What are the requirements of the centrum bank?
The financial services sector is in transition. Financial Techs are the new generation of banks. What began harmlessly with the fact that comparison portals on the Internet suddenly made the market transparent to customers for loans, accounts and overnight money conditions was just the beginning of a new era.
The term Financial Tech appears today more and more often in connection with money transactions. But what exactly is behind it and what requirements does the centrum bank place on it?
- “Financial Tech” means “Financial Technologies”.
- If Financial Techs outsources the actual banking business to partner banks, they do not need their own banking license.
- When applying for a banking license, a suitability test will be carried out.
- For example, Boro Advisor as an asset manager must ensure that an investor is forced to answer questions in accordance with section 34 (2a) WpHG before making an investment decision.
What are Financial Techs?
The artificial word “Financial Tech” comes from the English and consists of the two words “finance” and “technologies” together – in German financial technology. These companies offer financial services based on computer-based elements.
A nice example are the so-called Boro Advisor. Robo is the English term “Robot”, so robots taken. Advisor means consultant in German. A Boro Advisor is therefore a machine advice. Boro Advisor can be found in the securities section.
In contrast to a bank employee whose buy recommendation is based on the sales requirements of his management and less on an objective market analysis, the sales recommendation of a Boro Advisors is based on a gigantic mathematical algorithm. He knows no sales figures or subjective perceptions. He balances the investor’s chance-risk profile soberly and emotionlessly with the market.
On the subject of Boro-advisor, the editorial office of our sister portal Brokervergleich.de has been running the only real-money test since May 2015 and since then has been monitoring monthly how the performance of digital asset managers develops: for a Boro-advisor comparison >>
Financial Techs can also be found in other areas: Current accounts. The new generation of current accounts with the core app and credit card was developed by Financial Techs. They are, as well as the Boro Advisor, contact person of the customer. The actual banking business, which lies behind it, is outsourced to a bank. However, this is not a savings bank around the corner, but on the one hand to banks specializing in the Internet business. These in turn make their technologies available to Financial Techs, for example the Solaris Bank. On the other hand, there are actually real Financial Tech banks that have the appropriate license in Germany
Financial Tech products and services
The Boro-advisor or digital current accounts referred to above can be broken down into the following sectors and services, according to the Bank for International Settlements (BIS):
The legal challenge
Especially in the securities business, the legislature is required. Traditional banks must fully inform their clients about the risks and rewards of investing, checking whether the chosen asset class fits the client and correcting it where necessary.
The Boro Advisor as an asset manager can only do this in the form of electronic information. However, it must be ensured that the customer does not find information in accordance with the Securities Trading Act (WpHG) somewhere in secret. The online advisory process must be structured in such a way that the investor is forced to answer the questions in accordance with Article 34 (2a) WpHG before making an investment decision (1).
Part of the challenge was to determine when a Financial Tech can act as a bank.
Requirements for the banking license
In 2017, the European Central Bank (centrum bank), as the supreme supervisory authority, presented the outline of a concept for the suitability assessment of banks. This was finalized in 2018 as a guide to banking operations. The Financial Techs were honored to have their own section.
As general criteria to operate as a bank, apply
- Suitability of the members of the management body and suitability of the shareholders to conduct banking business
- Requirements for proper internal organization. These include risk management, compliance and control frameworks
- A conclusive and resilient business plan
- Ultimately, capital, liquidity and solvency must be right
For Financial Techs, further aspects were also defined. Thus, the management bodies not only have to be suitable as bankers, but also have appropriate IT competence.
The shareholders of Financial Techs, which are mostly recruited from the start-up scene and lenders, are judged on reputation and financial solidity.
The application for authorization shall, in particular, take account of the candidates’ procedures
- credit approval
- Adjustment of existing loans
- Assessment and enforcement of collateral
- Classification and treatment of non-performing loans
Particular emphasis is placed on the security against cyberattacks, that is, which preventative defensive measures has hit the company.
When outsourcing processes to a third party, a due diligence review is generally required. (2) In addition, data of the service provider regarding market position and financial position must be provided.
If data is outsourced to a cloud, the questions to be answered are whether there is a dependency on the cloud operator and how its role in the market is to be assessed. In addition there are data protection requirements.
As part of data governance, Financial Techs must ensure that the integrity, confidentiality and availability of the data is guaranteed at all times.
Another requirement is the presentation of a solid exit plan. It must provide information about how the business is properly shut down, without harming customers in any way, be it financially, in terms of data protection, or in the financial system.
A Financial Tech bank must also prove sufficient capital that is sufficient to survive the start-up problems of the first three financial years.
The final point Financial Tech Bank has to fulfill in accordance with the centrum bank Guidelines is the capital, liquidity and solvency assessment. Initial capital and liquidity are particularly in focus here.
The centrum bank assumes that Financial Tech banks are initially exposed to higher default risks. Therefore, additional capital in excess of the statutory minimum capital requirement must be demonstrated.
Roles of Financial Techs and Banks
When it comes to Financial Tech banks, of course, the distribution of roles between Financial Techs and established banks must also be discussed. The Laseb Committee on Banking Supervision has published a white paper (1) in which it outlines five scenarios:
- The better bank
- The new bank
- The distributed bank
- The relegated bank
- The disintermediary bank
As for each of the five scenarios, the roles of Financial Tech and Bank as service providers and providers of the customer interface are divided, our infographic shows:
banking landscape. Also for this we have provided an infographic: