Fintech (Financial Technology) is the use of software, data and networks to deliver or change financial services, and also the industry of companies that do it; the Financial Stability Board describes it as technologically enabled innovation that could materially affect financial markets, institutions and services. Payments is the largest segment. Whether a fintech needs a licence depends on the activity: selling software to banks usually needs none, while holding client money, executing payments, lending or exchanging crypto-assets generally does. The licence sets the capital bill, from at least €350,000 for an EU electronic money institution to €5 million for a credit institution. A licence cannot be transferred apart from the company holding it, and a new controller needs regulatory approval.
Types of fintech
Payments is the largest segment: card acquiring, payment gateways, account-to-account transfers, remittances and digital wallets. Banking covers app-only banks and banking-as-a-service providers that let non-banks offer accounts and cards. Lending includes consumer and SME credit platforms, buy-now-pay-later, P2P lending and invoice finance. Wealth and trading cover brokers, robo-advisers and crypto exchanges. Two further groups sell to financial firms rather than consumers: regtech for compliance, and insurtech for insurance distribution, pricing and claims.
Does a fintech need a licence
It depends on the activity, not on being "fintech". A company that only sells software to banks usually needs no financial licence. A company that holds client money, executes payments, lends, gives investment services or exchanges crypto-assets generally does, either its own or through a licensed partner.
The licence choice sets the capital bill. In the EU, an electronic money institution needs initial capital of at least €350,000 under Directive 2009/110/EC, a credit institution at least €5 million under Directive 2013/36/EU, and a crowdfunding platform at least €25,000 or a quarter of annual fixed overheads under Regulation 2020/1503. Crypto-asset service providers need MiCA authorisation, and in the US, money transmitters register with FinCEN and obtain state licences.
Fintech vs bank
A bank can take deposits and lend them out, has access to central bank facilities and its deposits are insured. Most fintechs cannot lend client funds: an EMI must safeguard customer money separately and may not pay interest on e-money balances. Fintechs compete on product, speed and cost, and many depend on a bank for accounts, card issuing or scheme sponsorship, which makes those partner relationships a key risk.
A worked example
An illustrative payments start-up processing €15 million a month for 400 merchants can operate as an agent of a licensed payment institution, paying the principal a share of revenue, or apply for its own licence. At a 0.4% net take rate it earns €60,000 a month; if the principal keeps a quarter, owning a licence saves €180,000 a year, which has to be set against the capital, compliance staff and authorisation process a licence brings.
Fintech M&A
Buyers of fintech companies pay for the licence, the client book and the technology, and the licence is often the part that is hardest to replicate. A licence cannot be transferred separately from the company that holds it, and a new controller needs regulatory approval before completion. Diligence covers compliance history, safeguarding, partner bank and scheme contracts, and whether the target's revenue depends on activities its licence does not cover.