Introduction

Fiinu's subsidiary is currently planning to apply for a UK banking licence from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

Fiinu has a customer-centric operating model which improves ﬁnancial inclusion, a strong leadership team with experience, alternative data analytics and insights vision and a forward-looking approach to bringing to the market potentially revolutionary products and services enabled by Open Banking. Open Banking, in summary, allows connections between different banks, third parties and service providers to enable them to simply and securely exchange data which is aimed at beneﬁtting customers.

Fiinu’s Plugin Overdraft® is an unbundled overdraft solution, which allows customers to have an overdraft with Fiinu without changing their existing PCA provider. Open Banking allows Fiinu’s Plugin Overdraft® to attach (“plugin”) to the customer’s main bank account, no matter which bank they may use. Fiinu leadership team can execute its plan and bring increased long-term value to new investors and current shareholders. Fiinu’s vision is built around Open Banking, and it believes that it increases competition and innovation in UK banking.

Open Banking is a central component of the UK government’s ﬁnancial services policy, implemented by the Competition and Markets Authority (“CMA”), to enable the unbundling of retail banking products, in particular Personal Current Accounts (“PCA”). One key area of focus for the FCA and the CMA is the unbundling of an overdraft credit facility from the PCA, as consumers are still only able to have a single overdraft facility with their PCA. In line with this policy objective, Fiinu wants to bring consumer choice to the overdraft market, by being able to offer its Plugin Overdraft®. It is rare that such an opportunity emerges in ﬁnancial services, especially when incumbent banks are reducing access to overdraft credit including an unintended consequence of regulatory reform.

Financial Inclusion

Fiinu’s model is tailored and positioned to ﬁll the gap it has identiﬁed by providing a new choice in the overdraft market. Fiinu’s dynamic Open Banking-led underwriting model is based on the principle that overdraft limits will be provided to those who can demonstrate an ability to make repayments within a reasonable time without adversely impacting their overall ﬁnancial well-being or needing to borrow more elsewhere to repay Fiinu. According to Experian (Oct 2021) the presence of an arranged overdraft in a credit ﬁle can improve the credit rating if consumers use it sensibly.

FCA data suggests (2022) that over the last four years, the number of personal current accounts in the UK has increased by 15%, from 87 million to over 100 million. This means that, on average, each adult in the UK now has approximately 1.9 current accounts. Most of these accounts, 55 million (FCA, 2018) do not have access to arranged overdrafts at all. This is predominantly caused by the underlying risk-based underwriting principle and methods which are based on the Probability of Default (“PD”). The prevailing methods are also driving the incumbent banks to tighten their lending criteria in the aftermath of the global COVID-pandemic and possible economic downturn.

The PD model is a mature underwriting approach that is ideally suited for the secured lending markets. However, it is a sub-optimal method for unbundled overdrafts as empirical data suggests that, in most cases, the PD model results in a binary decision, on pre- determined one-size ﬁts for all overdraft limits, resulting in the majority of potential customers being rejected.

On the other hand, the principles of Fiinu’s Open Banking-led underwriting models are different to these traditional methods. Fiinu will be able to adopt a sophisticated approach to assess affordability and to set credit limits, thereby potentially enabling it to extend its overdraft credit to a substantially wider population than traditional banks. Fiinu’s borrowing long and lending short business model could result in a Net Interest Margin (“NIM”) for Fiinu of over ten percent net which is considerably higher than UK, US and world banking averages of 1.3%, 3% and 3.8% respectively (2020).

Furthermore, the unintended consequence of the 2020 regulatory reform of the overdraft market resulted in the removal of a speciﬁc credit product – the unarranged overdraft. However, the removal of this product did not remove the demand for credit, but rather it forced consumers to seek alternatives which, in most cases, are non-bank credit products. There is a range of such alternatives in the market, some regulated and some unregulated. According to the FCA (Jun 2019) merchants who offer Point of Sale (“POS”) credit as part of their credit offers include catalogue credit, store cards and retailers who offer ﬁnance at the point of sale (this can be in-store or online). The most recent new POS credit choice is Buy-Now-Pay-Later (“BNPL”).

FCA primary research (Jul 2017) suggests that the credit scores of people who used these types of non- bank products worsened signiﬁcantly. According to the Journal of Financial Economics (Nov 2021), empirical data research indicates that some of the other non-bank alternatives cause an immediate 4.7% drop in consumers’ credit scores, and this can increase to 10% over time. Non-bank credit alternatives can also cause issues when dealing with lending banks.

According to Reﬁnery29 (2021), people who use BNPL products are being declined for mortgages. Barclays for instance (2021) includes BNPL in their creditworthiness assessment and all active BNPL credit agreements will be considered when affordability is assessed, although a BNPL mark in credit ﬁle does not automatically result in rejection for a mortgage application. A non-bank credit mark stays in a customer credit ﬁle for up to seven years.

These potentially adverse consequences of use of non-bank credit alternatives are not widely known by the public who use them. In addition, Klarna, one of the most popular BNPL providers, has announced that from 1 June 2022 it will start reporting customer debts to credit reference agencies which will impact credit scores from late 2023 onwards.

Access to Fiinu’s Plugin Overdraft® can help individuals start to build their credit proﬁles through the provision of a credit limit by a bank lender rather than less mainstream providers. This is partly facilitated by Fiinu’s bespoke underwriting model which as noted above is more focused than typical bank models.

Fiinu’s primary market research supports FCA research which suggests that consumers ﬁnd overdrafts to be the second most trusted ﬁnancial services product after mortgages. Having said that, only 45% of adults with a bank account have access to an overdraft. There is therefore a signiﬁcant gap in the market between supply and demand of overdrafts, including an opportunity to improve financial inclusion.

The First Open Banking Interest Income / Deposit Margin Provider

According to McKinsey (2021), out of the 259 licensed Open Banking providers in the United Kingdom, the signiﬁcant majority (about two-thirds) are ﬁntech companies without a deposit-taking bank licence. Fiinu directors believe this is primarily because obtaining a bank licence entails certain costs and a time commitment on the part of an applicant that many ﬁntech companies are not prepared to incur.

The current bank-led Open Banking propositions do not add any real value to customers, and they are very similar across all participating banks, comprising mainly of a simple account aggregation feature built into existing mobile phone applications enabling customers who have accounts with more than one participating bank to see such bank accounts in one app.

Once Fiinu's subsidiary is granted its Banking Licence by the PRA and FCA, it will become the ﬁrst Open Banking led interest income/deposit margin banking infrastructure provider. Fiinu will become a deposit-taking bank and its technology will become a bank-independent platform, serving all other UK bank customers. Fiinu’s business model is described as “borrowing long and lending short”, the long position being its ﬁxed-term customer deposits which are used to fund short-term overdraft lending. The spread between the cost of funding (one-year ﬁxed term deposit) and overdraft lending, which is measured in days, results in an interest margin.

Figure 1 UK Open Banking commercial models broken down

On a wider scale, whilst Fiinu considers that the adoption of Open Banking is in its infancy, it has already seen revenue growth, which is expected to grow at a rate of 24.4% annually and is expected to reach annual revenues of $43.15 billion by 2026, according to Allied Market Research (2021). In the four years from 2018 to 2021, Open Banking users across the globe doubled and this is expected to continue to accelerate rapidly due to consumers continually moving to digital services along with the modernisation of the ﬁnancial sector around the world. In the UK, Open Banking could reach some 40 million users by 2025. From a technical perspective, Application Programming Interface (“API”) usage of Open Banking is more prevalent than is generally considered to be the case. In the UK alone, according to Open Banking (2022), there were over 10 billion Account Information Services (“AIS”) API calls made in 12-months between Nov 2020 and Nov 2021. Below are most common open banking API call types:

Get account — request a list of all customers’ bank accounts
Get balances — request a list of balances for all these accounts
Get transactions — request a history of transactions for said accounts
Get beneﬁciaries — request from a bank to get the account beneﬁciaries’ data
Get direct debits — request to a bank to provide direct debit data for a speciﬁed account
Get product — request to a bank to provide the list of products enabled for a speciﬁed account
Get standing orders — request to a bank to list all standing orders for a speciﬁed account
Get party — request to a bank to provide account holders’ business details
Get offers — request to a bank to provide a list of offers available to a speciﬁed account
Get scheduled payments — request to a bank to provide a list of scheduled payments for a speciﬁed account
Get statements — request to a bank to provide a summary of transactions for a certain period for a speciﬁed account
Get statement transactions — request to a bank to provide details of transactions for a certain period for a speciﬁed account.

These are just some of the basic Open Banking API speciﬁcations, but these API calls demonstrate the enormous range of possibilities offered by bank API integration. By way of example, since the McKinsey publication, an additional 78 ﬁrms were authorised to provide Open Banking services in the UK which stood at the end of Q4 2021 as 337 regulated providers. Statistics continue to show the rapid growth of Open Banking, despite the traditional technology adoption cycle of ‘innovators ﬁrst and general population later.’ In summary, Open Banking is experiencing very rapid growth. This is positive news for the consumer as Open Banking assists in protecting customer data through open banking standards and security protocols, which creates a more integrated payment market and crucially, it increases ﬁnancial inclusion. It also increases consumer choice by bringing newer and more innovative fintech companies like Fiinu into both the UK and global markets.

FinTech Market Opportunity

Nearly two-thirds (62%) of the UK adult population with a PCA used some form of overdraft in 2019. In April 2020, the FCA imposed new overdraft rules which resulted in an estimated 16.5 million adults losing access to a form of overdraft in 2020, namely unarranged overdrafts. The loss of access to unarranged overdrafts has resulted in a more than £10 billion funding gap in the £300 billion unsecured lending market.

Fiinu’s ﬂagship product is the Plugin Overdraft, a personal ﬁnance management app which is trademarked in the United Kingdom, European Union and the United States (US application pending).

The word ‘overdraft’, like the word ‘bank’, is a protected and restricted expression in ﬁnancial legislation. Obtaining a Banking Licence is therefore the foundation for Fiinu’s business because only banks can offer current account with overdrafts. The Banking Licence will allow Fiinu to scale its overdraft lending as it will be able to fund its loan book with affordable and stable access to retail deposits.

Once authorised, Fiinu intends to initially source all of its deposits through deposit aggregators, including Flagstone Investment Management Limited and Raisin Platforms Limited, which are platforms that allow consumers to spread their money across multiple accounts with different banks.

Fiinu's customers will not be required to switch their bank account to Fiinu or to pay a minimum amount per month into the Fiinu current account in order to qualify for an overdraft. In fact, as highlighted in Figure 2, it is expected that most customers will continue to use their existing debit card, and other transactional services provided by their existing bank account as before. Fiinu will provide a plugin third-party bank overdraft facility.

Figure 2 Open Banking provides ﬂexibility to customers

Fiinu’s risk appetite is to provide overdraft limits for up to £1,500 to any qualifying UK bank account. The use of an overdraft is more common than people generally think and through the Open Banking-enabled use of technology, Fiinu can further extend the use of the product.