On November 13, 2007, the European PSD1 directive made it possible to offer payment services to new providers. Previously, this was reserved for banks only. 

Since then, the number of payment institutions has risen sharply, particularly due to digitization and new technologies. However, there are a number of regulatory, operational and financial aspects to consider when setting up a payment institution.

What is a payment institution in Germany?

A payment institution is a company that provides financial services focused on processing payments and money transfers. Payment institutions can usually offer different types of payments:

  • Transfers from one bank account to another bank account.
  • Direct debits
  • Card payments
  • Electronic money (e-money)

As defined by BaFin (German Federal Financial Supervisory Authority) and according to the definitions of the ZAG (German Payment Services Supervision Act), a payment institution is an enterprise that operates payment services or offers payment instruments on a commercial basis or to an extent that requires business operations to be conducted in a commercial manner.

In Germany, this license (or authorization) is granted by the Federal Financial Supervisory Authority (BaFin), which is subject to the legal and technical supervision of the Federal Ministry of Finance. 

There are four types of approved institutions, each of which is allowed to offer a greater or lesser range of services;

  1. Credit institutions. These are banks, both traditional and new generation banks. They are subject to stricter regulations and offer a very wide range of services. For example, credit institutions are the only ones that can offer lines of credit (such as loans or overdrafts) and investment and savings products.
  2. Payment institutions. Their services include deposit and withdrawal operations (including cash transactions), account management, provision of payment instruments such as bank cards, transfers and, of course, payment operations (by card, transfer or direct debit).
  3. E-money institutions: However, payment institutions cannot carry out cash transactions, as they are only allowed to carry out transactions with e-money.
  4. Tied agent: A person or company that is contractually bound to a specific financial service provider and is usually only allowed to distribute or broker that company’s products or the solutions it has approved. These act as intermediaries or vicarious agents on behalf and for the account of the above-mentioned institutions (under their liability umbrella). They broker the payment services of the institutions to which they are bound for the end customers. 

Due to this intermediary function, contractually bound intermediaries do not require BaFin approval, but they are subject to institution supervision. At the same time, they are listed in a public register at BaFin.

This is how, for example, the Dutch B2B fintech FINOM operates, working with Solarisbank in Germany and Treezor in France in the field of payment transactions.

How to become a payment institution in Germany

#1. Identify the type of permit you need

The business model you choose and the design of your products and services determine the permit you must apply for from the German Federal Financial Supervisory Authority.

Do you want to offer payment services? As soon as your institution offers payment services, you need a permit as a payment institution. 

Payment services are regulated in the Federal Republic of Germany on the basis of the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG). It requires written permission from the Federal Financial Supervisory Authority (BaFin). The purpose of BaFin’s authorization and registration requirement is to increase the security of payment transactions and to protect consumers who are economically disadvantaged, and therefore in need of protection.

If you also want to issue e-money, you need a permit as an e-money institution. With this permit, you can automatically provide all payment services. In addition, the ZAG defines exceptional cases in which no payment services exist.

As part of the permit procedure, you must submit, among other things, a business model, a business plan with a budget plan for the first three fiscal years, and a description of the measures to meet the security requirements. Different requirements are imposed on payment institutions and electronic money institutions, for example, with regard to initial capital.

If your business activity consists in marketing the payment services of another institution, you can register with BaFin as a tied agent through the commissioning institution.

Do you stay below certain limits? In other countries, such as France, there are small payment institutions or small electronic money institution licenses, which are actually an exception to the respective license.

The German legislator has not taken this exception into account. Therefore, payment services, regardless of their size, must always apply for the appropriate permit for the respective business activities.

In which geographical area will you operate? If your payment institution wants to offer its services in other EU states or in the European Economic Area (EEA), it can do so via a cross-border agreement. 

If your payment institution has a license in Germany (a member state of the EU), it can operate in any other EU or EEA country without the need for another license.

Can you be exempt from a license? According to the Payment Services Supervision Act, anyone wishing to provide payment services on a commercial basis in Germany requires written permission from BaFin. Privileged payment providers such as the Deutsche Bundesbank are exempt from the permit.

#2. Meet all necessary criteria to obtain a permit

The German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) applies to payment institutions.

All requirements regarding a permit are listed here.

In the permit application, the requirements of the regulatory authority are listed, notably including:

  1. Business Requirements. The permit application must include a viable business plan outlining the company’s business model. Specifically, it includes a market study and a three-year business plan that outlines financial projections and demonstrates your ability to use all the resources and procedures necessary to operate your facility smoothly.
  2. Financial Requirements. Depending on the payment services your payment institution offers, initial capital is required (usually between 20,000 and 50,000 euros). However, payment institutions must meet regulatory capital requirements to demonstrate solvency. This includes projections showing how you will meet the capital and solvency criteria in your first three fiscal years of business. Finally, your institution must outline how it plans to safeguard the funds it receives from users.
  3. Organizational Requirements. The institution must have a clear, transparent business organization, a proper IT infrastructure, and sound internal control mechanisms with effective detection and risk management procedures. Anti-money laundering and counter-terrorist financing mechanisms must also be in place. In addition, you must outline how you intend to ensure payment security.

#3 Start the permission process by contacting the regulatory authorities.

Before submitting a formal permit application, you should contact BaFin and the Bundesbank to organize preliminary discussions. They will inform you about the permit requirement, the permit procedure and the requirements for ongoing supervision. Legal advice, on the other hand, is not available. You can then complete an application for the desired permit. 

The application is complex, as it must include a variety of financial and technical documents. You should ensure that you have completed the application in full – an incomplete application will delay the process.

Note: If you are acting as an intermediary, your credit, payment or e-money partner must complete the application.

If you meet all the conditions, BaFin will grant you permission as a payment or e-money institution within three months of receipt of your completed application. However, BaFin often requests additional documents, so the decision usually takes longer!

Depending on the type of authorization, the criteria for applying for authorization as a payment institution may vary. Especially compared to the status of payment service provider, each status requiring authorization is associated with significant supervisory and organizational requirements. Regardless of what you plan to do, a clear definition of your business model and the establishment of sound control procedures are essential.

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