Fintech legislation in Europe
Your ideal chance to get a first-hand look at it
Did you watch ” The Playlist” on Netflix?
It’s a 6 episodes limited series about Spotify and its rise to the stardom. But, one episode was more interesting than another, even though it didn’t look like that in the beginning.
Episode number 3 talked about legislation and how hard it was for Spotify to make its business model legal.
This reminded me of fintech legislation in Europe 😂
Did you ever wondered what is happening behind the curtains, and what kind of legal issues fintech companies encounter?
To make things interesting…I found us someone who can talk about it firsthand 👌
Introducing you today’s content sponsor…Barion
Barion is a Hungarian fintech company specializing in e-commerce payments. What is interesting about them is that they are in the process of moving from Hungarian license to Dutch one. They will share with us why, and tell us their first-hand experience with getting licenses, something you can’t find online 😉
I hope you will enjoy this one!
Our Sponsor
Barion is a Hungarian data-driven payment platform. The company is a licensed e-money institution, serving more than 15.000 customers in 15 countries within Europe and over half a million users are using Barion Wallet.
Quick regulation intro
Beeing a global solution puts a lot of stress onto legislation departments because navigating all those licenses…
Take a look at Revolut example 👇
The more diverse product it is…the more licenses you need.
When it comes to fintechs, there are 3 general types of licenses 👇
1. Full Banking License
*It’s worth mentioning that only a handful of neobanks own this license.
This is your standard banking license, a license you would expect from a bank. This banking license allows financial institutions to accept customer deposits and issue loans using those customer funds. It also provides the broadest scope of services, but the downside is that this license is the most heavily regulated.
There are two sets of authorities that can issue such a license; national authority or supernational authority.
A national authority is, in most cases, a central bank that covers a specific country. So if you want to open a bank in, let us say Japan, you would need approval from their central bank, and the banking license would be valid only for Japan.
Supernational authority such as the European Central Bank (ECB) in Europe or the Federal Reserve (Fed) in the United States gives more flexibility. For example, once you get an ECB banking license, you are allowed to provide cross boarder services withing any EU country. This is also called single passport.
The main "problem "with the "Full Banking License "is that the application process is lengthy and can take up to 15 months, depending on the jurisdiction. Not to mention the cost of the whole process😱
2. Fintech License or "Payment "License
Jurisdictions across the globe realized that the banking industry was set for a change, so they embraced innovation through new types of financial services licenses. These are typically light versions of banking licenses designed to accommodate digital business models, thus allowing these institutions to offer financial services. For our European readers, PSD1 and PSD 2 regulations should "ring the bell".
As part of the banking transformation, two types of sub-licenses emerged:
Electronic Money Institution License
Electronic Money License (EMI) supports digital payment services, including creating IBANs, issuing electronic money (BIN Sponsorship - Credit Card), and management thereof, where the end-user can maintain funds in the account.
This license provides customers with the same banking experience for everyday payments as a full banking license.
Of course, there are limitations to the EMI license:
Company under EMI license is not allowed to provide banking services; only limited payment services. In that regard accepting customer deposits and paying interest on it is strictly forbidden. Loans are not strictly forbidden, they are allowed under limitations.
An EMI license holder must safeguard customer money, and there are two options to do it: safeguarded in an escrow account or the safeguarding money will be covered by insurance or suretyship.
An EMI license holder must like any other financial institution fulfil all AML/KYC requirements. If those requirements are met, then there are no limitations in terms of the maximum amount of what customer can hold in their e-wallet.
The Payment Institution License
A Payment Institution License (PI) supports various payment services enabling transactions to be carried out by card, mobile app, transfer, or direct debit. It also supports cash withdrawals, foreign exchange transactions, and data processing (Open Banking players - Account Information Service Provider and Payment Initiation Service Provider).
Under a PI license, offering long-term loans to the client is still not possible, but it is possible to provide short-term loans. However, only loans repayable within a maximum of 12 months are allowed and only to customers with an account with a payment institution. Within this framework, the payment institution manages the monthly direct debit transactions for the traditional bank that finances the credit.
The same thing applies to EMI’s as well.
If you compare that to the standard bank, you don't have to have an account in that specific bank to get a loan from them.
Under PI license, the financial institution cannot take custody of the client's funds which must be deposited with a credit institution, where the funds are guaranteed up to a certain amount. That amount in Europe is usually 100,000€.
3. The Partnership model or The Payment service provider agent model
The most significant advantage of this license type is that it allows startups to bypass the lengthy and complex license application process. Startups, or other organizations, do not necessarily need to hold these licenses on their own; they have the option of operating under the auspices of a licensed financial institution. Credit institutions, payment institutions, and electronic money institutions, approved by a regulatory body, may use agents they have commissioned to provide payment services under their responsibility.
Depending on the type and character of such services there are either agent or simply outsources services. Both fall under notification obligation towards the competent regulator - such notification shall be made by the partner (PI, EMI, CI) and may be audited by the regulator as well.
Barion first-hand license experience
Now, let’s find out all the “juicy” details on how all this works firsthand.
Today with us we have Balazs Judik, Barion’s CMO. He is part of the Barion new markets expansion team, and he knows all the details about the license change.
Balazs, can you please tell us what kind of license Barion currently holds and how long it took you to get the license?
Barion operates with an electric money issuer license provided by the National Bank of Hungary.
The development of our system took roughly 2 years. After submitting our documents, the approval took about 6 months. The process was fairly smooth
How much did it cost roughly to acquire the license?
During those days, there wasn’t any aside of the work of the experts and advisers, obviously. We had an initial capital requirement thas is a typical EMI prerequisite. Hungarian license is considered to be relatively cheap.
What kind of documentation did you had to provide to acquire your license? Can you tell us more about the whole process of preparing the documentation in general?
It’s pretty standard list of required documents within the EU, approximately 30-40 different ones.
Do you have some kind of license renewal period? Is there some kind of yearly check up from authorities ?
No license renewal needed, however there are both regular and occasional check ups from the authorities, both on- and offsite.
Why are you changing your license?
Because there are only a few fintech companies in Hungary and the authorities don’t have experience with this field – hence the legislations are not following the trends in a timely manner. There are various disadvantages, discrepancies, and deficiencies in the Hungarian regulation. Here is the 5+1 most important ones:
KYC requirements have more data points than in other countries, causing inconvenience for international clients. For example, obtaining and verifying names of one's mother and name at birth, and demanding additional data points for companies like tax and registration numbers. These extra data points make our KYC tedious.
We're forced to use a Hungarian company for remote KYC due to non-compliance of readily available remote KYC SaaS services with Hungarian regulations, leading to higher costs.
In case of remote KYC we have two possibilities: video KYC assisted by an operator on our side or self-service KYC with a selfie. According to the Hungarian regulation self-service KYC puts a limit on the account of the user if the user does not have an ID card with RFID built-in. This limitation renders self-service KYC useless as ID cards with RFID built-in is far from being ubiquitous in the EU. The situation is improving, but it will take 5-8 years until this limitation becomes unimportant. As a result we are using the expensive and uncomfortable video KYC for all of our users.
Due to currency volatility, we had to set lower limits for EUR and CZK accounts compared to competitors using HUF. The problem is that the Hungarian legislation defines these limitations in HUF.
Authorities require policies and documents primarily in Hungarian, causing extra expenses and effort for our international company.
Various areas, including peer-to-peer lending, cryptocurrencies, light banks, and certain crowdfunding activities, remain unregulated or strictly prohibited in Hungarian regulations.
How different is the process of acquiring new license compared to the old one?
It isn’t, the processes are similar. We are checking the regulations and prepare the necessary documentations. The only real difference is the language barrier while moving the license abroad and some of the requirements (KYC, AML) might differ slightly in another country.
We hope you enjoyed another edition of Business Wave!