Poland: Payment Institutions License In Poland

Payment Services Market in Poland

Due to the advanced digital payments and identity solutions, increasing digitalization of Polish customers, fast growing ecosystem, highly-skilled labour, and partner-oriented start-up cooperation models, since 2018 - 2022, the number of Fintech companies has nearly doubled. Poland with the biggest financial services market in CEE, aims to become one of the 30 most competitive financial centres in the world, within next 5 years, under the Future Finance Poland initiative launched in February 2023 jointly by the Polish Fintech Foundation, Polish Financial Supervisory Authority (KNF), and Finance Ministry.

Payment Services Grow Drivers

One of the major drivers of growth in the Polish FinTech market comes from the increasing expectations of financial market users, related to intelligent, customised and integrated value propositions. Next is a notable willingness of top banks to innovate and form strategic partnerships. Example of such partnerships is a local BLIK system, beloved by Poles, a universal mobile payment solution, launched in early 2015, with around 13,5 million users pay with it every month. From January to March this year, its users made 374 million payments worth PLN 50.1 billion.

Types of Fintech players

Although on the map of Polish Fintech we have several providers, the 3 following groups of players stand out in the forefront:

• payment institutions,
• finance management providers, and
• software providers.

In connection with the proposed changes to PSD2, this article will tackle national payment institutions in Poland, especially the licensing process.

A national payment institution ("PI") is one of several forms of payment services business available in Poland (in addition to e.g. small payment institutions ("SPI"), payment service bureaus and electronic money institutions).

As of August 2023, there are:

• 177 small payment institutions,
• 41 national payment institutions,
• 1138 payment service bureaus, and
• 1 electronic money institution.

Investors planning to conduct business in Poland usually apply for the status of a small payment institution (which can operate with certain restrictions on: territory, scope of payment services, value of transactions, and amount funds held for individual users – which solutions is good for startups), or national payment institution.

Payment Institution Regulation in Poland

A payment institution may operate both in the territory of the Republic of Poland and abroad. Payment institutions are not subject to restrictions on the limit of funds held in user accounts or the limit on the total value of completed transactions that a small payment institution is subject to. Payment institutions are subject to rigour with regard to the form of business (either a limited liability company or a joint stock company) and minimum capital requirements (depending on the service, it is at least €20,000 to €125,000).

The licensing procedure for payment institution differs significantly from the registration procedure that is carried out for small payment institutions. In practice, it lasts from 12 months to 2 years from the submission of the application and ends with the issuance of an administrative decision (either authorization or denial of authorization).

In terms of capital requirements, it should be mentioned that the draft PSD3, involves raising the capital threshold for service providers (services enabling cash to be placed on and/or withdrawn from a payment account, execution of payment transactions, including transfers of funds from and to a payment account, including where the funds are covered by a credit line with the user´s payment service provider or with another payment service provider, issuing payment instruments, acquiring) from €125,000 to €150,000.

Payment Institution vs Small Payment Institution in Poland

The most significant differences are shown in the table below:

Payment Institution - Scope of Services

Within the scope of the authorization, a domestic payment institution may:

1. accept cash deposits and make cash withdrawals from the payment account, and take all actions necessary to operate the account,
2. perform payment transactions, including the transfer of funds to a payment account with the user's provider or with another provider:

1. grant payment credit,
2. issue payment instruments,
3. provide acquiring service,
4. provide money remittance service,
5. provide a payment transaction initiation service,
6. provide an account information access service.

In addition, payment institutions as a hybrid payment institutions can also provide services other than payment services. These include the provision of closely related ancillary services to the provision of payment services, such as:

• currency exchange services,
• services for secure storage of funds transferred for the purpose of executing a payment transaction,
• data storage and processing services,
• operation of payment systems,
• conducting other business activities.

Regulatory Requirements for Payment Institutions

Management Board

The management board of a national payment institution should consist of at least 2 members. The members of the board must provide assurance of the proper running of the institution (during the licensing process it will be necessary to submit, among other things, a certificate of non-criminal record, documentation of experience and knowledge in management, knowledge of the financial market).

Can a foreigner/non-Polish resident be a member of the board of directors of a national payment institution? In principle, yes, although the following should be taken into account:

• at least half of the management board, including the president, and the board member responsible for risk management should speak Polish,
• the management board (and the supervisory board, if applicable) should include persons with the appropriate educational profile, a good reputation in connection with their functions, knowledge, competence and experience necessary for effective, proper and prudent management (or supervision),
• the number of management board members (and the supervisory board, if applicable) should ensure effective, proper and prudent management of the institution, and in particular take into account the scope, scale and complexity of its activities. It is usually recommended that the board of directors include at least 2-3 members,
• the amount of time devoted to performing the duties of a board member should be sufficient to ensure effective management, taking into account the size, specificity and scope of the entity's activities.

In addition, it should be noted that on April 14, 2022, the FSA issued a resolution stating that any ties of the licensed entity, its significant shareholders and its managers to the Russian Federation or the Republic of Belarus, in the form of origin (citizenship) from these countries, concentration of its social activities, professional or economic activities in those countries, or close personal or business ties with entities concentrating their activities there, is and will be treated by the Financial Supervision Commission as a substantial doubt that the licensed entity's activities will be conducted in a proper manner - lawful, honest, transparent, prudent and stable. As a result, there is a high probability that in licensing or authorization proceedings, in which ensuring the proper conduct of business is a condition for admission to and operation in the financial services market or management of an entity operating in that market, this requirement will be deemed not to have been met for entities with such ties.

Consequently, this means that the FSA may deny an entity a PI permit if the above-mentioned ties to Russia or Belarus are present.

Shareholders (including beneficial owners)

According to the Fintech Poland report, when looking at the Polish FinTech industry in terms of types of investors, it is dominated by the private and local category – as many as 6 out of 10 Polish FinTechs have an individual person from Poland among their strategic investors. 14% of FinTech companies claim that their majority shareholder is a foreign commercial law company. Slightly fewer, about 10%, have a Polish company as their strategic investor.

Same rule applies to PIs – in practice participation of foreign investors is noticeable. A PI may have both Polish and foreign shareholders (beneficial owners). It is worth mentioning though, that KNF, during the licencing process, will assess whether the shareholders have any connections with the Russian Federation or the Republic of Belarus, as per KNF's resolution of April 14, 2022.

Capital requirements

Providing account (enabling deposits and withdrawals), executing direct debit, credit transfer, payment instrument payments, granting payment credit, issuing payment instruments, acquiring service, require having the minimum share capital 125,000 euros (equivalent in Polish zloty).

When providing money transfer services, the minimum share capital is 20,000 euros, and for payment transaction initiation services it is 50,000 euros.

If the payment institution provides payment credits, the minimum capital requirement, shall be increased by 5% of the average balance of receivables at the end of each month for payment credits granted during the last fiscal year.

The equivalent in the Polish currency of the stated amounts in euros is determined using the average exchange rate announced by the National Bank of Poland, in effect on the date of issuance of the permit. A national payment institution, with the exception of a national payment institution providing only payment transaction initiation services, is required to have at all times its own funds adapted to the size of its business and the type of payment services it may provide on the basis of its authorization.

Payment Institution License

The proceedings before the Financial Supervision Authority are quite detailed and last from about 1 to 2 years. If the application involves the provision of acquiring services, the National Bank of Poland is also involved in the proceedings, whose President issues an opinion on compliance with the law and ensuring the security and efficiency of the payment service. This affects the length of the proceedings.

On January 2023, the European Banking Authority issued a report on the peer review on an authorization under PSD2¹, where it stated that Poland was the country with the longest authorization process (20-24 months) of all European FSA.

PI License - paperwork

The documentation required for an application for a license to operate as a PI includes, among other things (only the essential documents are listed):

1. basic documents related to company registration in Poland - unless the company is foreign,
2. a list of the services it wishes to provide,
3. a program of activities for 3 years,
4. a financial plan for 3 years,
5. a risk management and internal control system, including:
   • a description of the rules for handling cash accepted for payment transactions,
   • procedure for monitoring security incidents and monitoring and handling user complaints, including security-related complaints, and follow-up,
   • an internal communication system that includes rules for communicating information relevant to the organisation and operation of the applicant,
   • a procedure for conducting periodic and permanent controls,
   • accounting procedures under which the applicant will record and report its financial information,
   • data to identify the person or persons responsible for internal control functions,
   • data to identify the person of the auditor and the identification of audit firms,
   • a description of how the outsourced activities, actions, and tasks will be monitored and controlled,
   • a description of the management of the group, where the applicant is a subsidiary of an entity that has a permit or registration from the competent supervisory authorities authorising it to operate in the financial market,
   • a procedure for documenting, monitoring, tracking, and restricting access to sensitive data,
   • business continuity plan,
   • rules for collecting statistics on business performance, transactions, and fraud,
   • security policy,
   • AML/CFT procedure, AML / CFT manual for employees,
6. bank guarantee or liability insurance (if providing PIS services),
7. documentation on board members and shareholders (shareholders).

PI License - Procedure

The documentation is reviewed in detail by the Financial Supervisory Authority, which calls for additional information in case of additional questions. What does the Authority pay the most attention to? In recent years, it has been felt that the Authority has placed great focus on the security of information and ICT, AML issues, outsourcing policy and outsourcing agreements.

Cost of PI License

The issuance of a license to provide services as a national payment institution is subject to a fee in the amount of the equivalent in the Polish currency of the amount of €1,250 (using the average exchange rate announced by the National Bank of Poland, in effect on the date of issuance of the license to the account indicated in the FSA's request for payment of this fee).

On the other hand, a change in a permit to provide services as a domestic payment institution shall be subject to a fee in the amount of the equivalent in the Polish currency of the amount of €400 (using the average exchange rate announced by the National Bank of Poland, in effect on the date of issuing the decision on the change in the permit to the account indicated in the FSA's call for payment of this fee).

Supervision of payment institutions

The supervisory authority over PIs is the Financial Supervisory Authority – Komisja Nadzoru Finansowego. The FSA is authorised to take appropriate supervisory actions, including punishment for violations. In particular, the FSA examines whether the interests of users and consumers are respected (e.g., in terms of fees and information obligations), and whether the payment institution adheres to acting in accordance with the law and internal regulations. Finding a violation, the FSA may issue recommendations. These may include a summons to take certain actions indicated in the summons and aimed at eliminating violations. The FSA also has a number of coercive measures to remove violations. These will include, for example, financial penalties, a demand for the dismissal of the entity's managers and even, in extreme cases, the issuance of a ban on operating as a PI.

The Payment Institution, as part of its activities, is obliged to bear the costs of supervision. The amount of fees depends, among other things, on the required amount of own funds and the actual costs of supervision (the actual costs of supervision are indicated in the Announcement of the President of the FSA, published annually. However, in any case, regardless of whether the actual supervision costs are higher, the fee paid may not exceed 1% of the amount of the minimum value of the initial capital, calculated as of the last day of the year for which the payment for supervision costs is due.

Acquisition/disposal/division of a national payment institution

An entity that intends to directly or indirectly acquire or take up shares in a national payment institution in a number that ensures reaching or exceeding, respectively, 20%, 30% or 50% of the total number of votes in the constituent body or share in the share capital, or if, as a result of the acquisition or taking up of shares, such institution would become a subsidiary or co-subsidiary of such entity, shall notify the FSA of such intention.

The FSC shall object, by way of a decision, to the purchase or acquisition of shares or stocks in a domestic payment institution if:

• the entity submitting the notification has not supplemented the deficiencies in the notification or the documents and information attached to the notification within the prescribed period,
• the entity submitting the notification has not provided additional information or documents requested by the FSA within the deadline,
• is justified by the need for prudent and stable management of the domestic payment institution, due to the possible adverse impact of the entity submitting the notification on the institution, or due to the assessment of the financial condition of the entity submitting the notification,

In the event of a merger or demerger of a payment institution or the acquisition of its business, the authorization shall not be transferred to the acquiring or newly formed entity created as a result of the merger or demerger or to the acquirer. The exception is if the hybrid payment institution is separated in implementation of a decision of the Financial Supervision Authority in this regard (separation order).

Issuing electronic money as Payment Institution

A national payment institution with a share capital of not less than the equivalent in Polish currency of €125,000 is authorised to issue electronic money. PI can issue e-money only in the territory of Poland, where the amount of electronic money (issued by PI) remaining in circulation may not exceed the equivalent of €5,000,000.

In order for the PI to start issuing electronic money, it needs to submit a notice to the FSA of its intention to carry out such activity. Moreover, along with the notification, the PI is required to submit an application for entry in the register of information on the issuance of electronic money, which is expected to result in the FSA making an appropriate entry in the register.

Poland as a getaway to the EU financial market and local support

Active PI licence holders can operate outside the territory of Poland through a branch (exercising freedom of establishment in the EU) or as part of cross-border activity without opening a branch (exercising freedom to provide services in the EU).

Polish regulator – KNF is involved in many activities designed to support the entities it supervises as well as those which have recently begun doing business in the financial industry. KNF is quite active in terms of issuing official positions on the regulatory changes. KNF also allows the access to the Virtual Sandbox, which is a safe IT environment where companies can test their innovative solutions. The Virtual Sandbox allows its users to simulate basic operations defined in PSD2 such as Payment Initiation Service (PIS), Account Information Service (AIS) and Confirmation of the Availability of Funds (CAF) – in a secure environment and with help from KNF.

PSD3 and open banking for payment institutions

The disclosed on June 28^th, 2023 PSD3 draft aims at repealing and replacing the second Payment Services Directive (PSD2) and the second Electronic Money Directive (EMD2), combining the separate regimes for payment services and electronic money into a single regime. According to PSD3, Electronic Money Institutions (EMIs) will cease to exist, as there will only be Payment Institutions (PIs), which will be able to be authorised to offer electronic money and payment services.

European Commission noticed that some payment providers tend to choose, as home country, those Member States where the application of Union rules on payment services is more advantageous for them and provide cross-border services in other Member States which apply stricter interpretation of the rules or apply more active enforcement policies to payment service providers established there. The Commission pointed out that such practice distorts competition, and therefore solutions to limit such practice should be taken. We should expect EBA to develop draft regulatory technical standards on authorisation, and a common assessment methodology for granting authorisation or for registration.

What will change for the payment services providers?

• PIs will be required to avoid concentration risk in safeguarding customer funds by "ensuring that the same safeguarding method is not used for the totality of their safeguarded customer funds." They will also be required to "endeavour not to safeguard all consumer funds with one credit institution.",
• PSD3 requires payment institutions to maintain winding-up plans as a condition of their authorisation. These plans should describe what would happen in the event of the firm's failure, support the orderly wind-up of its activities, and address the continuity or recovery of critical activities performed by the institution's outsourced service providers, agents, and distributors (as applicable),
• as mentioned earlier, payment institutions will be subject to increased initial capital requirements and different own funds calculation methods – for example PIs who intends to provide services as maintaining the account, executing transaction from the payment account, issuing payment instruments, and acquiring would be required to have a capital of no less than €150,000 (currently in Poland the amount is €125,000),
• registered account information service providers will be permitted to hold their own funds of €50,000 as an alternative to holding professional indemnity insurance as is currently required by PSD2.

It is assumed that the final version of the PSD3 directive will come into force in 2026.

Footnote

1. https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2023/1050744/Peer%20Review%20Report%20on%20authorisation%20under%20PSD2.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.