European Central Bank publishes guide for license applications fintech banks


Fintech bank - License - Requirements - European Central Bank

The ECB published for consultation a
guide with further indications on how it assesses license applications of fintech banks.

The purpose of the guide is to introduce a consistent approach to the assessment of licence applications for new fintech banks and for the establishment of specialised subsidiaries of existing credit institutions (both significant institutions and less significant institutions) applying a fintech business model. The guide is intended to enhance transparency for potential fintech bank applicants and increase their understanding of the procedure and criteria applied by the ECB in its assessment of licence applications.

The concept of fintech has been defined by the Financial Stability Board as “technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services” (see
FSB, “Financial Stability Implications from FinTech” p. 7, June 2017).

Taking into account this description, the ECB defines a fintech bank as “having a business model in which the production and delivery of banking products and services are based on technology-enabled innovation”.

Given the variety of institutions and technologies across the countries participating in the SSM, this broad definition aims at capturing the different activities of credit institutions in the different jurisdictions and in particular:
  • existing banks that evolve and integrate technological innovation by developing fintech solutions in-house, acquiring fintech companies or engaging in strategic partnerships with them (through “white labelling”, outsourcing, etc.);
  • fintech banks which are new market participants and adopt technological innovation to compete with established banks throughout the value chain, as well as existing financial service providers (e.g. payment institutions, investment firms, electronic money institutions, etc.) that extend their scope to include banking activities and can therefore be considered new market entrants requiring a banking licence.

The guide specifically addresses the following 4 aspects related to banking license requirements:

1/ governance (suitability of the members of the management body and suitability of shareholders);

2/ internal organisation (risk management, compliance and audit frameworks);

3/ programme of operations; and

4/ capital, liquidity and solvency.

The main specific characteristics that will be taken into account by the ECB in the assessment relate to the fact that fintech banks have a business model that is at its core technology-driven.

As a result, governance of such a bank requires specific expertise, the shareholder structure is likely to be different compared to a traditional bank (participation of providers of venture capital / incubators, no long term participation), such bank is subject to increased vulnerability to IT related risks (cyber crime, dependency on cloud computing, data governance).

Also, due to their recent entrance on the market and the relatively new technologies they use, there is greater uncertainty with regard to fintech banks’ business projections and the resulting capital requirements.

According to the ECB, the start-up phase of a fintech bank could pose a greater risk of financial losses which may progressively reduce the amount of own funds available and the start-up phase of a fintech bank may face increased liquidity risks.

The guide underlines that it is intended to be technology-neutral and seeks to neither support nor discourage the entrance of fintech banks as market participants, compared with banks with other types of business model.

However, to the extent high standards are applied by the ECB compared to traditional banks, the question arises as to whether a level playing field is in effect secured between both.

the guide was subject to public consultation until 2 November 2017.

Régine Feltkamp