Full banking licence or e-money licence? Here's what you need to know

If you're a business that’s thinking of working with a Banking-as-a-Service provider, one of the first decisions you'll have to make is which licence you'll need: full banking licence, or e-money licence?

It's also a crucial one. Your decision will determine the direction your business will take, what services you can or can't offer your customers, and even how you market yourself.

In this article, we'll explore the key differences between a full banking licence and an e-money licence, their pros and cons, and the reasons you'd choose one or the other.

What's a full banking licence?

A full banking licence certifies that you meet the legal criteria to operate as a bank. Having this licence means you can:

• Offer payment services
• Manage customers' deposits
• Offer interest-bearing accounts
• Issue credit cards, loans, and other lending products
• Offer other financial services products such as bancassurance and wealth management
• Use the term 'bank' in your name and marketing materials
• Give customers the peace of mind that their deposits are protected by a deposit protection scheme (up to €100k per depositor)

In Germany, a full banking licence is known as a CRR credit institution licence or, more commonly, as a deposit credit institution licence. In addition to the full banking licence, it's also possible to apply for a licence for individual regulated activities.

To get a full banking licence, you need to apply to the financial services regulator in the country where you want to operate and prove that you meet the criteria. That said, in the Eurozone it's the European Central Bank that ultimately decides whether to approve an application.

In practice, the national financial services regulator — in Germany, this is BaFin, the Federal Financial Supervisory Authority — receives licence applications and makes preliminary decisions. The ECB then reviews the decisions and confirms them, applies additional conditions, or rejects them.

Because every EU country's banking laws must meet minimum standards, EU banking licences enjoy what are called passporting rights. So, having a licence in one EU country — Germany, for instance — allows you to offer your services in other EU countries and in the EEA.

Of course, all specific requirements of the respective national supervisory authorities must be met in order to receive permission for 'cross-border passporting'.

How do you get a full banking licence?

First things first, you'll need to meet a minimum capital requirement. This is an amount of money you must set aside over and above any customer deposits.

EU rules set the minimum capital requirement at €5 million. But the key word is 'minimum'. If the regulator has concerns, for example because they think your business model is very risky, they can tell you to set aside a larger amount.

It's useful to think of the minimum capital requirement as a rainy day fund. If you take a risk and lose some of your customers' money, for instance, you can make up for the losses by dipping into this reserve.

Banks must also contribute to a depositor protection scheme. By law, if a bank fails, customers have a right to get their money back, up to a maximum of €100,000 per customer.

Alongside minimum capital requirements, you must provide the regulator with extensive documentation. This includes, amongst many other things:

• A business plan that explains how you'll manage customers' money and your strategy for becoming and staying profitable
• A rundown of your organisational structure, that is how you're going to manage and run the bank and comply with the law on an ongoing basis
• A list of potential conflicts of interest

Regulators also conduct a series of comprehensive interviews, plus thorough background checks to ensure the key people who own and run the bank are 'fit and proper'.

The idea is to make sure that those who are in charge or have a say in the bank's business are trustworthy and have the right knowledge and experience, so your money is safe.

What's an e-money licence and how do I get one?

An e-money licence allows you to offer payment services and some other financial services products, but not operate as a bank or use 'bank' in your name or marketing materials.

Broadly speaking, e-money institutions can:

• Accept customer funds and change them into e-money, but not manage them. Customers can use e-money accounts as digital wallets, but they can't earn interest on them or go overdrawn
• Offer debit cards, account-to-account transfers, standing orders, and direct debits, but not lending as a standalone product.
• Offer some digital financial services products, such as foreign currency exchange

Like full banking licences, e-money licences issued in EU countries have passporting rights, which means you can offer your services in the rest of the EU and EEA.

That said, it's national financial services regulators who approve applications. The ECB isn't involved. The licence application process is also shorterand less complex.

The key people must prove they're 'fit and proper', and you must show you have the right technologies, partnerships, and risk management controls in place.

But the minimum capital requirement is a much lower €350,000. And, because you can't take risks with client money (more on this in a minute) there's no need to join a depositor compensation scheme.

Full banking licence vs e-money licence: what are the pros and cons?

The single biggest difference between banks and e-money institutions is that banks can do four things e-money institutions can't:

• Manage customers' money, including investing it or using it to issue loans to other customers at a profit
• Offer interest-bearing accounts
• Offer standalone lending products like mortgages or personal loans
• Hold additional licences. Alongside banking business, banks can also obtain special licences — a payment institution licence, or a securities trading licence, for instance — that allow them to offer a broader range of products and create additional revenue streams

Of course, because banks can take risks with customers' money, they have to follow very strict regulatory requirements, and are under somewhat more scrutiny than e-money institutions. Which means there's less flexibility when it comes to how you operate.

By contrast, e-money institutions must keep customers' money safe in a segregated account with a licensed bank. You can't touch customers' money or take any risks with it.

Needless to say, this requirement means that, as an e-money institution, you're dependent on third-party providers, which can make you somewhat less nimble.

Because you can't take risks with customers' money, there's also no requirement to join a depositor compensation scheme. But customers won't necessarily understand why, and may be put off by the fact their deposits aren't protected and that you're not a full-blown 'bank'.

Lastly, most e-money licences have limits on transaction volumes, which can restrict how quickly and how much you can scale.

The upside is that e-money licences were specifically designed to allow non-banks to compete with banks. Because there are restrictions on what types of services you can and can't offer, there's more operational flexibility. And this allows you to be more agile and innovate more quickly.

	Bank	e-Money institution
Minimum capital requirement	€5 million	€350,000
Application fee	approx. €25,000	€1,000 - €3,000
Length of application process	18 months +	approx. 15 months
Supervision	European Central Bank and national financial services regulator	National financial services regulator
Services	All services offered by e-Money institutions, plus all types of lending products	Payment services, e-Wallets, Foreign exchange transactions
Customer security	Depositor protection scheme covers up to €100,000 per customer	Must keep client money in a segregated account, Limits on transaction volumes (vary by country), Can't offer interest-bearing or lending products
Passporting rights in the EU and EEA	Yes	Yes

Whether you need a provider with a full banking licence or an e-money licence, Solaris can help

If you want to offer customers the full range of banking services — from basic current accounts, to credit products and financial advice — a full banking licence is the way to go. The trade-off is that it has stricter ongoing compliance requirements.

By contrast, while an e-money licence restricts what you can or cannot do, it gives you the flexibility to make the most of technology. So it's a good choice if you want to offer digital-only multi-currency accounts, e-Wallets, or products designed to serve specialised verticals.

At Solaris, we have the most comprehensive suite of licensing options in Europe. Through our partnership with BaaS leaders Contis, we have:

• a German CRR credit institution licence, with branches and local IBANs in France, Italy, and Spain, and passporting rights in the rest of the EU and EEA
• a Lithuanian e-money licence, with passporting rights in the EU and EEA
• a UK e-money licence, which gives the right to operate as an e-money institution in England, Wales, Scotland, and Northern Ireland
• a (preliminary) crypto custody licence in Germany, which allows to take care of crypto assets on behalf of third parties

Regardless of which route you decide to take, we can help you get started quickly and cost-effectively and offer your services to customers all across the EU, EEA, and UK right out of the box.

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