Money Remittance Business as a Regulated Activity Under the ZAG

A payment service that is very often offered unknowingly and which requires a license is the money remittance business within the meaning of Section 1 (1) sentence 2 no. 6 of the Payment Services Supervision Act (ZAG). This occurs in situations where a service provider accepts funds without setting up a payment account for the sole purpose of transferring them to a payee specified by the payer or to the payer’s payment service provider. Conversely, a money remittance service is also provided when a service provider accepts funds for the payee designated by the payer without setting up a payment account and makes them available to the payee. Both types of money remittance services require prior obtaining of a BaFin license for the provision of payment services pursuant to Section 10 (1) ZAG. However, money remittance transactions are often provided by companies that offer such services merely as an additional service. In particular, platform operators that connect supply and demand often have an interest in processing payments made between platform users on the platform by accepting them and then paying them out to the actual payee, possibly after deducting their own fees. If such additional services are provided, they often fulfill the factual requirements of money remittance business. However, if providers offer these services—knowingly or unknowingly—without the necessary authorization from BaFin pursuant to Section 10 (1) ZAG, BaFin may take supervisory measures to have the transactions immediately stopped and winded down.

BaFin Authorization for Money Remittance Business Pursuant to Section 10 (1) ZAG

Companies that wish to make money remittance transactions a deliberate part of their business model generally require prior written authorization from BaFin. The application for authorization must meet the usual requirements for license applications under the ZAG. In particular, the applicant must be able to demonstrate that it has two professionally qualified and reliable directors who can devote sufficient time to their management tasks. In addition, the owners controlling the applicant company must also be reliable. The business organization and internal controls within the company must comply with regulatory requirements, in particular those under the ZAG, the GwG, and the DORA. The administrative practice of BaFin under the ZAG-MaRisk must also be observed. A minimum amount of EUR 20,000 is required as initial regulatory capital. BaFin generally considers money remittance transactions to pose an increased risk of money laundering and terrorist financing, which is why particular focus should be placed on money laundering compliance and the consistency of the presentation of the planned business model when preparing applications for authorization for money remittance transactions. The procedure takes three months from the submission of the complete application documentation, with the period starting anew in the event of additional requests. For this reason, authorization procedures in accordance to the ZAG usually take six to twelve months. The quality of the application documents submitted has a significant influence on the actual duration of the procedure, which is why the utmost care should be taken when preparing an application.

Exemptions Under Section 2 ZAG May Allow Money Remittance Transactions Without a License

In addition to obtaining your own license, in individual cases it may also be possible to avoid the applicability of the licensing requirement by making use of an exemption within the meaning of Section 2 ZAG. This option is particularly interesting if the provision of money remittance transactions does not constitute the core of the service actually provided, but is rather to be offered as a by-product. A relevant exemption may apply pursuant to Section 2 (1) No. 2 ZAG in situations where the service provider has a genuine mandate from the payer or payee to negotiate or conclude a contract and acts as a central regulator or commercial agent in this respect, whereby BaFin interprets this exemption restrictively and it is not sufficient, for example, if the service provider has a corresponding power of attorney on both sides of a contract. The exemption only applies if the service provider has been authorized by either the payer or the payee. A further exception is provided for in Section 2 (1) No. 5 ZAG for cash-to-cash currency exchange operations, Section 2 (1) No. 6 for certain payment transactions using checks, bills of exchange, or other specific instruments in paper form, and Section 2 (1) No. 9 ZAG for contributions by technical service providers to payment services, provided that they do not themselves come into possession of funds. In practice, the exemptions regulated in Section 2 (1) No. 10 ZAG are also frequently applicable. According to this provision, services based on payment instruments that can only be used for payments on the business premises of the instrument issuer, in limited networks of service providers, or for a very limited range of goods or services are not considered payment services. In addition, the ZAG provides for numerous other exemptions for specific business areas that may be relevant in individual cases.

The lawyer responsible for advising on applications for licenses for money remittance business with BaFin and on the regulatory design of business models to avoid money remittance transactions requiring a license is Attorney Dr. Lutz Auffenberg, LL.M. (London).