Banking licence

In plain words

Think of a bank as a warehouse that lends out part of what you store there. You can walk in and take your goods back at any time, but while they sit on the shelf, the warehouse rents some of them out and earns money doing it. Because that is risky, the state watches the warehouse closely and promises to make you whole, up to a limit, if it ever collapses.

A banking licence is the permission to run that warehouse. It lets a company take deposits from the public and use them to make loans, which is how banks earn most of their money. In return, a bank must hold much more capital than any other kind of financial firm, keep enough cash and liquid assets to meet withdrawals, plan for its own failure, and accept supervision of its finances, not only of how it treats customers. Its customers’ deposits are covered by a national deposit guarantee scheme, such as the Financial Services Compensation Scheme (FSCS) in the UK.

That combination, deposits plus lending plus insurance, is what makes a bank different from an EMI or a payment institution. An EMI can hold your money and move it, but it may not lend it, and it protects you through safeguarding rather than insurance. It is also why a banking licence takes years, not months, to win.

Illustration

From partner licence to full bank: what each route lets you do

Swipe sideways to see the whole diagram.

How it works

How a licensed bank works

Deposits come in, loans go out, and capital sits in between as the shock absorber.

1. 1

   Customers deposit money

   The deposit becomes a debt the bank owes the customer, repayable on demand or at the end of a fixed term.

2. 2

   The bank lends part of it

   Mortgages, business loans, overdrafts and cards. The gap between what it pays depositors and what borrowers pay is its main income.

3. 3

   Capital and liquidity absorb the shocks

   The bank’s own capital covers loans that go bad, and a buffer of cash and liquid assets covers withdrawals on a bad day.

4. 4

   Deposit insurance backs the customer

   If the bank fails anyway, a national scheme pays depositors back up to a limit per person, per bank.

What the customer seesBalance £10,000

What the bank holdsLoans, liquid assets and capital

Bank vs EMI vs sponsor bank

Founders usually compare three ways of giving customers an account. The app can look identical in all three. What changes is who holds the money, what can be done with it, and who the regulator calls when something goes wrong.

The sponsor route is often called Banking-as-a-Service. For how these trade-offs play out for neobanks, read BaaS vs EMI for neobanks.

Getting a banking licence in the UK

In the UK, a bank is a dual-regulated firm. The Prudential Regulation Authority (PRA), part of the Bank of England, supervises its financial safety: capital, liquidity, risk management and what happens if it fails. The FCA supervises its conduct: how it treats customers, how it fights financial crime and how it competes. Both must agree before a bank is authorised. ¹

Legally, what a new bank applies for is a Part 4A permission under the Financial Services and Markets Act 2000 that includes accepting deposits. The PRA leads the application and the FCA assesses it alongside. By law the regulators must decide within six months of a complete application, or twelve months if it is incomplete, but most of the work happens before the formal clock starts.

The PRA and FCA run a joint New Bank Start-up Unit for exactly this reason. Teams meet it early, test their business model and draft documents, and only submit once the regulators expect the application to be complete.

What the regulators expect to see

Mobilisation: licensed, but with limits

Raising tens of millions and hiring a full bank team before you even know whether you will be licensed is a hard sell to investors. Mobilisation solves that chicken-and-egg problem. The regulators can authorise a new bank with restrictions: it is legally a bank, but it may hold no more than £50,000 of deposits in total. ¹

During mobilisation the bank uses its new status to finish raising capital, hire the rest of its team, complete and test its systems, and run small pilots, often with staff as the first customers. The period is normally expected to last no more than 12 months. Once the regulators are satisfied that everything promised in the application is in place, the restriction is lifted and the bank can take deposits at scale, protected by the FSCS.

Mobilisation is not a lighter licence and not a sandbox. The rules are the same as for any bank. What is limited is the risk to the public while the bank finishes getting ready. If it cannot complete mobilisation, it is expected to hand back the licence in an orderly way.

Illustration

The path of a new UK bank

Swipe sideways to see the whole diagram.

The EU: credit institutions

EU law does not use the word “bank” as its legal category. It uses credit institution: a firm whose business is to take deposits or other repayable funds from the public and to grant credit for its own account. The rules come in two parts. The Capital Requirements Directive (CRD) covers authorisation, governance and supervision, and each country writes it into its own law. The Capital Requirements Regulation (CRR) applies directly everywhere and sets the detailed capital and liquidity rules, based on the international Basel standards. ²

The CRD sets a minimum initial capital of €5 million for a credit institution. That is the legal floor. Supervisors look at the business plan and usually expect considerably more, because a new bank tends to make losses for its first years.

Who grants the licence

In the euro area, every credit institution licence is granted by the European Central Bank as part of the Single Supervisory Mechanism. The application goes to the national supervisor, such as the Bank of Lithuania, the Central Bank of Ireland or De Nederlandsche Bank, which assesses it and proposes a decision; the ECB takes it. ³ Outside the euro area, the national supervisor grants the licence itself.

Once licensed, an EU credit institution can passport its services across the European Economic Area, either directly or through branches. This is why the choice of home country matters so much: the supervisor you pick is the one you will work with for years, wherever your customers are.

Country notes

• Lithuania has offered a specialised bank licence, a full credit institution licence with a narrower range of permitted activities, aimed at fintechs that want to take deposits and lend without becoming a universal bank. As everywhere in the euro area, the ECB grants the licence.
• Ireland became a common EU home for UK fintechs and banks after Brexit, because it is English-speaking and close to the UK legal system.
• The Netherlands and Germany host several digital banks and have experienced supervisors, but their processes are thorough and expect a full banking organisation from day one.

Deposits at an EU credit institution are protected by the national deposit guarantee scheme, harmonised at €100,000 per depositor, per bank. ²

The Gulf: digital bank licences

A digital bank licence is not a lighter licence. It is a full banking licence for a bank that serves customers only through apps, without branches. Gulf regulators have used the label to invite new, app-first banks into markets traditionally dominated by large local banks.

Saudi Arabia

SAMA, the Saudi Central Bank, set out a licensing framework for digital banks and has approved several since 2021. A Saudi digital bank is a full local bank: it is incorporated in the Kingdom, meets SAMA’s capital and governance requirements, and connects to national rails such as SARIE for instant transfers and mada for cards. ⁴ Founders who are not ready for that weight usually look first at SAMA’s payment and e-money licences or its regulatory sandbox.

United Arab Emirates

Onshore, the Central Bank of the UAE licenses banks, including digital-only banks, many of them backed by existing local banking groups. The two financial free zones are separate jurisdictions: Dubai’s DIFC, regulated by the DFSA, and Abu Dhabi’s ADGM, regulated by the FSRA, each authorise banking business in their zone under their own rules. Free-zone banks are generally limited in serving UAE retail customers and taking dirham deposits, so a consumer bank for UAE residents normally means a CBUAE licence.

Bahrain

The Central Bank of Bahrain is a single regulator for the whole financial sector. It licenses retail banks, including digital-only models and digital brands of existing banks, and runs a regulatory sandbox that fintechs often use before applying for a full licence.

Banking licences at a glance

Should you apply for a banking licence?

A banking licence is a business model decision before it is a regulatory one. It makes sense when lending on your own balance sheet, or deposit insurance, is what makes your product work.

A common path is to start on a sponsor bank or as an EMI agent, move to your own authorised EMI licence, and apply for a bank licence only when lending becomes central. Read why some fintechs outgrow the sponsor model for the step before.

Example: from wallet to lender

The same idea in other markets. A Lithuanian payments firm that wants to lend to small businesses across the EU might apply for a credit institution licence through the Bank of Lithuania, decided by the ECB, and then passport it. A Riyadh team building a consumer bank for young Saudis would go to SAMA for a digital bank licence, after first proving demand under a payment licence or the sandbox. A Dubai founder serving UAE residents in dirhams would need a CBUAE licence, not a DIFC one.

Common misconceptions

FAQ