This article looks at obtaining an Authorised Electronic Money Institution (e-money) or Authorised Payment Institution license in Germany. If you are planning on offering payment services such as issuing debit cards, money transfer services, merchant services or electronic wallets and prepaid cards, you will need to apply with the German regulator, namely, the Federal Financial Supervisory Authority (BaFin), before you can offer such services.
In this article, we will look at:
The second Payment Service Directive (PSD2) and its significance to payment services and electronic money.
The German regulator
The Authorised Payment Institution license
Authorised Payment Institution permissions
What is electronic money?
Authorised Electronic Money license application
Authorised Electronic Money Institution
How to prepare a strong license application
Passporting
Apply to become an authorised payment institution or electronic money
Initial capital requirements
Next steps
1. The second Payment Service Directive (PSD2) and its significance to payment services and electronic money firms
PSD2, or the Payment Service Directive 2, is an EU Directive (Directive 2015/2366) that sets requirements for businesses that provide payment services. It applies to banks, building societies, payment institutions, e-money institutions and their customers.
PSD aims to promote innovation within the payments sector. Furthermore, it aims to improve protection for consumers and make payments both safer and more secure.
The PSD2 directive came into force on 13 January 2018.
Its main objectives are to:
Contribute to a more integrated and efficient European payments market
Improve the level playing field for payment service providers (including new players)
Make payments safer and more secure
Protect consumers
2. The German regulator
BaFin regulates firms that provide regulated services, including, consumer credit, payment services, e-money, lending, insurance and investment services.
The Payment Services Supervision Act (ZAG) regulates the supervision of payment services in Germany.
If you wish to issue electronic money services in Germany, such as prepaid cards or electronic wallets, you will require an Authorised Electronic Money Institution license from BaFin.
Another important thing you must do before making an application is to ensure you meet the regulator's conditions. For example, you will need to ensure that your management and people such as directors, must be located in Germany. You will need to demonstrate through your application that you have appropriate resources to operate your business. This includes having sufficient financial, management, staff, and systems to manage your business.
The German regulator BaFin expects firms to meet a range of requirements before it allows them to provide regulated financial services. When an applicant firm submits an application seeking authorisation, BaFin will review their business plans, risks, budget, resources, systems, controls and people.
3. The Authorised Payment Institution license in Germany
An authorised payment institution license enables a business to provide payment services across the European Economic Area. Some countries, including Germany, provide the option of an additional license with less stringent conditions and requirements.
4. Authorised Payment Institution permissions
Let’s look at the payment services a payment institution license holder is able to provide to its users.
1. Payment accounts. Examples of payment account include debit cards and payment cards. The user is able to place and withdraw cash on such accounts as well as use the account card to make a payment transaction, using the card to buy goods and services. Users are also able to set up direct debits standing orders as well as transferring funds.
2. Merchant services. Holders of the payment institution license are able to provide merchant services. This can include acting as a master merchant and offering merchants the ability to accept card payments.
3. Money remittance. Money remittance or transfer is another service payment institutions are able to offer. This service enables the payment service provider to enable users to make cross border payments, internationally.
4. Payment initiation services. Under this model, an initiator I.e. as a payment service provider under the payment institution license, subject to the user's consent, is able to initiate payment directly from the user's bank account and transfer the amount directly to the merchant retailer’s bank account, removing the Visa and Mastercard networks from the payment process.
5. Account information services. Under this permission, subject to the user's consent, a payment service provider is able to provide access to a user’s accounts and enable them to view consolidated account information in one place.
5. What is electronic money?
As per Article 2(2) of Directive 2009/110/EC, “e-money” means “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transaction, and which is accepted by a natural or legal person other than the electronic money issuer”. Prepaid cards and electronic wallets are examples of electronic money.
6. Authorised Electronic Money license application
As part of your e-money license application, you will be required to submit a number of documents, policies and procedures, including, a business plan, your safeguarding measures (how you will keep your client money separated and ring-fenced), your governance arrangements and risk management, your procedures for managing and handling security incidents and customer complaints, your security policy and your measures against financial crime, including AML. These policy and procedural documents must be specific to your firm and adequately address key aspects as set out by the regulator. Submitting templated documents will not be accepted and will cause delay, and potential rejection of your application. This is why it is important to prepare policies and procedures that are well thought-through and adequately address the regulator’s requirements and what it expects to see.
An important part of your e-money license application is to ensure you meet the regulator’s basic conditions. Think of the basic condition as the basic requirements you must have in place. For example, your employees must be located in Germany. You will need to demonstrate through your application that you have appropriate resources to operate your business. This includes having sufficient financial, management, staff, and systems to manage your business. Your team should be suitable and competent in their roles.
As part of your electronic money institution license application, you will need to provide details of your IT systems, including both core systems and any support systems. The regulator will expect to see that you have these in place before it issues your electronic money institution license.
7. Apply to become an Authorised Electronic Money Institution in Germany
As part of your Authorised Electronic Money Institution license application, you will be required to provide the following information as part of your application:
company identification details
programme of operations
business plan and financial forecasts
a description of your business’s organisation structure
evidence of your initial capital
your measures to safeguard funds of your users
your compliance & governance arrangements and internal controls
your procedure for monitoring, handling, and following up on security incidents and security-related customer complaints
your processes for filing, monitoring, tracking and restricting access to sensitive payment data
your business continuity measures
the principles and definitions applicable to the collection of statistical data on performance, transaction and fraud
security policy
your internal control mechanisms to comply with obligations in relation to money laundering and terrorist financing (AML/CTF obligations)
details of your qualifying holdings (shareholders)
details of any outsourcing arrangements
8. How to prepare a strong Germany EMI e-money license application
You will need to demonstrate that you have your mind and management as well as operational setup and presence in Germany. This means establishing a physical base, including a physical office.
Furthermore, you must have adequate resources in place. This includes financial resources, i.e. possessing sufficient funds to manage and operate the business. You will be required to demonstrate that you have suitable and experienced management and employees to manage the business.
The business activities must be described in detail and demonstrate a viable business plan. The management team and the shareholders must be professional, trustworthy and qualified. Firms must also demonstrate that they adequate IT systems and internal controls to ensure the safety of payments and manage fraud adequately and effectively.
Under the Payment Services Supervision Act, the company's own funds must be proven and kept available on an ongoing basis (ongoing capital). Client money must either be safeguarded in a segregated client account or insured with an insurance company.
Both agents and distributors of e-money or payment service firms must also abide by the laws relating to money laundering as stipulated in the German Money Laundering Act (Geldwäschegesetz – GwG). In particular, they must ensure that their contracting parties and beneficial owners are identified.
You must provide policies and procedural documents that clearly demonstrate that you understand your business risks. Firms should prepare a risk framework and address how they will mitigate their risks, including operational, security and money laundering risks.
9. Passporting
If you are authorised as a regulated financial service firm within a country inside the European Economic Area, you can provide your regulated services, as a payment service provider or electronic money provider across the rest of the countries within the European Economic Area without requiring additional licenses in those countries.
The EEA states are Austria, Belgium, Bulgaria, Croatia, Cyprus (Republic of), Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden.
Accordingly, if you were regulated in Germany, you would be able to provide regulated services within the above countries without requiring additional licenses in those countries. To achieve this, you would need to apply for a ‘passport’ to do so.
With passporting, you are able to set up a branch in an EEA state and/or provide cross-border services or advice.
Passporting is only available to authorised firms i.e. authorised payment institutions and electronic money institutions.
Passporting is not available to local-level or small firms such as small electronic money institutions or small payment institutions.
10. How long does it take to obtain the license?
BaFin must make a decision within three months of receiving a complete application. In reality, it takes around 4-5 months to obtain the license.
11. Initial capital requirement
The following will apply with regards to the initial capital.
Authorised Electronic Money Institution - €350,000
Authorised Payment institution –
Payment accounts i.e. debit cards - €125,000
Merchant acquiring/payment processing - €125,000
Money remittance - €20,000
How we can help
Buckingham Capital Consulting is a leading international consulting firm, specialising in payment services, electronic money, banking and investment services. We are able to advise you on the best course of action and strategy based upon your business plan and financial product or service. We can help you with licencing, compliance, operational setup and related services, including, obtaining banking facilities. For more information, visit our website on www.buckinghamcapitalconsulting.com.