When Does Your FinTech Business Need Licensing? Key Cases to Consider

The launch of a FinTech business is associated with numerous bureaucratic challenges, one of which is receiving a license. Licensing is not a legal formality. It is a vital step towards establishing a legitimate and transparent business that can build trust with customers. The World Bank stresses that licensing is needed to protect customers and ensure that FinTech startups comply with fundamental regulations combating cybercrime and money laundering.

In addition, regulatory compliance for FinTech businesses makes them more competitive, so it’s essential in the fast-growing market. According to recent statistics, the number of FinTech companies is growing steadily in the USA, Europe, and Asia-Pacific. While new FinTech businesses have a hard time standing out in this landscape, licensing is a great boost to their growth. 

To help you move in the right direction with your FinTech project, this article walks you through the world of FinTech licensing. Our aim is to help you decide whether your FinTech business needs a license and.what steps you can take to move forward with licensing You will also get a basic understanding of the key terms and requirements around FinTech business licensing. Equipped with this knowledge, you can then seek relevant services and assistance from lawyers and consultants.  

What Is a License, and Why Do You Need One?

Licensing is a process of obtaining permission to operate from the local regulator. It allows a business to conduct operations within a particular jurisdiction. It also ensures that a FinTech business complies with all financial regulatory requirements. The FinTech licensing process aims to perform a thorough check of the businesses’ financial standing, internal procedures, security measures, and any other aspects that determine its legitimacy and compliance. A licensed company is required to maintain transparency, protect clients’ data, and prevent financial crimes such as fraud and money laundering. 

Obtaining a license is not an easy process, and it can feel like a burden rather than a desirable step in the business growth process. Nevertheless, it can help accrue many advantages:

• Improvement of a company’s standing through assuring its compliance, operational integrity, and financial stability.
• Safe expansion of business operations and services.
• Innovation and growth by fostering trust and stability.

It is important to emphasize that requirements for FinTech licenses vary considerably depending on the jurisdiction. Some jurisdictions have rather strict regulations that control everything, from internal procedures for licensed FinTechs to whether they are allowed to operate in other locations. 

Others have more lenient regulations that make it easier for new companies to build a licensed business. For example, the UK, a country with a significant number of registered FinTech companies, is known for its engaged regulators and proactive policymaking. The United Arab Emirates is another example of a country with favorable regulations towards FinTech businesses. Getting a crypto license in the UAE is relatively easy compared to Europe and the USA due to tax-friendly policies, the absence of minimum investment requirements, and no residency or local employee quotas. As a result, companies willing to register there have fewer problems with establishing their operation and complying with existing laws. 

Breaking Down the Licensing Process: What to Expect

One of the main things to understand about licensing is that it generally deals with two broad categories of requirements. These include licensing requirements related to capital and licensing requirements concerning internal policies and processes. Capital requirements demand that FinTech startups have a minimal level of authorized capital. It is needed to demonstrate their liquidity and ability to operate for a long time. The goal of such a requirement is to ensure that the company can respect its obligations to clients and protect their funds.

Capital Requirements

Capital requirements for FinTech licenses can vary depending on the business type and jurisdiction. For example, an Authorized Payment Institution License typically has higher capital requirements than a Small E-money Institution License. Capital requirements can also be tiered. For instance, e-money providers may need to have set bands of capital as a percentage of their e-money float, which often amounts to about 2-5%.

Internal Procedures Requirements 

Requirements  concerning internal procedures and policies are even more diverse and complex. These focus on ensuring that a company builds its internal processes according to professional standards and legal norms. Here are some of the examples of requirement types that you may need to consider when applying for these licenses:

• Requirement to employ a minimum number of people with proven expertise in financial management, security, etc. 
• Requirement to have software systems in place to ensure that financial operations are conducted safely. 
• Requirement to have well-defined internal policies and procedures. 

The latter aspect requires particular attention because it is often the most bureaucratically challenging. For example, an applicant needs to provide a written anti-money laundering policy. The regulator  carefully examines AML requirements provided within the policy. The goal is to ensure that the company cannot be involved in illegal financial practices. 

The U.S. Department of the Treasury reported the high risks of global illicit finance threats. So, it is worth your time and effort to ensure that your FinTech is equipped to combat these crimes. 

Licensing can also involve the assessment of data protection protocols, reporting systems, and risk management strategies. Data protection can be a particularly challenging requirement to comply with. FinTech businesses operating in the European Union are a good example. Since the introduction of the new EU General Data Protection Regulation (GDPR), financial companies need to perform regular data protection impact assessments. They also need to keep detailed records of their data processing activities. 

Furthermore, licensing also proves that the company has competencies for risk governance. It means that the company must have the resources to locate, measure, control, and manage risks. The requirements regarding knowledge and expertise concern all employees of a FinTech business. The areas they need to be competent in are diverse and include the following:

• Financial expertise.
• Compliance knowledge.
• Business acumen.
• Risk management.
• IT proficiency.
• Ethical knowledge. 

Finally, the IT capabilities of the FinTech business are evaluated during the licensing process. Regulators assess whether the applicant has adequate cybersecurity risk management plans in place. For example, certification such as ISO 27001 for information security management may be needed. It proves that the business takes cyber threats seriously. Given that all FinTech operations happen online, this aspect of licensing is of critical importance. 

Who Needs a License? Key Activities That Require Licensing

At this point, you probably wonder, “When does a FinTech business need a license?” The answer is pretty straightforward. Any business that somehow interacts with customers’ money highly likely requires a license (with some exceptions). Many areas of FinTech operation require licensing, so it is worth going through each of them in more detail. 

Provision of Payment Services and Money Transaction Services

Businesses allowing for the execution of payment transactions,, generally need a payment service provider license. In fact, a wide range of operations is included in this category: card issuance, money remittance, the operation of payment accounts, and acquiring card transactions, among others. 

Revolut, one of the fastest-growing FinTech companies, is a great example of a company requiring a license. In addition to providing a wide range of services that allow it to compete with traditional banks, it issues virtual and physical cards, credit and debit cards, and multi-currency cards. As such, it had to obtain an Electronic Money Institution license in order to operate in the European Union. 

E-Money Institutions

E-money is a prepaid electronic payment product that works on a card- or account-related basis. A digital alternative to cash, e-money can be used to pay for products and services and can be easily accessed online. 

In the past, e-money fell outside the scope of regulation because its use was mostly limited to very narrow areas. For example, e-money could be used within a single retail chain. With time, FinTech businesses managed to embrace the limitless opportunities. They adopted e-money operations to take advantage of the untapped customer base not served by traditional banks. The trend was particularly prominent in emerging markets in Africa and Asia, where e-money businesses took off. The USA and China also joined the trend, with e-money services such as PayPal and AliPay occupying a significant market share. 

Operations with Cryptocurrencies 

Any company that buys, sells, and trades cryptocurrencies on behalf of its clients probably needs a license for a crypto assets service provider. Licensing demonstrates that the business complies with regulations related to anti-money laundering and know-your-customer procedures, among others. 

The latter type requires FinTech companies to collect users’ personal information to verify their identity. It can include ID card, document verification (e.g., utility bills as proof of location), face verification, etc. Naturally, a company also needs to demonstrate that it has the necessary processes and capabilities within its crypto wallet software to store this data safely. 

It is important to keep in mind that the cryptocurrency market is not as rigidly regulated as traditional banking. However, many governments have plans to introduce more comprehensive regulations. For example, the UK announced plans for the gradual development of a regulation regime for cryptocurrencies. 

In practice, it means that businesses working with crypto need to keep track of legislative changes to ensure the continuity of their operations within a specific jurisdiction. By having the most current cryptocurrency licenses, these companies can also remain competitive and build further trust with customers. The process of obtaining the license can be incredibly empowering, as businesses are motivated to strive for innovations, such as introducing the most advanced crypto bank software.

Types of FinTech Licenses: A Brief Overview

The name of the main types of FinTech licenses can vary considerably depending on the jurisdiction. There is no point in trying to understand the differences because it is the responsibility of licensing consultants to choose the type that works for you. Most likely, they will recommend one of the following license types:

• Payment Service Provider (PSP) licenses permit a company to provide various payment services to customers.
• Electronic Money Institution (EMI) licenses allow FinTech startups to emit electronic money and provide related digital payment services.
• Cryptocurrency licenses regulate the market of crypto service providers. 
• Money Service Business (MSB) licenses (Canada) are needed for companies that transmit or convert money.

Each type has very detailed specifications on the minimum requirements to be respected. In order to prepare for the application process, you will need to create a comprehensive business plan and ensure compliance with regulatory standards. This process takes months, if not years, as documentation to certify that the relevant regulator will carefully check the business. 

All successful FinTech companies have come a long way to get the licenses they need. For example, a German FinTech company, N26, encountered delays in obtaining an EMI license. Regulators were originally dissatisfied with the company’s poor compliance with customer due diligence requirements. However, after making significant changes in its internal systems and processes, N26 managed to not only obtain the license but also expand its services across markets. This success story shows that although getting an electronic money institution license is not easy, it pays off eventually. 

Conclusion

As you have probably already guessed from this article, getting a license is practically impossible without in-depth knowledge of jurisdiction details licensing for FinTech and the types of licenses. Whether you need a money service business license or a license for a crypto startup, you won’t be able to navigate the regulatory environment alone. 

Our team can help you find experienced consultants who will lead you through every step of the process and who know how to get a FinTech license as fast as possible. If your company uses blockchain technology, we can also provide blockchain consulting services. Our team can ensure that your business complies with all technical requirements regarding data management so that you can obtain your license with ease.