This article covers the requirements and peculiarities of ECB banking license

Licensing for payment and fintech companies: ECB banking license. Source: shutterstock.com

The fintech unicorns are tired of competing with banks and relying on their old-fashioned business models. They find it easier to bring innovation to their clients by becoming banks themselves. Today they have such a possibility.

In general, becoming a fintech bank is based on five key elements:

• A unique core banking platform,
• An API system to be able to connect to third parties,
• Compliance with KYC infrastructure and processes,
• A banking license to hold client funds without restrictions of other banks,
• An individual customer base, and a strong customer support team.

However, nobody promised disrupting traditions would be easy. Getting an ECB banking license to be able to provide banking services across all the EU terrain takes a lot of time and tons of paperwork.

Is it worth it?

In December 2018, the newspapers carried screaming headlines on the subject of Revolut getting its ECB license. It allowed the London-based fintech giant to offer services typically provided by traditional banks, including full current accounts, consumer and business lending, and overdrafts. This has also become the first step by Revolut towards globalization. Revolut founder and CEO Nik Storonsky hopes to expand the firm’s services in the U.S. in 2019, as well as Canada, Singapore, Japan, Australia, and New Zealand.

The company’s management was truly excited about this achievement. In the next few months, they expect a solid growth of a customer base, since they can now provide all the services available at traditional banks, but at a much more reasonable price. The firm has already served over 3 million customers. Without a banking license, they could offer only prepaid debit cards and current accounts, along with the premium features like cryptocurrency trading and foreign exchange transactions. Even with those limitations, Revolut was opening between 8,000 and 10,000 current accounts every day. Now that their customers will also be able to deposit their salaries directly into Revolut accounts, with up to €100,000 covered under the European Deposit Insurance Scheme, the numbers could go up steeply.

A German company, N26 received its license back in 2016. It was a key turning point in their corporate history. When the team decided to take a chance at fully-fledged mobile banking, they employed less than 20 people and now have just closed their USD 10 million Series A funding round. In the last two years, the ECB banking license has helped N26 to expand their consumer base to 1 million customers across Europe, to do business in 17 markets, and to rapidly improve their product offering. In 2018, the firm raised a total of USD 215 million from some of the world’s most well-known investors. It currently employs more than 1000 people and has offices in Berlin, New York, and Barcelona.

This mobile bank offers everything you need for handling your finances in an app. Lock and unlock your card, set spending and withdrawal limits, save and budget using Spaces, and instantly send money with just an email address or phone number with MoneyBeam. Opening a standard N26 account is fast, paperless, and won’t cost you a thing. Their business solution offers an extra layer of security, 3D Secure (3DS). It also brings cashback and uses artificial intelligence to automatically categorize your spending. How many traditional banks can boast that?

How to get the ECB banking license?

The national competent authorities (NCAs) are the first contact point for receiving licensing applications. The supervisors generally hold regular meetings with an applicant to guide them through the assessment process and to discuss the submitted information in detail.

The applicants can have preparatory consultations and discussions before submitting their application. Those have no influence over the overall assessment timeline. Once the application is submitted, the 6-month revision period begins for some Member States. During this time, the NCA confirms the submission of the application and its completeness. They can request more information if it’s necessary. In the other Member States, the 6-month period starts only after the completion of the application. Nonetheless, any suspensions postpone the legal deadline.

However, the assessment of banking license applications in Europe belongs to the sole competence of the European Central Bank (ECB), which makes the final decision to grant, extend or withdraw a banking license in the euro area. An authorization decision must be taken within 12 months.

The ECB is in charge of all banking authorizations in the euro area, whether banks are large or small. It is also the direct supervisor of the biggest entities, indirect supervisor of the smaller ones, and ensures consistency and high supervisory standards throughout the whole system.

Recently, the main authorization body launched a public consultation regarding the process of application and criteria of its assessment for fintech credit institutions. This move is a display of recognition of the increasing presence of fintech operations in the banking sphere. The consultation draft is focusing on increased liquidity requirements recognizing the volatility of its activity. The explanatory documents can be found on the official website of the institution.

The assessment criteria include:

• the applicant bank’s supervisory capital levels,
• their program of operations,
• the structural organization and the suitability of their managers and relevant shareholders,
• risk control frameworks,
• the bank’s vulnerability to cyberattacks,
• regulation of outsourcing and cloud services,
• data governance,
• liquidity and solvency.

No particular business model for banks is advocated. The text applies to all license applications to become a credit institution within the meaning of the Capital Requirements Regulation (CRR), including, but not limited to, initial authorizations for credit institutions, applications from fintech companies, authorizations in the context of mergers or acquisitions, bridge bank applications, and license extensions.

These common policies aim to create a level playing field throughout the euro area and ensure that entities will adhere to banking regulation and supervision. They also promote awareness and enhance transparency within a highly competitive banking sector.

The only peculiarity about a fintech bank has to do with the suitability of the management body. Taking into account the technology-driven business models, the top managers must have sufficient knowledge, skills, and experience not only in banking and/or financial business but also in technical aspects of the organization’s activities.

After the decision on a license is made, the ECB can begin an enhanced follow-up monitoring to confirm the authorized entity’s adherence to the submitted program of operations. If it doesn’t comply with the ECB regulations, it may become subject to sanctions.

Light version

There is also a simplified version of a banking license implemented on 1 January 2019 in Switzerland. It intends to simplify the regulatory requirements for fintech companies that accept public deposits, including but not limited to payment providers, blockchain-based companies, and crowdfunding platforms. This regulatory simplification is also known as a “Swiss light banking license”.

The new regulations include a “sandbox”, allowing fintech companies to accept deposits up to CHF 1 million without a banking license, as long as such assets are not invested or interest-bearing. If the CHF 1 million sandbox threshold is exceeded, the new framework allows deposits up to CHF 100 million, with certain additional requirements.

The limitations are:

• Companies cannot use the term “Bank” in their name or in connection with their activities.
• Like the full banking license, confidentiality obligations and AML-KYC due diligence obligations shall apply.

Relaxations of the “Swiss Light Bank Licence”:

• The Swiss banking license “light” has relaxed accounting and auditing standards applying the general standards of the Swiss Code of Obligations.
• Compliance audits can be carried out by an auditing firm subject to less stringent authorization requirements.
• Deposit insurance provisions do not apply. But companies under the Swiss Light Bank Licence must notify all customers that they do not carry such insurance prior to accepting their deposit.
• Companies benefiting from the Swiss Light Bank Licence have a reduced capital requirement in the amount of CHF 300,000, or 5% of their total deposits, whichever is greater.

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