB circulated proposed guidelines for such tech-centric banking startups last week and requested public comment by Nov. 2, 2017.

In its proposal, the agency expressed concern about the volatility of fintech banks’ price-sensitive customer base, and the challenges such institutions can face being newcomers entering a mature market with a niche product that might have to price aggressively to snag market share.

In terms of initial capital, “The start-up phase of a fintech bank could pose a greater risk of financial losses which may progressively reduce the amount of own funds available,” the draft stated. Also, as its business model matures, the institution could face significantly different risks, which need to be accounted for.

And when it comes to liquidity, a fintech bank could encounter more severe risks during startup. For instance, “Online depositors can exhibit price-sensitive behaviors, being more likely to withdraw their deposits and switch to a competitor paying higher interest rates,” said the ECB. “There is a risk that online deposits accepted by fintech banks are more likely to be volatile and less ‘sticky’ than traditional bank deposits.”

The ECB also cited execution risks with the business model of fintech banks. “The ECB and NCAs [national competent authorities] will assess whether the applicant can demonstrate that it is able to hold sufficient capital to cover start-up losses in the first three years of activity and, where applicable, the costs associated with the possible execution of an exit plan,” the agency said.

A budding fintech bank’s business plan should “precisely describe the forecast start-up losses in the first three years of activity and should include financial forecasts for the period up to the break-even point,” it added.

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