Who amongst us is not familiar with this situation? You have a great business idea for a revolutionary financial product. But unfortunately, you don’t happen to have the required licence or permissions for this. What can you do? Luckily, there are now numerous providers where you can borrow a licence or a permission. This is offered by providers with spectacular names such as License as a Service, Banking as a Service, BIN Rental, BIN Sponsoring or – somewhat cumbersome – sponsor bank relationship. Sometimes it is also called licence rental. However, what do these terms actually mean? What do you need to consider when you borrow a licence or permission? What risks are inherent therein? Lots of questions that PayTechLaw will answer and not shy away from – even when things get complicated. And as complicated issues are more easily understood with the help of examples, let’s envisage the following situation:
FinLoFT GmbH from Berlin, a hip FinTech, has created THE killer app with which users can finally do their banking business on their mobile phone. Apart from providing access to their current account, the FinLoFT app also enables mobile payments. For this, the FinLoFT app is linked to a virtual debit card. Thanks to the NFC chip in the user’s smartphone, users can pay contactless via their debit cards. FinLoFT wants to sell the whole product, i.e. current account, debit card and app, under the name FinLoFT pro. FinLoFT’s two founders discuss their plans with their lawyer and ask what they need in order to get their product on the market as quickly as possible.
Permission or licence – that is the question
First, the lawyer explains to the two founders that you require permission from BaFin if you want to run current accounts in Germany and issue debit cards. Additionally, a licence is required from the operator of the payment system in which the debit cards are to be issued. As FinLoFT has neither permission nor a licence and has ploughed all its money into the development of the app, the two founders fear that their dream of a successful business will come to an end at this stage. However, our lawyer can assuage their fears: They could borrow the permission and the licence from a company who holds both. Our two founders like this idea. A quick search on the internet and a few e-mails later, they already have two offers on the table.
Give me your customers – I‘ll give you my money
The first offer is from Tech Bank GmbH. Tech Bank offers to broker customers to Tech Bank. Tech Bank can then decide at its discretion whether it would like to offer FinLoFT to these customers. It also wants to determine the product features as well as the prices of FinLoFT. For every product sold, FinLoFT receives commission from Tech Bank. And even better: Tech Bank will also assume all economic risks connected with the customer. For example, if one of those customers were to overdraw their account, this would not be FinLoFT’s problem.
The idea of not bearing any risk is attractive to the founders but they are disappointed that they would need to give up control over their product as well as the customer relationship. They are also not happy that Tech Bank can decline customers entirely at their discretion. This isn’t for us, think the FinLoFT founders.
Yin and Yang – opportunities and risks go together
This is why our two founders are very happy to have another offer on the table: Power Bank Ltd. from Ireland is very familiar with the requirements of FinTechs. Power Bank describes itself as the number 1 FinTech bank in Europe. It offers the following deal to FinLoFT: FinLoFT determines the product features as well as the prices of FinLoFT. Power Bank also agrees to accept every customer provided by FinLoFT to the extent legally possible. Power Bank will even pass on all turnover generated by Power Bank with the product to FinLoFT. In return, it wants remuneration for its services. Additionally, Power Bank wants FinLoFT to assume all risks associated with the business (e.g. if a customer overdraws its account and does not provide sufficient balance in the account in time).
This proposal suits the two FinLoFT founders better. After all, they have developed an algorithm to detect “bad eggs” in the pool of customers with an accuracy of 99.96%. The rest is entrepreneurial risk. They are very happy and accept Power Bank’s offer.
And the moral of the story? There is no such thing as THE licence rental!
What can we learn from this short story? The key take-aways can be summarised as follows:
- Before a FinTech selects a service provider it should first consider what exactly it is required for. For example, if you would like to offer loans, it does not make much sense to work with a company other than a bank. In Germany only banks are authorised to issue loans.
- Additionally, you should consider to whom the customer and the product should “belong” from an economic perspective. As often in life, the one who pays takes the benefit. The more control you would like to retain over your business, the more risks you will generally need to assume.
- Finally, try not to get confused with the different terminology. Banking as a Service, License as a Service, BIN-Sponsoring, BIN-Rental & co. are terms that may well be interpreted very differently by different people. There is no uniform definition of these terms. The only important point to look out for is that what has been agreed to commercially is also being implemented properly from a legal perspective. For this it is irrelevant how the cooperation is called.
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