Can financial service providers expand their operations without obtaining a banking charter?

TransferWise, the fintech company known for its money transfer services, is set to offer interest-bearing deposits to its clients in the coming months. This move marks a significant step for the company, as it expands its product offerings beyond traditional money transfers.

The new licences obtained from the UK Financial Conduct Authority (FCA) allow TransferWise to offer these deposits without becoming a fully regulated bank. This strategy, unique to TransferWise, is seen as a regulatory market opportunity that the company is taking advantage of.

The decision to offer interest-bearing deposits could potentially increase the number of users and funds available to TransferWise. However, the competitive interest rates offered by UK high street banks make it a challenge for TransferWise to attract customers away from their existing banking relationships.

Regulators generally prefer competition, and open banking has not been enough to pull large customer numbers out of these relationships. The success of TransferWise's new offering could pave the way for more regulatory alternatives to offer banking products, potentially leading to more companies following TransferWise's path.

TransferWise has around $2bn in deposits through its borderless account, indicating a strong foundation for its new savings product. The company argues that with its existing tech-forward KYC/AML systems, it is already adhering to many bank requirements without becoming a formal bank.

This move could also contribute to customer retention, but savings products are hard to differentiate. TransferWise's strategy of not lending out funds through other products, as traditional banks do, could set it apart in the market.

The FCA is expanding regulatory frameworks such as the regulatory sandbox and "regulatory nursery" to support fintech and payments firms. While specific banks and payments companies expected to participate in this licensing regime have not been named, it is clear that a range of fintech and payment service providers will be involved under new, less stringent licensing arrangements.

Neobanks and payment companies in the cross-border space can increase revenue by offering broader customer propositions. By adding a savings product, TransferWise is taking a step in this direction, potentially increasing usage of its debit card for travel and possibly addressing any potential gaps in smaller international payments.

In conclusion, TransferWise's move into interest-bearing deposits is a strategic move that could potentially disrupt the banking industry. It remains to be seen how successful this new offering will be, but it certainly marks an exciting time for the fintech company.