“They seemed to be making it up as we went along,” quipped Nick Ogden, founder of ClearBank, in summing up the twists and turns in the slippery bank licensing process for Europe’s financial technology startups, or fintechs. That journey, it seems, is set to become simpler. Last month, the European Central Bank announced it’s working on new licensing guidelines for fintechs.
Though it’s still relatively modest, the fintech sector has been grabbing market share from traditional banks, in sectors ranging from lending and insurance to “cryptocurrency” payments in bitcoin. Since July, the ECB has issued euro-zone licenses to six fintechs, and two applications are currently being processed, according to Jukka Vesala, director general for micro-prudential supervision at the ECB.
Fintech firms seek different shades of approval as a bank. Some, like Germany’s N26, wanted to be full-service, online retail banks from the start. “Without a banking license we would have been 100 percent dependent on a banking partner and very limited in our decision-making,” said Valentin Stalf, co-founder and CEO of N26, in a German magazine interview. Others such as ClearBank, a new British clearing and settlement bank, offer services to other firms, such as access to payment systems and core banking technology.
In principle, the same rules should apply to all providers of banking services, whether traditional institutions or brash, innovative start-ups. But on a few key issues, the ECB’s banking regulators are especially finicky with fintechs. Although member states are generally supportive of applicants (who usually apply in their country of residence), the pioneering nature of their business means the banking authorities who pore over applications face a steep learning curve.
“We’re not a standard bank, so it took a while for the authorities to understand the kind of services we were providing,” said Ingo Uytdehaage, finance chief at Adyen, an online payments platform based in Amsterdam. Founded in 2006, Adyen counts Netflix, Airbnb and easyJet among its customers and processed $90 billion worth of payments last year. The Dutch firm applied last autumn for a banking license that would allow it to bypass banks and process cross-border payments directly for its merchant customers, including many of the world’s top e-commerce firms. The European banking license gives Adyen the status of an acquiring bank, clearing the way for it to process payments nearly instantly, rather than relying on banking partners to handle settlements over several days.
Adyen’s application took just five months to go through, but other applicants have needed more patience. For Klarna, a Swedish payment firm valued at $2.25 billion (€1.9 billion) – the largest fintech to be licensed so far – the process took 20 months, until June 2017. The company, backed by Visa, Sequoia Capital, Permira and others, aims to become the “Ryanair of fintech” and has 60 million customers across Europe who use it to pay for online purchases from 70,000 retailers. Last year, Klarna processed €13 billion ($15.4 billion) in transactions.
For some, navigating the bureaucracy could be nerve-wracking. Some fintechs complained that the banking authorities asked for documentation that didn’t apply, such as organization charts for personnel that hadn’t yet been hired, or for “sandbox” risk assessments that didn’t imitate reality. Mr. Ogden of ClearBank said the licensing process in the UK involved 2,500 pages of documents weighing 13 kilograms (28.7 pounds).
Andreas Bittner, co-founder and chief operating officer of SolarisBank, the first German fintech to win a full banking license, noted that the ECB was to react within 10 days after receiving an application via Germany’s banking regulator BaFin, but that the ECB’s three responsible committees usually didn’t all meet within that time frame. “In the end, BaFin pre-informed ECB informally, to speed up the process and meet the 10-day deadline,” Mr. Bittner said.
Some fintechs complained that the banking authorities asked for documentation that didn't apply to them.
License in hand, SolarisBank applied for an entry in the German business register, and then hustled to the Bundesbank, Germany’s central bank, in order to obtain a bank identification code. Another delay loomed because bank identification codes are only issued four times a year – meaning if you miss a deadline, you wait another three months. “You need a bank identification code to work in the payments area, and that was the only thing I complained about,” Mr. Bittner added.
How much equity capital does a fintech need? Although there are binding rules on capital, regulators can demand more from fintechs, depending on how ambitious their business plan is. According to the ECB, this could be the case when, say, a fintech has an aggressive pricing strategy to gain market share. In any case, applicants shouldn’t cut it too close. “Everyone who wants a banking license shouldn’t target the minimum capital requirement, because that will reduce your chances,” said the SolarisBank manager.
Because many fintechs are young and their prospects uncertain, the ECB requires a fintech to have enough capital to keep its business afloat for three years. Regulators may also demand an exit plan, which shows how a fintech can shut down without harming customers or jeopardizing the stability of the financial system.
Now these disrupters can have their say in the process. On October 26, the ECB will hold an open hearing on the draft bank licensing guidelines for fintechs, and will accept feedback on the procedure until November 2. The final guidelines will be published just before Christmas.
This standardization should help rivet fintechs into the banking landscape, even if conventional institutions are less than thrilled at the consequences. A sharp rise in applications is expected in the years ahead, raising prospects of a shake-up in the sector. John Cryan, the boss of Deutsche Bank, recently said technological advancement would render the banking industry “unrecognizable” in just five years’ time. No wonder, then, that more and more bank branches are closing.
But legitimizing these upstarts is not the only threat. From next year, new EU rules will force banks to disclose accounts of willing customers to third parties – including fintechs without a banking license.
Jeremy Gray is an editor for Handelsblatt Global. Yasmin Osman, who covers banks and banking regulation for Handelsblatt, contributed to this article. To contact the authors: firstname.lastname@example.org, email@example.com