Generally, everyone who is considered resident in Germany according to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, “AWG”) has to adhere to reporting obligations for specific cross-border transactions according to the German Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung, “AWV”). This means institutions resident in Germany have to file external sector statistical reports (“AWV-reports”) to the German Central Bank.
Basically, AWV-reports have to be submitted to the German Central Bank if, as an example, payments of more than Euro 12,500 are made between non-residents and residents. Cross-border payments could be conducted by means of direct debit, cheques and notes or by cash payments. Even indirect payments such as netting and clearing of receivables and liabilities between non-residents and residents are considered to be reportable payments.
Remarkable for the AWV- reporting system is the fact that even branches of foreign entities could be subject of the AWV-reporting obligation. Branches are considered to be independent business units for external sector statistics purposes (even though they are regarded as one entity along with their head office according to company law). This means that cross-border payments between headquarter and branch may lead to AWV-reporting obligations.
Especially foreign banks which want to enter the German market by e.g. subsidiaries or EU-branches should already have a look into AWV-reporting obligations during the founding or establishment process. This is because AWV-reporting obligations may already arise during the establishing period when providing the German institution with capital or tangible means. Likewise, questions in connection with AWV-reporting should be considered with respect to the set-up and implementation of systems in connection with reporting data flows. Already during the establishing process, it can be analysed (provided the business plan has been determined) to what extend AWV-reporting obligations might impact the involved companies. In so far, it could be examined if an automatic reporting procedure is required or if the occasional manual submission of AWV-reports is sufficient.
In addition to the reporting of payments further AWV-reports such as reporting of direct investment stocks of residents abroad and direct investment stocks of non-residents in Germany have to be submitted. Furthermore, receivables and liabilities towards non-residents have to be reported to the German Central Bank as well provided they exceed certain reporting thresholds.
The practical experience of several bank formations shows that the duration of a bank formation depends on the size/volume of the bank which will be founded. If a specialist institute is to be founded, one can concentrate on the conception and configuration of a few key processes besides the necessary control and support processes. Accordingly, for a bank with a broader focus a longer start up period is required.
Advantage of already existing banking structures and processes
This effort is reduced if the founder can rely on already existing structures of a bank, for example, the structures of a parent company, which can then be transferred in a customized way to the new institute. In contrast the formation on a Greenfield site without a any basis or template that can be build upon always means a different effort e.g. in the development of a sourcing strategy.
The regulatory environment plays an important role for the duration of a bank formation. These tasks can be a high time burden if many reconciliations with the financial supervision have to be made and thus a high effort in preparatory work must be made. A thoughtful preparation focusing on the specific needs of the supervision and the central questions in advance simplifies the voting and associated time requirements.
Detailed questions can help to gain the decisive time and cost advantage
In complex work packages of bank formation which are also dependent on internal and external suppliers or can influence them the duration of a bank formation with a little less detail planned approach can be negatively influenced. Even ostensibly minor activities in the formation process can affect the duration enormously and thus extend the time and budget frame. For example, applying for a bank code can only take place at certain times of the year. This application should be scheduled carefully because e.g. the nomination of some specific IT-applications and the application of licenses to issue credit cards play an important role and must be set beforehand. A late application can cause a delay of the bank formation project. Overall, a structured and planned implementation of a bank formation can save time, resources and thus costs.
The law on the implementation of the Second Electronic Money Directive was adopted on 1 March 2011 and published on 8 March 2011 in the Federal Gazette. Therewith electronic money business is taken out of the Banking Act (KWG) and the licensing requirements have been regulated in the Payment Services Act (ZAG). Also under this law, a licensing procedure must be conducted at the Federal Financial Supervisory Authority, if the establishment of an electronic money institution is planned. For already existing electronic money institutions, which have got a license under the Banking Act, there exist certain transitional provisions. Electronic money institutions, which previously had an exemption under the Banking Act, may continue issuing electronic money until 30 April 2012 without permission according to the Payment Services Act.
As time goes by …
Time is relative. But from a regulatory perspective the last four years since 2007 brought close to epochal changes. In nearly all areas of the financial industry the measures taken to scope with the financial crisis led to fundamental amendments and new regulations which already transformed the industry sustainably and will further do so in future.
What you can look forward to
Insofar it was high time to start a new edition of the English publication "Banking business in Germany", which was published last time 2007 as 2nd edition. The work offers its readers a detailed and comprehensive overview of Germany in general and its financial industry in particular, including the possible legal forms of an organisation in Germany, the relevant supervisory authorities and supervisory framework, and German tax law and labour relations. The book can be used as a helpful guide to the establishment of banks, branches or representative offices in Germany.
Also the new edition is developed in close cooperation between the Association of Foreign Banks in Germany (Verband der Auslandsbanken in Deutschland e.V.) and PwC. It is scheduled for January 2012.
Greenfield Approach vs. Established Business Model
We see both in the peak of the financial crisis and in its foothills, which can still be felt, the formation of new banks. But it turns out that most of these new bank formations are currently no strategic startups handling a new business segment or a new group of customers, but outsourcing of already existing banks.
Particularly spin-offs in form of previously separated operating divisions or whole business units can be observed. The reasons are often the focus of the strategy of issuing banks due to regulatory requirements. Therefore, the reasons are more exogenously predetermined through the legislation or through requirements in terms of competition law. Nevertheless, it is shown that even these carve outs operate successfully on the market.
The reasons lie on the one hand in a stable business model that has mostly been successfully proved over the years and on the other hand in the introduced processes as well as the associated actors (employees). Even prior to the carve outs, there is a sufficient and very reliable basis for calculating the business case which can be drawn on historical figures.
Challenging Operations and banking license
The stability of the underlying facts and the existing business model should not shift the view for the need of a clean separation of structural and organizational structures and the complexity of an own licensing. The inclusion of a department or business unit into an already existing bank is much easier- also due to the established structures-as to act on one`s own responsibility in the course of founding a new bank. However, even years after the formation it can be seen that carve-outs with an existing and stable business model act more successful at the market than before the bank formation.
According to the law of the Supervision of Payment Services (ZAG) Payment Service Providers are treated separately in terms of their permission and supervision. With the formation of ZAG-Institutes permission for activities requiring a permit has to be requested and the business organization is prepared for the operation under current supervision by BaFin and the German Bundesbank. It is necessary to first identify the activities requiring a license and document the results comprehensibly for the supervision.
The exact analysis of the business model, particularly the type of the intended payment services, provides the basis for every further action and is the prerequisite for the approval procedure. The business model will be checked in all facets of foundation and the subsequent operation of a ZAG institute and matched against all necessary requirements. The questions about the products and services as well as the development of the value chain are particularly in focus. Furthermore the organizational structure and processes, the demands on IT infrastructure and the factors influencing the business case are important. Planning for resources, costs and outsourcing as well as for necessary IT systems must be assessed.
The ZAG requires in particular that payment institutions at a smaller size will appoint at least one manager as a leader, as well that a certain starting or regulatory capital must be provided. All payment institutions are subject to the obligation of equity adequacy and are not obliged to deposit funds in a legal safety device which were accepted for the execution of payment. These funds are required by ZAG to be separated from other assets or protected by insurance. Furthermore, the regulatory and commercial requirements as well as tax issues will be considered in detail. After these prerequisites have been created, the licensing process with all the necessary activities follows. After licensing, the company proceeds to the operative business.
The global crisis in the banking sector appears to be controllable or in parts already overcome. Now, it becomes apparent that there is again an emerging interest in founding new banks. The reasons are diverse, from a changed strategic direction to the development of new products and services. Bank foundations are primarily carried out by already existing banks.
Boundaries of outsourcing and slimming-down of the TOM
The aim of this bank formation can be roughly outlined with the increase of penetration in the market cultivation, the conquest of new market shares and the establishment of a very customer-oriented business model. As a consequence of the financial crisis, this shows in many ways that market shares are reallocated and the most active banks take early actions. In addition to the strategic considerations, that must be met prior to the decision of founding a bank, particularly the decision for a future target operating model has a crucial influence on the future success of the newly formed bank
For this reason, the Tom is a critical success factor. From our practical experience, new institutes are positioned mainly as "Lean Bank" and obtain the majority of services, which are not directly provided to the customer, through service providers. In the classical case of a bank foundation or spin-off, the existing processes and structures will very often be transferred to the new bank via contractual arrangements. Thus, the mother or the emitting institute becomes the service provider with very dedicated knowledge regarding the operations of the new bank. In case that the outplacements are very large, the resulting lean staffing level comes to regulatory limits because then substitutions according to separation of functions, holiday and sickness as well as termination can affect the continuation of the business.
New Tasks with a clear orientation towards market cultivation
Due to the often observed reduction of the vertical range of manufacture and the consequent outsourcing of all significant processes at bank foundations, personal spaces are created that can and should be used particularly for focused market cultivation. The relation of employees to customers to employees in the back office can greatly be optimized especially in newly founded banks. This leads on one side to a support of the strategy of a strong market focus, often pursued with foundations of "Lean Banks", and on the other side to a very slim but still powerful staffing level.
On 30 April 2011 the transitional provisions of the Payment Services Act (ZAG) are going to end. According to that, companies who already had a license to provide money transfer business and credit card business before 25 December 2007, and companies who have provided their activities in the area of payment services (for example, the payment authentication business) without a license before 25 December 2007 can make use of the transitional provisions until 30 April 2011. However, starting on 1 May 2011, they require a licence according to the Payment Services Act to carry out the respective payment services. This licensing procedure includes the submission of extensive documentation to the Federal Financial Supervisory Authority (BaFin). Amongst others the submission of documents concerning the proof of the required initial capital, the business plan including a budget planning for the first three fiscal years as well as a description of the internal control mechanisms and the representation of the organizational structure is necessary. Since BaFin has to decide about the application only within three months after the complete documentation was submitted and since it is no longer allowed to conduct payment services according to the Payment Services Act without respective authorization after the expiry of the transitional provision, there might be a need for action.
The Restructuring Act of 9 December 2010 was published on 14 December 2010 in the Federal Gazette. Since 1 January 2011 at the latest all regulations of the Restructuring Act are binding. According to the explanatory memorandum of the Act the provisions of the Act shall regulate the proper wind-up of banks. This Act includes for banks which have run into difficulties the possibility to execute a so called controlled procedure (geordnetes Verfahren) (redevelopment proceedings and reorganization proceedings). In this context, the Federal Financial Supervisory Authority achieves the possibility to demand and enforce the necessary steps from a bank to solve their problems at an early stage.
On 27 September 2010 the Federal Government published a draft legislation which will serve for the implementation of the Second Electronic Money Directive. The content of the Second Electronic Money Directive is interlocked in a substantial part with the Payment Services Directive and the business activities of payment institutions. The implementation of the Directive shall take place until 30 April 2011. According to the explanatory memorandum of the legislation it is intended to take account the particularities of the electronic money business by creating a special type of institution. Similar to the institutions that provide payment services, it is planned to separate the activities of electronic money institutions from the Banking Act and to regulate them in the Payment Services Act. According to the Second Electronic Money Directive, the classification as a bank is no longer necessary to operate this business.