In the light of current developments following Brexit and with Germany becoming increasingly important as a FinTech centre, many start-ups outside of Germany now consider it a part of their future business model to apply for a German licence in order to provide customers with payment services using European passporting rights. The following article deals primarily with the documents that need to be submitted to obtain this licence, as defined in the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG).
ZAG regulates the supervision of payment services in the Federal Republic of Germany. The law implements Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market (the Payment Services Directive or PSD I). The intention of the PSD I was to establish a uniform legal framework for the provision of payment services in the European internal market. In addition, it eliminated cross-border barriers to enable payment service providers to offer their services throughout the territory of the internal market.
Regulatory purpose
Prior to the entry into force of PSD I, payment services were not subject to a uniform legal framework. Instead, informal systems existed worldwide to make financial transfers possible. There still remain reliable and cost-effective methods for fast financial transfers in many parts of the world, but these operate generally outside the regulated financial system and are thus prone to misuse by criminal organisations for money-laundering purposes or terrorism financing. The uniform legal framework will continue under the future regime of the revised Payment Service Directive (also referred to as ‘PSD II’).
Payment services
The law distinguishes between payment institutions and payment service providers (or PSPs), which are more widely defined to include (in addition to payment institutions) credit institutions and e-money institutions.
High requirements for ZAG licence application to be successful
Applicants wishing to provide their customers with payment services must meet a number of requirements. Depending on the planned activity, a sufficient initial capital of between €20,000 and €125,000 is required. If, in addition to payment services, further activities are planned requiring authorisation under the German Banking Act, the necessary initial capital may be higher. In addition, the directors and owners of major shareholders of the applicant must be technically suitable and trustworthy with respect to the planned transactions.
Furthermore, specific capital requirements must be complied with and appropriate risk management and internal control procedures must be established. With this in mind, payment institutions will need to perform a detailed supervisory advisory prior to any transaction.
Conditions for authorisation as payment institution
Admission as a payment institution is determined by section 8 ZAG, pursuant to which any entity that wishes to operate as a payment institution in Germany providing payment services on a commercial basis must obtain the written permission of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).
Pursuant to section 8 para. 3 ZAG, the licence application must contain the following information and evidence:
- the business model, setting out in particular the nature of the intended payment services;
- the business plan with a budgetary forecast for the first three financial years, demonstrating that the applicant has appropriate and proportionate systems, resources and procedures in place to operate soundly;
- proof that the payment institution fulfils the initial capital requirement;
- a description of measures in place to meet security requirements;
- a description of the applicant’s governance arrangements and internal control mechanisms, including administrative, risk management and accounting procedures, which demonstrates that such governance arrangements, control mechanisms and procedures are proportionate, appropriate, sound and adequate;
- a description of internal control mechanisms introduced by the applicant;
- a description of the applicant’s organisational structure, including a description of the planned use of agents and branches, as well as a description of outsourcing arrangements, and a description of the form of its participation in any national or international payment system;
- the names of the major shareholders, the size of their holding and proof that they meet the requirements to ensure sound and prudent management of the payment institution;
- the names of the directors, the persons responsible for the management of the payment institution and, in the case of undertakings pursuing other business activities in addition to the provision of payment services, the persons responsible for the management of the payment services of the payment institution. The application must contain proof that the above persons are reliable and possess adequate theoretical and practical knowledge and skills to provide payment services. The applicant must appoint at least two directors (or one director in the case of small payment institutions);
- the names of the auditors of the annual financial statements and consolidated financial statements;
- the legal status and articles of incorporation of the applicant; and
- the address of the applicant’s head office or registered office.
Investors that do not wish to provide payment services directly but that intend to acquire a significant shareholding in an existing payment institution are governed by the requirements specified in the ZAG in relation to shareholdings.
Client Alert 2017-139
