Ready to play

Being a startup is hard, for so many reasons.

In a normal non regulated company, you can form the legal entity and then once your product is ready, go to market and scale up from there. You can add staff as and when you need to, buy stock ahead of time or, even after if you run out and have cashflow issues. You may take a hit on reputation but if your stock takes times to ship, you’re still in business.

Being a startup in the fintech space is much harder due to the complexity of being licensed. When you submit your application to the FCA, you need to include a lot of information including details on your people, policies, procedures and systems. The FCA expectation is that once they grant you a licence, you are ready to hit the ground running or as the FCA says: “Come to the table ready to play”. This means startups are often required to have some very senior (and expensive) staff in place during the application process, as well as being able to show their systems and processes are in place and ready to accept orders. In some places, India for example, firms are even expected to have their minimum capital in their bank account at the application phase.

This is an issue for start ups because all of these things cost money to maintain and without a licence firms are often pre-revenue and already burning cash at an alarming rate.

It is sometimes worse than this depending upon the country you are applying in. Policies can often be relatively high level and somewhat theoretical, for example Firm X will have in place appropriate controls to monitor client activity. But the reality is, a firm will need access to systems and tools such as KYC platforms, sanctions screening tools and, of course, transaction monitoring tools to prove to the FCA that they have a proper and proportionate series of controls in place to support their application. The best applications are of course those with screenshots of systems customised with the firm's logo and logins that show the FCA that the firm has everything in place and is raring to go - but this means having access to the tools some months before they can even apply!

This leaves firms with a conundrum. Either they need to sign up and pay a vendor for a service that they know they won't be able to use. Then set it up, apply customisations and pay the relevant licence fees while they build out their application or (not that we've ever done this as part of the application process) firms need to hope that the MLRO can squeeze enough believable screenshots out of the vendors help guides, API documentation and from friends using the tool in the industry to place in the procedure and show off the firms exceptional processes.

From a vendor perspective the need to charge is somewhat understandable. Tools and platforms, even demo platforms, take time to configure and set up for clients. Giving firms who may never make it through the licensing process free access to their platforms, even to demo platforms or pre-production systems, can result in a lot of cost in terms of supporting such access and integration. This is why vendors often require firms to sign up and agree to pay the setup fee and potentially to pay the ongoing licence fees during the application period.

The pricing and cost of such access is also based on the number of transactions the firm is expected to process and a tiered pricing structure often makes the per transaction cost for low volume firms cripplingly expensive. If your firm is unlikely to process hundreds of thousands or sometimes millions of transactions, you may find yourself paying 75p per transaction with a hefty annual fee and a prepaid bundle for transactions. And naturally at this stage you won't be processing any transactions, so you lose your bundled transactions!

So, what’s the solution? Regtech firms could offer specialist bundles for startups that cover their setup costs, but still give startups what they need in order to get their regulator comfortable with the arrangement of the applicant firm. Given they don't need to offer the actual service, they could cover their setup costs and then charge no ongoing fees until the firm becomes licensed. Regtech firms could also simplify the setup processes to reflect the fact that startups aren't likely to need full access to the service at the early days of their offering and then provide easy and affordable access to the service when it is needed.

Here at Ermi, as part of our commitment to supporting startups and small firm and helping to reduce financial crime, we have created a package for startups that aims to affordably give them everything they need to meet regulations, while also simplifying the process for them. Check our our startups page for more information.