FinTechs have become an integral part of today's financial market architecture. In their case, the special feature is that their business model often requires regulatory permission from BaFin. But what are the respective regulatory aspects of FinTech business concepts frequently found on the market?
FinTechs are generally regarded as smart, successful and dynamic. But for all their smartness, FinTechs are also subject to the regulatory framework of German financial supervisory law, which is overseen by the German Federal Financial Supervisory Authority (BaFin). In this article, we would like to give you a first impression of the "pitfalls" that financial supervisory law can hold for FinTechs and how this can be "managed".
The term "FinTech" is composed of the words "Financial Services" and "Technology". FinTechs are generally understood to be startups that offer their customers innovative and technology-based financial innovations. A special feature of FinTechs is that their business model often requires regulatory permission from BaFin. The licensing requirements can arise in particular from the German Banking Act (KWG) or the Payment Services Supervision Act (ZAG). Thus, a separate supervisory review is essential for all FinTechs. In the following, we would like to give you an overview of supervisory aspects of FinTech business concepts frequently encountered on the market.
Alternative payment methods
A typical field of activity for FinTechs is the payment sector, in which FinTechs offer new payment methods as an alternative to traditional bank transfers or credit card payments. The payment process is usually initiated by the payer via the Internet, e.g., using a smartphone. The need for regulatory approval depends on the design of the respective payment processing. As a rule, permission under the ZAG is required for the provision of payment services.
If FinTechs offer their customers support in investing their money through automated systems (e.g. with the help of algorithms; so-called "robo-advice"), various supervisory licensing obligations come into consideration. If, for example, the FinTech provides its customers with investment recommendations by means of the application used, this generally constitutes investment advice requiring a license within the meaning of the KWG. If the FinTech carries out the recommendations independently, this may constitute financial portfolio management requiring a license under the KWG.
Crowdfunding is another field of activity for FinTechs. This is a form of financing that enables investors to invest in various projects via an Internet crowdfunding platform. The legal requirements for this so-called "swarm financing" are specified by the German Investment Act (VermAnlG).
Virtual currencies / crypto tokens
If a FinTech offers services in the area of so-called crypto-tokens (e.g. virtual currencies such as Bitcoin), it must always be examined whether the respective activity triggers a duty to obtain a license pursuant to the KWG. Crypto-Tokens may constitute financial instruments within the meaning of the KWG. Thus, for example, commercial trading – such as the operation of an exchange platform – is generally only possible with a corresponding KWG permit. If the business model provides for the custody of crypto-tokens, the so-called crypto custody business pursuant to the KWG may also be considered.
It is probably undisputed that digitization will continue to advance in the financial sector. This trend is supported not least by the legislator, for example through the introduction of the Electronic Securities Act (eWpG), which came into force on June 10, 2021. The eWpG enables the issuance of securities in a purely electronic manner, e.g. using blockchain technology. The eWpG includes new fields of activity for FinTechs in particular, for example in the context of crypto securities registry management, which was introduced into the KWG as a new financial service.
For FinTechs, the acquisition of their own licenses will continue to be an issue. As an alternative, so-called "license lending" may also be considered under certain circumstances. In order to achieve a smooth "going live" of the business model, we recommend consulting an experienced partner as early as possible, in particular to assess whether the business model requires a BaFin license.
Stagebild: iStock (Fizkes)
Fabian Hausemann, attorney-at-law, is a Senior Associate at Rödl & Partner's Hamburg office. As part of the banking and capital investment law team, Fabian Hausemann specializes in regulatory issues, in particular in the areas of the German Capital Investment Code (Kapitalanlagegesetzbuch, KAGB), German Investment Code (Vermögensanlagegesetzbuch, VermAnlG) and German Banking Act (Kreditwesengesetz, KWG). In particular, Mr. Hausemann advises FinTechs, capital management companies and fund initiators on conceptual and operational issues.
Dr. Christian Conreder, attorney-at-law, is a partner at Rödl & Partner in Hamburg and heads the capital investment law department. The focus of his legal work is on banking and capital markets law, namely in the areas of payment transactions and capital investment law. In addition to FinTechs, capital management companies and issuing houses, Dr. Conreder advises banks, payment service providers, card issuers and family offices on civil and regulatory issues.