What is a banking license?
A banking license certifies that a bank has met all the legal requirements when it comes to protecting its customers’ money and data. It’s a clear signal that you can feel safe and secure in the institution you’ve chosen. Read on to find out everything you need to know about banking licenses.
Banking license, defined
A banking license means that a financial company meets a set of strict government regulations. Only a company with a banking license can call itself a bank. To get a banking license, the institution has to meet a strict list of criteria, including keeping financial reserves on hand, and ensuring data systems are securely protected.
What does fintech mean?
“Fintech” stands for financial technology, and is a label applied to companies offering banking services through specialized software. The goal of fintech companies is to improve the delivery and quality of banking services—making money management simpler and quicker for the consumer. Fintech start-ups are disrupting the traditional banking sector. By offering banking services online instead of in branches, they give customers the power to handle their finances directly from their smartphones.Banking license vs. e-money license
The key difference between an e-money license and a banking license is where the customer’s money is held, as well as how it is protected.
- E-money firms must use a partner bank to hold funds, and your money isn’t protected by the European Deposit Guarantee Scheme (DGS).
- A licensed bank holds their customers’ funds themselves, and deposits are protected up to €100,000 by the DGS. This means that even if your bank should fail, up to €100,000 of your money would still be paid out to you.
How to apply for a banking license
To request a banking license, a company must contact their national supervisory authority, such as the European Central Bank, to start the review process.
- E-money license applications take up to 15 months and cost between €1,500 and €3,000.
- Banking licenses take up to 18 months and are more expensive—around €25,000.
Should I sign up for a licensed bank?
Licensed banks follow all the necessary government regulations to make sure their customers’ money is as safe as possible. In Europe, if a licensed bank fails (that is, when it can’t pay its creditors), then your money is protected up to €100,000 under the European Deposit Guarantee Scheme. Unlicensed banks and e-money firms do not offer this protection.N26 is a fully licensed bank.
Banking licenses: Regulations and compliance
Banking licenses are under really tight regulatory control. Regulatory bodies like the Federal Reserve in the U.S. or the European Central Bank in the EU enforce strict rules to keep the financial system stable and protect consumers. Banks have to follow rigorous compliance standards, including anti-money laundering (AML) regulations and know-your-customer (KYC) procedures. Regulations like these are crucial for managing credit risk, operational risk, and market risk. Compliance isn’t a one-time thing — it’s an ongoing process that takes a lot of resources and expertise. Banks need to stay on top of regulatory changes and invest in solid compliance systems to avoid penalties and damage to their reputation.Find a plan for you
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FAQ
Fintech refers to financial technology typically offered by financial services companies. Types of fintech include payment systems such as TransferWise, as well as mobile banking apps such as the N26 app. These systems are built using specialized software, usually with secure protocols to protect any money managed in the system.
A banking license certifies that a financial organization is running a secure banking business. Licensed banks must provide a full range of banking services while managing their customers deposits themselves. N26 has been a fully licensed bank since 2016.
Banking licenses allow services such as managing deposits in personal and business accounts, issuing debit and credit cards, and processing foreign exchange services. It officially certifies that the license holder is a recognized bank, and provides protection to their customers deposits up to €100,000.
An e-money licence is like a standard banking license, but with a set limit of transactions and banking services. These can include money transfers, currency exchange, the issuing of payment cards, and using digital e-wallets. E-money firms do not protect your deposits under the European Deposit Guarantee Scheme, nor do they allow services like lending and overdraft.
If a company wants to set up a banking license, they need to contact their national financial authorities. They must meet the requirements set by the authority, and have a business proposal to present. If deemed credible, the organization advises the firm on next steps. This process takes up to 18 months.
A deposit guarantee scheme (DGS) is also sometimes called deposit protection or deposit insurance. It’s an essential mechanism designed to protect depositors' money in case a bank fails. Under EU regulations, deposits are insured up to €100,000 per depositor per bank, so that individuals and small businesses can recover their funds. DGSs are funded entirely by banks and help ensure financial stability and consumer confidence. They also prevent governments from needing to use taxpayer money to compensate depositors in the case of a banking crisis. The European Banking Authority oversees compliance, ensuring that all member states follow these protective measures.
There are several key ways that banking licenses protect customers and their bank deposits. These licenses are regulated by financial authorities, which enforce strict capital and operational standards. Deposit guarantee schemes (DGS) protect deposits up to €100,000 per depositor in the EU, and if a bank fails, these schemes can quickly compensate depositors — often within seven days. Licensed banks are also obligated to act transparently and inform customers about their rights and protections. By aligning with international standards, banking licenses help maintain stability and overall consumer confidence in the banking system.
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