Businesses wishing to offer financial services in Germany must apply for a banking license. Explore what a banking license is, how the application process works, what businesses need to consider, and what the risks are of not applying for a license.

What’s in this article?

• What is a BaFin license?
  
• Which organization regulates and issues licenses?
  
• Who needs to apply for a BaFin license?
  
• What criteria are considered when issuing a BaFin license?
  
• What form does the application process take?
  
• How much does a BaFin license cost?
  
• What are the pros and cons of applying for a BaFin license?
  
• What are the risks of not having a BaFin license?
  

What is a BaFin license?

BaFin stands for “Bundesanstalt für Finanzdienstleistungsaufsicht,” the German Federal Financial Supervisory Authority, and its licenses and banking licenses represent official authorization for companies to offer financial services and typical banking services, respectively. People also refer to it as a BaFin permit, or KWG license. KWG stands for “Kreditwesengesetz,” the German Banking Act.

Section 32 (1) sentence 1 of the KWG stipulates the requirement for companies to hold a BaFin license prior to commencing activities of this nature.

Which organization regulates and issues licenses?

The competent authority in Germany for issuing a BaFin license is the Federal Financial Supervisory Authority (BaFin) in Bonn, Germany. Prior to May 2002, this organization was known as the Federal Banking Supervisory Office (BAKred). As part of a reform, the authority was merged with the federal supervisory authorities for securities trading (BAWe) and insurance (BAV) to form BaFin. As a central organization, BaFin is responsible for supervising banks, financial services companies, insurers, and securities traders.

With the rise in online trading, BaFin increasingly finds itself dealing with companies from the financial technology (fintech) sector. These include, for example, crowdfunding platforms, online marketplaces, or companies dealing in virtual currencies.

BaFin is an independent institution incorporated under public law and is in turn subject to the legal and technical supervision of the Federal Ministry of Finance. BaFin is led by a board of directors and financed by fees and contributions charged to the companies and institutions under its supervision.

In line with its articles of incorporation, BaFin is not only responsible for the general supervision of banking and financial matters, but it’s also responsible for the prevention of money laundering and the financing of terrorism. A further part of its goal is consumer protection. As the supervisory authority, BaFin monitors developments on the financial markets. Where the authority recognizes negative trends, it introduces preventive measures to counteract such developments.

Who needs to apply for a BaFin license?

The aforementioned Section 32 of the KWG defines the mandatory license obligation for conventional banking transactions and financial services. By law, companies also need a BaFin license if they collect money from multiple persons with the aim of investing it—on their behalf and to their benefit—as part of a defined investment strategy.

Where this takes the form of a managed investment fund, the management company simply needs to register with BaFin in accordance with Section 44, in conjunction with Section 2 (4) of the German Capital Investment Code (KAGB). A BaFin license is not necessarily required.

The following businesses from the banking and financial sectors require a BaFin license based on their business model:

• Banking transactions: The typical operations performed by a bank include receiving financial deposits and issuing loans. A BaFin license is required for both. Whether an institution offers all standard banking operations or specializes in just one or two specific areas, it makes no difference—a license is still required.
  
• Securities trading services: Businesses exclusively engaged in the management and sale of securities require a BaFin license.
  
• Financial services: A BaFin license is required for all transactions conducted in regard to leasing, asset management, or other financial models.
  
• Cryptocurrency trading: The issuing, management, and hedging of crypto assets or private cryptographic keys with the aim of holding, storing, and transferring crypto assets are also subject to the BaFin license.
  
• Payment services and e-money: In order to provide certain payment services or issue electronic money (e-money), businesses require authorization in the form of a BaFin license.
  
• Mixed or hybrid business models: Where a company already offers some of the aforementioned transactions from the areas of banking and financial services, and is considering offering further financial services, an additional BaFin license may be required.
  

What criteria are considered when issuing a BaFin license?

Modern-day banking and the financial world have changed massively in the past few decades. The rise in digitalization and new online business models mean credit is often issued more or less without any physical consideration. In the past, precious metals were predominantly used as collateral for credit risks.

Moreover, the global finance system has become considerably more complex due to the increase in international networks. The globalization of financial transactions has led to a rise in prosperity. At the same time, the propensity for the finance world to suffer major crises has also increased. In order to protect customers, BaFin applies certain criteria very stringently when considering license applications.

Reliable business management is one major requisite for approving a BaFin license application. Management is considered reliable when it demonstrates the necessary technical expertise. In addition, management teams should also hold a certain level of experience. BaFin would consider a company’s management to be unreliable if certain criminal acts had been levied against it—for instance, fraud or embezzlement—or similar breaches of applicable laws and regulations.

To obtain a BaFin license, the applicant business needs to have a funded business plan, with a budget forecast for at least three years. This requirement also serves to protect customers. Ultimately, BaFin would like to know whether a company’s business idea is viable (i.e., whether it will have the necessary capital for at least three years).

Finally, BaFin also considers whether a business will observe and implement the provisions of the Money Laundering Act. This might sound difficult, as no one can predict the future. But on a practical level, a business must therefore demonstrate in its application that it has functioning compliance provisions—in other words, an expressive, written commitment to comply with the law in the future.

What form does the application process take?

Applications for a BaFin license must always be made in writing. In the case of limited liability corporations, the board of directors or management is responsible for applying on behalf of the business. With a commercial partnership, each personally liable partner needs to submit a written application.

In addition to the criteria set out above, a specific minimum level of capital needs to be maintained. This starts at 50,000 euros for financial services. For companies in the securities trading and “pfandbrief” bond sectors, this sum rises to a maximum of 25 million euros.

Where a company fulfills the key criteria set out in Section 32 of the KWG, it has an enforceable legal claim to be granted a BaFin license. However, the authority has the final say. With modern online business models in particular, such as fintech companies, businesses must be prepared to handle any queries from BaFin. To this end, businesses should apply great care and attention when completing their written applications.

As a rule, BaFin requires 6 to 12 months to check the submitted documents and to approve the relevant BaFin license.

How much does a BaFin license cost?

BaFin charges a license fee. This is calculated differently depending on the applicant’s business model.

• Fees for businesses providing financial services amount to between 2,000 and 17,000 euros.
  
• Fees for businesses offering typical banking services are between 5,000 and 20,000 euros.
  

In addition to the BaFin license fee, other costs may arise—for legal advice, as an example. These are normally calculated on the basis of time spent on the application. Tip: ask for an overall price up front. Some law firms will offer a fixed-price service for BaFin license applications.

What are the pros and cons of applying for a BaFin license?

The most important benefit of holding a BaFin license is legal security. With a banking license, all financial transactions are automatically BaFin-compliant.

It also represents a quasi seal of approval, telling the outside world that a business places great value on customer protection. With a German banking license, businesses also gain access to the EU market, as the license also applies in the European Union. This opens up a marketplace with more than 500 million customers.

Applying for a BaFin license requires time, money, and diligence. The legal consequences of failing to acquire the relevant banking license can result in significantly higher costs. For one, it may lead to sanctions in the form of written warnings, fines, compensation claims, or—in particularly severe cases—custodial sentences. And further, the lack of a BaFin license jeopardizes the entire company.

What are the risks of not having a BaFin license?

In principle, businesses subject to mandatory licensing take on a significant risk without a BaFin license. The sanctions range from a simple fine to criminal investigations.

Even negligence can result in a custodial sentence of up to three years, depending on the severity of the offense. In addition, BaFin also reserves the right to partially or wholly ban the business from operating.

In terms of civil law, businesses may find themselves liable to compensation claims from injured customers. In addition, rival companies may assert claims under competition law and pursue companies without a BaFin license in court.

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