6 minute read
If you're a business that’s thinking of working with a Banking-as-a-Service provider, one of the first decisions you'll have to make is which licence you'll need: full banking licence, or e-money licence?
It's also a crucial one. Your decision will determine the direction your business will take, what services you can or can't offer your customers, and even how you market yourself.
In this article, we'll explore the key differences between a full banking licence and an e-money licence, their pros and cons, and the reasons you'd choose one or the other.
A full banking licence certifies that you meet the legal criteria to operate as a bank. Having this licence means you can:
In Germany, a full banking licence is known as a CRR credit institution licence or, more commonly, as a deposit credit institution licence. In addition to the full banking licence, it's also possible to apply for a licence for individual regulated activities.
To get a full banking licence, you need to apply to the financial services regulator in the country where you want to operate and prove that you meet the criteria. That said, in the Eurozone it's the European Central Bank that ultimately decides whether to approve an application.
In practice, the national financial services regulator — in Germany, this is BaFin, the Federal Financial Supervisory Authority — receives licence applications and makes preliminary decisions. The ECB then reviews the decisions and confirms them, applies additional conditions, or rejects them.
Because every EU country's banking laws must meet minimum standards, EU banking licences enjoy what are called passporting rights. So, having a licence in one EU country — Germany, for instance — allows you to offer your services in other EU countries and in the EEA.
Of course, all specific requirements of the respective national supervisory authorities must be met in order to receive permission for 'cross-border passporting'.
First things first, you'll need to meet a minimum capital requirement. This is an amount of money you must set aside over and above any customer deposits.
EU rules set the minimum capital requirement at €5 million. But the key word is 'minimum'. If the regulator has concerns, for example because they think your business model is very risky, they can tell you to set aside a larger amount.
It's useful to think of the minimum capital requirement as a rainy day fund. If you take a risk and lose some of your customers' money, for instance, you can make up for the losses by dipping into this reserve.
Banks must also contribute to a depositor protection scheme. By law, if a bank fails, customers have a right to get their money back, up to a maximum of €100,000 per customer.
Alongside minimum capital requirements, you must provide the regulator with extensive documentation. This includes, amongst many other things:
Regulators also conduct a series of comprehensive interviews, plus thorough background checks to ensure the key people who own and run the bank are 'fit and proper'.
The idea is to make sure that those who are in charge or have a say in the bank's business are trustworthy and have the right knowledge and experience, so your money is safe.
An e-money licence allows you to offer payment services and some other financial services products, but not operate as a bank or use 'bank' in your name or marketing materials.
Broadly speaking, e-money institutions can:
Like full banking licences, e-money licences issued in EU countries have passporting rights, which means you can offer your services in the rest of the EU and EEA.
That said, it's national financial services regulators who approve applications. The ECB isn't involved. The licence application process is also shorterand less complex.
The key people must prove they're 'fit and proper', and you must show you have the right technologies, partnerships, and risk management controls in place.
But the minimum capital requirement is a much lower €350,000. And, because you can't take risks with client money (more on this in a minute) there's no need to join a depositor compensation scheme.
The single biggest difference between banks and e-money institutions is that banks can do four things e-money institutions can't:
Of course, because banks can take risks with customers' money, they have to follow very strict regulatory requirements, and are under somewhat more scrutiny than e-money institutions. Which means there's less flexibility when it comes to how you operate.
By contrast, e-money institutions must keep customers' money safe in a segregated account with a licensed bank. You can't touch customers' money or take any risks with it.
Needless to say, this requirement means that, as an e-money institution, you're dependent on third-party providers, which can make you somewhat less nimble.
Because you can't take risks with customers' money, there's also no requirement to join a depositor compensation scheme. But customers won't necessarily understand why, and may be put off by the fact their deposits aren't protected and that you're not a full-blown 'bank'.
Lastly, most e-money licences have limits on transaction volumes, which can restrict how quickly and how much you can scale.
The upside is that e-money licences were specifically designed to allow non-banks to compete with banks. Because there are restrictions on what types of services you can and can't offer, there's more operational flexibility. And this allows you to be more agile and innovate more quickly.
|Minimum capital requirement||€5 million||€350,000|
|Application fee||approx. €25,000||€1,000 - €3,000|
|Length of application process||18 months +||approx. 15 months|
|Supervision||European Central Bank and national financial services regulator||National financial services regulator|
|Services||All services offered by e-Money institutions, plus all types of lending products||Payment services, e-Wallets, Foreign exchange transactions|
|Customer security||Depositor protection scheme covers up to €100,000 per customer||Must keep client money in a segregated account, Limits on transaction volumes (vary by country), Can't offer interest-bearing or lending products|
|Passporting rights in the EU and EEA||Yes||Yes|
If you want to offer customers the full range of banking services — from basic current accounts, to credit products and financial advice — a full banking licence is the way to go. The trade-off is that it has stricter ongoing compliance requirements.
By contrast, while an e-money licence restricts what you can or cannot do, it gives you the flexibility to make the most of technology. So it's a good choice if you want to offer digital-only multi-currency accounts, e-Wallets, or products designed to serve specialised verticals.
At Solaris, we have the most comprehensive suite of licensing options in Europe. Through our partnership with BaaS leaders Contis, we have:
Regardless of which route you decide to take, we can help you get started quickly and cost-effectively and offer your services to customers all across the EU, EEA, and UK right out of the box.
Want to start offering financial services in Europe and the UK?
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