Challenger bank, concept

Challenger bank: When to engage your suppliers

You’ve decided to start a bank, you’ve built the unique offering, your C-suite is on board, and you’ve delivered your initial submission to the Bank of England. The next things to consider are: What’s going to be done in-house and what’s going to be outsourced? When do you engage your suppliers? While systems providers are the focus of many outsourcing efforts, what about your customer services, back office, bank infrastructure and risk controls and audit function? All are candidates for outsourcing.

Retonomy has worked with a number of fintechs and challenger banks, and in each case, the engagement of key suppliers has been critical to the success: engage too soon, you start to burn through cash, but wait too long to save money, and you stand a chance of being delayed in launching the bank. The Bank of England likes to see evidence not just of the plans of engagement but also of the system architecture and credible progress in building the capability.

How to manage your suppliers

Outsourcing requires careful management, and there are two main options: manage internally or use a service integrator? This is a question of scale and a service integrator can work well in large organisations. With multiple suppliers delivering into the same service or product, it is sometimes preferable to have one “throat to choke” by having one supplier lead the delivery. In this case, being removed from the supplier management “coal face” must be a strategic decision rather than a default position. However, in smaller organisations and start-ups, this requires a leap of faith by the founders in the service integrator and can often be more costly than having a dedicated resource internally.

“Planning engagement with suppliers is a challenge for new entrant banks. The length of the application process for a ‘banking license’ can vary, but is almost always longer than the applicant hoped. For a period of time they will need to carry the full operational cost of a UK financial institution without permission to trade. For an entity with limited resources, this expense and the delay in revenues can derail the project.

To try to mitigate this cost, the management team might be tempted to short-cut vendor selection and commercial negotiations and to appoint suppliers at the last possible moment. This lack of diligence is also problematic as it can introduce risk and reduce the quality of the delivery. It may also impact the new entrant bank’s application for a license as they will be unable to evidence effective outsourcing systems and controls to the regulator.

Timing all resourcing decisions, whether recruitment or supplier engagement can make a substantial difference to a new entrant banks chances of success.”
Jof Walters, CEO: Million

Danger to cash flow

Challenger banks suffer from the same affliction as most startups: investment. In banking, investors are reluctant to put cash in too early until they see evidence of the bank spinning up. But until the investment comes in, the bank runs on whatever money (usually the founders’) is available. Of course, this concerns operating cash… the capital needed to support the banking operation is another matter!

This is particularly the case with some of the challengers who have built their offering on technology and whose first round investors tend to be from the tech arena. These investors are used to gaining a return from initial investment, but quickly find that it’s not enough to build the infrastructure needed and nowhere near the capital requirements.

Building a bank is not a cheap business, to date, Tandem has raised more than £110m and Starling more than £64m, with a further £80m needed. Getting the financing wrong can have a considerable impact on the financial health of the bank: Metro recently miscalculated its capital requirements causing a drop of more than 40% in the share price.

Danger to timelines

Getting a banking licence takes longer than expected. Currently it’s taking approximately two years from acceptance of initial submission. Although the process is a defined year from application to decision, we see delays in both the application being accepted initially and also at the decision stage. Applicants are willing to let the twelve month time limit lapse rather than retract their application or be declined. Starting to pay your suppliers too early endangers the viability of the new venture; too late and it could extend the time to granting the licence. And until this point the bank doesn’t make money: it cannot take deposits and cannot start trading.

Without experience in managing suppliers there is also the risk of misunderstanding supplier delivery timescales. Not only do teams often fail to include enough contingency for slippage in the delivery but they also fail to understand how long it takes a supplier to recruit resources, stand up a project team, and set up programme governance.

How to resolve the problem

  • Decide how you’re going to outsource and to who by formulating your Sourcing Strategy and conducting supplier selections.
  • Take a staged approach: work out which has the longest lead time and engage these suppliers first. And build in contingency!
  • If you are going to use a service integrator model, decide which supplier is best placed.
  • In your negotiation, make sure you have sufficient protection, especially in the situation of a decline of licence. It has been known recently for the application be turned down at a very late stage or delayed indefinitely. In this situation, having the ability to reduce the services or cancel the contract with minimum penalties is advisable.
  • Give yourself longer to engage your suppliers than you initially estimate: the engagement and contracting process can become protracted.

Starting a bank is an exciting proposition, and the current dissatisfaction with the high street banks makes it an appealing challenge, but takes longer and costs more than most expect. Making the right choices in sourcing and engaging the right model at the right time can increase the chance of success.

For more information about how outsourcing to Retonomy can help your busines, get in touch or give us a call on +44 (0) 1438300200.