The digital bank license obtaining option is an attempt by the National Bank of Georgia to promote the development of new technologies and innovative approaches in Georgia.
1. Advantages of digital banking in comparison to old school banks
- • Innovation and speed: Digital banks are more flexible and adaptable to market changes. They can quickly adopt new technologies, implement innovative financial services and respond to customer needs faster than traditional banks;
- • Development of a convenient, fast and accessible digital financial ecosystem adapted to the technological infrastructure around the user;
- • Better use of big data;
- • Entry of new technological players and increased competition in the financial sector;
- • Expanding the area of access to the customer. Digital platforms allow banks to reach a wider audience, which increases the bank's potential client base;
- • Digital banking platforms enable personalized services, available online 24/7.
Obtaining a Digital Bank License is a similar process to that of obtaining ordinary banking license, with several steps and somewhat moderate requirements at the beginning. Interested candidates must apply to the National Bank of Georgia.
There are several (four) stages to overcome, in order to get the digital bank running fully. First stage being Proof of Digital Bank Concept. The National bank, together with the innovations office works with the applicant in an interactive manner to finalize the concept in a way, that it reaches second stage.
Banking license applicants have the opportunity to consult with the National Bank before submitting a written application for a banking license. The purpose of the preliminary consultation is to guide applicants through the process, help them comprehend the requirements to be met and form the right expectations.
2. Basic Requirements for Licensing of Digital Bank in Georgia
Requirements for Digital Bank: Capital
Capital requirement for an ordinary bank is GEL 50,000,000 and capital requirement for a digital bank is 5,000,000 at the start and should increase gradually, until it reaches full bank status.
Requirements for Digital Bank: Business Plan
The license applicant’s business plan is assessed in terms of the adequacy, feasibility and potential position in the banking sector, and that is one of the key aspects of the process. Minimum requirements are defined by law.
Requirements for Digital Bank: Fit and Proper of Administrators and Significant Shareholders
The license application must include declarations of fit and proper for significant shareholders (both direct and indirect). Fit and proper requirements are defined by law[1].
Requirements for Digital Bank: Ownership and Group Structure
Information on the ownership structure should include data on all levels of ownership, including direct shareholders, intermediate owners and beneficial owners holding significant shares[2].
Requirements for Digital Bank: Corporate Governance and Risk Management Framework
The applicant should have prepared the following documents in order to get the license:
- · Organizational structure and management job description;
- · Framework for managing credit risk, market risk, operational risk and other relevant risks;
- · The model for internal assessment of capital adequacy;
- · Calculation of capital adequacy in accordance with the requirements of the National Bank, based on the budget presented in the business plan;
- · Accounting policy.
The license fee is set at GEL 200 000 (In accordance with the Law of Georgia on License and Permission Fees).
3. Requirements and Stages for Licensing Digital Bank
Stage 1: Proof of Digital Bank Concept
Concept – Business Plan:
The applicant should be able to demonstrate that it has a sustainable business model of digital banking that is not just a general concept.
The document of concept of Digital Bank should show the innovativeness of the product and compliance with the concept of digital banking. The document should provide information about the channels used for providing the services and other characteristics.
Digital bank should be a business model that has a potential to increase access to finance, reduce the cost of financial intermediation.
A Business plan document should include:
· Details on how the applicant intends to conduct its business and progressively meet the requirements for obtaining a full banking license;
· Financial and operational goals, relevant quantitative and qualitative benchmarks and deadlines that will be used to assess the success of the activity
Technological criteria:
The digital bank should meet the following technological criteria (inter alia, combination of only few from the below listed can be acceptable):
- · Provide banking services mainly through digital channels;
- · Use materially new technologies and / or innovative technological business models for the local market when providing banking services;
- · Focus on developing open banking and wholesale banking as a service business model;
- · Both external and internal banking modules are based on the API interface and the technological infrastructure relies on a modular arrangement (e.g. according to the principles of BIAN Standard);
- · Have digital technological means for user identification, authentication and can provide this service to the third parties
Business Termination Plan:
The applicant should have a business termination plan and deal appropriately with technology-related risks. The termination plan must include:
- · The list of triggers upon which the termination plan will take effect;
- · The organizational unit and persons responsible for triggering and smooth implementation of termination plan;
- · Identification and mitigation of material risks that could hinder the execution of the plan;
- · Mechanisms for minimizing risks for consumers and the financial system;
- · Channels and resources that will be used to make settlements with customers;
- · Analyze the risks of money laundering and terrorism financing during the process of providing services through electronic channels and their mitigation measures.
- · Meet the requirements for obtaining a banking license defined under the legislation of Georgia
The business plan as well as business termination plan submitted by the applicant shall be subject to periodical review and development in parallel with the digital bank licensing process
Stage 2: Banking Infrastructure Set Up Period, Initial Model Testing on Insiders, Testing Information Systems
At the next stage, the license holder should pass a proof of concept test, which involves examining the business model in a test environment. In addition, the bank must submit:
· The penetration test on the full operating environment of the bank, security systems assessment and network audit reports conducted by independent third party.
· Audit and risk assessment for the outsourced third party systems and cloud service providers.
Stage 3: Limited Digital Bank
Upon successful completion of the second stage, the entity should be allowed to conduct banking operations in the real environment within the limits set by the National Bank. These limits may include:
- · Attracting deposits and equivalent credits;
- · Liquidity;
- · Use of complex financial products (e.g. complex derivative and structured products). This does not imply restrictions on the use of technologically complex products.
- · International operations
Stage 4: Full Digital Bank
- · Minimum capital requirement - GEL50,000,000;
- · Alternative liquidity requirements; instead of computing the LCR-NSFR, the simple liquidity coverage ratio is calculated in proportion to the attracted funds; the initial limit is 100%.
- · Restrictions on banking operations. Banking transactions are allowed only for insiders participating in the test
- · Terms, conditions and benchmarks to limit systemic risk, and test the potential of a proposed business model. Certain terms may include direct or modified operational goals and respective quantitative and qualitative benchmarks stemming from the business plan.
During the review of the documentation and information submitted for obtaining a banking license, the National Bank has the right to request, within its authority, any additional information necessary to make a reasoned decision in that particular case.
All documents should be originals or notarized copies. Documents from abroad should be apostilled / legalized.
The process of digital bank licensing can go on for no more than 3 years. Digital Bank may additionally request the extension of this process for not more than 1 year.
At present, two digital banks Peysera Bank Georgia JSC and Hesh JSC have been created in Georgia. Both banks will work in a test mode for 7 months after their establishment, and they will be limited in carrying out banking activities, such as issuing any loans, cash and non-cash payments, etc. The list of permitted activities may be changed gradually by the decision of the National Bank of Georgia.
If you want to be next to open bank account and get a license in compliance with all the rules, the LTA team is ready to support you step-by-step and help you to simplify the process.
DISCLAIMER: This is not a legal or tax advice. Our opinion is not binding for any court or tax authorities. Any kind of investments bears risks. Using the website does not trigger lawyer / accountant – client relationship.
[1] see Chapter 21 of the Law of Georgia on the Activities of Commercial Banks. Also see: (Regulation on the Fit and Proper Criteria for Commercial Bank Administrators).
[2] For detailed list of information to be submitted, please refer to Article 3 of the Law of Georgia on the Activities of Commercial Banks.
