Payment Licenses in Europe: How to Find the Right Regulator?
Obtaining a banking/payment licence in one EU state generally entitles a financial organisation to trade in all the other states. Yet the approval process can vary greatly from one jurisdiction to another. Which one is best?
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Offering Fintech Services in the EU
As the EU and the majority of the member states don't offer regulatory sandboxes, companies, and startups interested in offering licensed payment or banking services in the EU should either work with licensed financial institutions (known as "Banking as a Service Provider - BaaS" or "Payment as a Service Providers or PaaS" or apply for a payment or banking license.
Another option during market entry could be to invest in or acquire a licensed company. Although, in theory, an M&A deal could supply the regulatory protection a Fintech could need, in practice, M&A processes and approvals can take as much as a license application. Therefore, an acquisition only makes sense as a market entry strategy if the target company’s strategic value adds to the market entry. Otherwise, the process might cost or take as much time as a BaaS partnership or license application.
Working with white-label banking or payment service providers in the EU to offer Fintech services is a strategic decision. Outsourcing licensed activities to a BaaS or a PaaS can be beneficial during the proof-of-concept stage, as the team might lack the necessary compliance know-how, experience, or human resources. BaaS and PaaS partnerships allow neobanks and Fintech service providers to outsource the essential technical, operational, and regulatory burdens and risks and focus on their core business. However, as the business grows, BaaS partnerships can quickly become expensive for pre-seed and seed-stage Fintech startups. In addition, BaaS and PaaS companies usually have ongoing compliance requirements and can block ambitious product development cycles.
Alternatively, it might make sense for a Fintech to apply for a license directly in the market. This could be due to the intention to get a regulatory stamp of approval and to start the market activities with a boost of trust. Also, if the right BaaS partner isn't found or the company intends to multiply users within the first year. Other underlying strategic factors could also exist in a license application decision. In any case, the most crucial step will be to find the right jurisdiction to make the license application.
Payment License Applications
Applying for a banking or payment licence in the EU is a big commitment. It requires a lot of preparation and planning, plus a willingness to be patient while the regulator goes through the approval process. Some EU states are considered to be more accommodating to potential licensees than others, but the reality depends on more than just a regulator's efficiency.
So what should you look out for when considering where to apply? What are the pros and cons of the "best" EU jurisdictions for banking and payment licensing? And what can you do in order to simplify and expedite the process?
Who Needs a Payment Licence, and Why?
Different Fintech services are regulated under different EU banking, trading, and payment licenses.
Banking licenses require more economic and human capital and sector expertise. The application process for a banking license is more extended and more demanding. The market is also more established and competitive. Therefore, startups often prefer centering their business models around payment licenses.
In order to offer payment services and trade as an Authorised Payment Institution (PI) or Electronic Money Institution (EMI), any financial organisation operating within the EU requires a licence. The type of licence required depends on the type of business the organisation is planning to carry out.
The PI licence is the easier of the two to obtain, because an PI can only process payments; it can't issue money. An EMI, on the other hand, can issue digital money, for example in its clients' e-wallets. An EMI is not quite a traditional bank, because it can't lend out its clients' deposits the way a bank can, but in most other respects the difference from a consumer's perspective is negligible.
The main reason for the licensing of PIs and EMIs is protection of consumers and the financial system as a whole. EMIs and PIs have a lot of power. Corruption or incompetence could harm not only a firm's own customers but the entire banking and payment system across the EU. Checks are stringent and penalties for breaching licence terms can be severe. This is also why the application process takes months rather than weeks: there's a lot at stake, and regulators do not like to be rushed.
What to Consider When Applying for a Licence
Financial firms need to take into account various factors when planning a licence application. These include the following:
• Ease of licensing - time to process the application, plus cost in terms of fees and work-hours
• Staffing requirements - who is required to actually work in the physical location where the licence is granted?
• Passporting access - to all of the EU or only part?
• Reputation of the licensing authority - trust and recognition can be helpful in the market
• Taxation - even if a firm's main business is elsewhere in the EU, the requirement to at least maintain an office in the licensing jurisdiction may have tax implications
On the other side of the fence, EU regulators have strict requirements for licence applicants. These include:
Validity of business plan - especially including risk management factors such as credit and liquidity risk
Personnel appraisal - assessment and interviews of directors and senior management
Capital requirements - usually assessed using the Basel III framework
Reporting scheme - which must comply with EU reporting obligations
Anti-money laundering procedures - for obvious reasons
Governance and internal controls - to minimise the chance of operational failure
Deposit guarantee scheme participation
The exact requirements depend on the license type and the target jurisdiction.
Popular Regulatory Destinations for a Payment License
There is no league table of licence application efficiency, unfortunately. However, some EU states are more favoured by applicants than others, for a variety of reasons.
Here, in alphabetical order, are some of the more popular jurisdictions for licence applicants, along with advantages and disadvantages of each. This is not an exhaustive list, and the pros and cons of each are subject to change over time.
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Cyprus: has a strategic location, offers a well-established regulatory framework for financial services, uses English as a main business language (which can be helpful for international firms) and has a significant base of fintech companies and financial institutions. On the other hand, the Central Bank of Cyprus has stringent requirements and the approvals process is thorough. Expect plenty of competition from other would-be applicants, which may affect the approval process.
France: offers one of the largest markets in the EU, has Paris as a traditional financial centre (good for networking and business connections) and has actively encouraged fintech growth in recent years. Disadvantages include a complex regulatory environment (French bureaucracy has a deserved reputation) and the likelihood that some documents and interviews may, by law, have to be in the French language.
Germany: Frankfurt is an established financial hub, while Berlin is a major centre for fintech startups. The country has had a strong economy - arguably not quite so strong at the moment - and offers access to a large consumer market. However, competition within the financial sector is high, and the often-labyrinthine Germany bureaucracy puts even the French public sector to shame. Germany is ranked outside the top 100 for starting a business, but a licence granted in Germany certainly commands respect.
Ireland: Dublin has become a significant financial centre, partly due to many years of relatively low corporate taxation. Several international banks and PIs are based there. English is the business language, simplifying licence application for international firms. However, competition is high and there is increasing regulatory scrutiny, in part as a consequence of the aforementioned low taxes.
Lithuania: Lithuania has been actively promoting itself as a fintech-friendly jurisdiction for at least a decade. It has a streamlined process for obtaining licences for both EMIs and PIs. It has a limited local market in comparison with larger EU states, and a licence granted there may not have the same level of international recognition as one from a larger financial hub.
Luxembourg: a country known for its stable political and economic environment, Luxembourg has a well-established financial sector and is particularly appealing for investment funds and similar institutions. However, the costs of compliance can be relatively high, and the country's focus on certain sub-sets of financial services may not best suit for some fintech firms.
Malta: another small, largely English-speaking country like Cyprus, Malta has become a hub for financial services. Its regulatory framework is seen as favourable to fintech companies, plus it has a policy of low corporation taxes. But it's a small market and (like Ireland) EU regulators are scrutinising it more carefully due to its tax laws. This may result in stricter compliance requirements.
Netherlands: Amsterdam is a growing financial hub and the country as a whole has good financial infrastructure and a stable regulatory environment. However, that stability is the result of strict regulatory compliance requirements, and there's a lot of competition in the financial sector.
United Kingdom: a wildcard entry given that the UK is no longer part of the EU, but London has been a major financial hub for decades, offering access to a large domestic market and with English widely-spoken. The UK's financial regulatory authorities are generally well-respected worldwide. However, although British fintech firms can and do still operate in the EU, Brexit has changed the regulatory landscape, especially with respect to passporting, and so the barriers for licensing and compliance are higher.
Although a licence granted in one jurisdiction can generally be used in other EU states (“European Passporting”) through the passporting process, sometimes it helps to have the licence granted in a country that's favourable to a financial firm's core business. In this respect, the Scandinavian countries, although not included in the above list, may appeal since their populations' take-up of mobile banking and financial services apps is amongst the highest in Europe.
Where is the Best EU Jurisdiction in Which to Apply for a Licence?
The best EU jurisdiction to apply for a payment (or banking) license comes down to the specifics of the business and the overall strategy.
The EU consists of 27 markets and not one but 27 different cultures. Therefore, it’s usually not possible to have a one-size-fits-all approach with financial products in the EU, as most customer clusters are loyal to local solutions and brands due to the trust element.
Fintechs targeting a particular problem should get close to the jurisdiction of the market that has this problem. Especially at the beginning, offering solutions from a distant market (e.g., using a license from Cyprus or Malta to offer Fintech products to Germany or France) might be perceived negatively by the customers if the connection isn’t made clear. Recently, the regulator practice has also leaned towards rejecting license applications that only intend to use the license as a springboard.
Suppose the Fintech isn’t solving a particular problem but has a product-based approach (i.e., wanting to launch or expand a specific product). In that case, they should look at the markets they have the most connection to from a target user, human capital, and economic capital points. If the license jurisdiction doesn’t offer any customers, talent, or investments, applying from that jurisdiction might not make sense.
Before making a license application, there are many strategic questions to answer, and the most crucial questions can be narrowed down to three. Entrepreneurs interested in applying for a license are recommended to answer these questions before curating a licensing strategy.
Do I have any (target) customers in the market?
Do I have any (potential) talent or partners in the market?
Do I have any (future) investors in the market?
Other alternatives should be considered if the target license jurisdiction doesn’t offer any market connection points to the company.
License Readiness: It all Comes Down to Preparation
Whether applying directly to an EU regulator or using the services of an agency to apply on your behalf, preparation is vital when applying for a licence. A poorly-prepared application is likely to be rejected, wasting time and money – including the cost of lost trading opportunities.
An ideal banking or payment application will have a connection to the target jurisdiction, be prepared by a team of strategic, technical, and legal experts, and can answer all fundamental questions about the business model and activities before getting in contact with the regulator.
Each EU state has its own regulatory authority for licences: BaFin in Germany, ACPR in France, DNB in the Netherlands, CSSF in Luxembourg and so on. More information on the application process can be found on this EU page.
Please get in contact with us to find out the right starting point for your business.
Disclaimer: This blog piece is prepared for information purposes and doesn’t intend to give any regulatory or legal advice. Companies wanting to enter the market or intending to get a banking/payment license should run the process with experienced lawyers and strategic fintech advisors first to determine the best starting point. Contact us to get banking and fintech lawyer recommendations from our network or to discuss the best strategic jurisdiction for your business idea.
