FinTech: Which license does your business need?

Banking Regulations in Germany – Overview 

FinTech business models can be categorized, having the relevant banking regulations in mind. In reality, the categories presented rarely occur as "single-variety". However, many of the FinTechs can be assigned to one of these categories depending on their business focus. This categorization is the first step in deciding which license and which license requirements (e.g. capital requirements) are relevant.

📈 Trading

💸 Payment Solution

💳 Lending Business

🤖 Robo Advice

🪙 Crypto 

🤑 Crowd Financing

Procedures, Costs and Timelines

Required Documents

The responsible body for the application to obtain the relevant license is the relevant national banking authority, in Germany the BaFin and somtimes the European Central Bank.

The application must contain, among other things, detailed information on the business model, business processes and business plan as well as a description of the measures taken to meet the requirements for risk management and internal control.

The exact requirements depend on the kind of business and license you apply for → More information can be found here.

Costs for the License

Between EUR 5,000 and EUR 20,000. Please note that on top of this you need to account for capital requirements and advisor costs, so that the total costs can easily exceed EUR 1 million.

Timelines

In most cases, BaFin has 6 months to decide on your application. The timeline however, only starts if all application documents are completely handed in. As BaFin has free decision power on whether it considers all application documents being complete, the exact timeline is hard to predict.

Banking-as-a-Service

Startups or other organizations do not necessarily need to hold these licenses on their own. They have the option of operating under the umbrella of a licensed financial institution. Fintechs, such as payment institutions or trading platforms, may use agents whom they have commissioned to provide payment services under their responsibility. This makes it easier for them to establish themselves and operate under the umbrella of a third party until they have achieved sufficient scale to obtain their own license.

There are many Banking-as-a-Service (BaaS) players in the market that offer licensed financial services, for example, BIN sponsorship for credit cards, investment advice, and loan origination. In fact, many neobanks operate a white-label debit card and wallet, or offer loans issued through third-party institutions.

Depending on the commercial agreement and the type of service, these usually require setup fees as well as a monthly subscription and/or a per-user fee. The advantage of the agent model is that it allows startups to bypass the lengthy and complex license application process and to operate profitably before reaching scale. It also allows them to quickly evaluate their strategic assets and test how they fit in the market.

The disadvantage is a dependency on third parties, which comes with less flexibility and less control and understanding of the cash flows. A business case must be conducted to determine whether you should work with a partner or obtain your own license. Your level of scalability and timeframe are factors as well.