Further to our recent blog exploring some of the key challenges we see firms facing when seeking authorisation as a payment service provider (PSP) by the Financial Conduct Authority (FCA), we are keen to explore some key aspects of the application process where the FCA has placed intense scrutiny.
In this blog, we’ll share our insights on key aspects / expectations of the FCA in respect of firms’ Business Plans, in particular:
- Marketing Plans; and
- Financial forecasts.
Tailored, Viable Business Plans and Strategy
As we explained in our previous blog, it is important to articulate and demonstrate a clear and profitable strategy as part of the application process which will explicitly consider the ongoing viability for the firm. This is especially key in the current economic environment. The strategy will need to demonstrate consideration of specific UK customer needs and opportunities available in the UK market backed by sound assumptions and stress scenarios based on empirical evidence.
Marketing Plans
The FCA expects firms’ Marketing Plans to consider:
- An analysis of the company’s competitive position in the payments market concerned; and
- A description of the payment service users, marketing materials and distribution channels.
From our experience, we have observed some firms’ marketing plans having been robustly challenged by the FCA, whilst we have observed others that have been well considered, robustly articulated and supported with key evidence.
In those cases where we have observed the FCA raising significant challenge, key areas of challenge have routinely centred around:
- A lack of any kind of analysis of the relevant market, its key players, products and pricing; including how firms expect to compete and differentiate themselves in order to build customer base, retention and revenue;
- Poor articulation of the target market and the go-to-market approach. This is of particular concern to the FCA, linked to the Consumer Duty Principle, where it expects the target market to be clearly defined and adherence monitored. This concern is of increased importance where firms intend to use agents and/or distributors, who may not always adhere to the firms target market approach; and
- Ill-considered and/or underdeveloped marketing materials/channels, leaving the FCA concerned that customers may not be given all necessary information to understand the product/service and whether it will meet their needs.
Conversely, we have observed some authorisation applicants that have invested significant time and effort in developing their Marketing Plans including:
- Significant market research, including competitor products and pricing to enable the Plans to draw out key differentiators and unique selling points;
- A clear go to market approach and target market, with well defined key performance indicators, measures and controls to ensure products are aimed at the intended market; and
- Advanced and well considered distribution strategy and marketing materials, with processes and controls established to monitor the performance of the strategy and success of marketing materials.
Financial forecasts
During the Covid pandemic and the cost-of-living crisis, the FCA became increasingly concerned about the viability of new firms entering the market, observing that many run at a loss for several years before becoming profitable, with others failing in the early years.
From recent experience, we have observed the FCA being particularly challenging over firms’ financial forecasts and resources. It is becoming increasingly scrutinous of the adequacy of firms:
- Initial and ongoing capital adequacy;
- Liquidity; and
- Linked to both of the above, the adequacy of stress testing, which the FCA is placing more and more emphasis on.
We have also observed the FCA scrutinising firms’ income statements and balance sheet forecasts, especially where there are inter-group loans and cash flows, where the FCA has often asked ‘what if…..?’ in the event of the other group company / parent entity failing or experiencing financial difficulty.
And finally, linked to the marketing plans, we have seen the FCA challenge how realistic firms’ projected growth figures are in terms of customer and revenue growth.
In summary
Two of the most critical elements of a firm’s Business Plan are:
- The strength and detailed consideration of the marketing approach and plan; and
- The robustness of financial forecasts including plausible stress testing scenarios and how realistic customer and revenue growth may be.
The importance of these two aspects of the Business Plan cannot be over-stated. Therefore, significant time and effort is required to ensure the Plan is well considered, well researched and well presented.
Here at KPMG, we have significant experience helping firms to develop their Business Plans, whether related to authorisation applications or not.
Please reach out to us if you would like to discuss how we can help you.
And, please do look out for future articles as we explore other more granular FCA expectations on other elements of the authorisation application process.
