Crowdestate has achieved another important milestone in becoming a regulated alternative finance institution, and June 21, 2021, is an important date for both us as well as for all our investors. With its decision (No 4.1-1/82, dated June 21, 2021), the Estonian Financial Supervision and Resolution Authority (EFSA) has granted Crowdestate a payment institution license.
The payment institution license allows Crowdestate to provide its clients with all payment and e-money services, including the opening of payment accounts and fulfilling the payment instructions.
Why the payment institution license?
Crowdestate has been operating the segregated Client Account since early 2015, and as such, the segregated Client Account falls under the regulation of the European Payment Services Directive (PSD2). While preparing for our international expansion, we were surprised to learn that the same PSD2 directive is interpreted quite differently by the regulators in different European Union member states. The more liberal regulators (like the Estonian FSA) considered the Client Account and the related payment services to be falling under the exemptions of the PSD2 directive, and the more strict ones had an exactly opposite opinion.
It became clear that without having a payment institution license, Crowdestate’s expansion plans would be seriously endangered or, in the best case, limited to the small number of more liberal European Union member states.
Parallelly, the European Parliament was working on the draft regulation of the European Crowdfunding Service Providers, and the topic of payments related to crowdfunded projects has been included in the early drafts of the regulation. As soon as the clear outline of the European Crowdfunding Service Providers’ regulation (currently adopted as Regulation EU 2020/1503) was published in early 2019, we carried out an assessment of our current business model to understand the implication of the regulation and found out, that obtaining the payment institution license along with the crowdfunding license is unavoidable unless we change our business model and outsource the payment services to already operating payment institution.
Crowdestate started the preparations for the application process in late 2019 and submitted its license payment institution license application in late October 2020. Over the next 6 months, we worked closely with the Estonian FSA to ensure that all our internal rules and regulations, processes, documentation, and technical capabilities were in line with the requirements of the Payment and E-money Institutions Act. During the application processing period, we provided the Estonian FSA with 10 rounds of answers to their close to 200 business-specific questions.
Our internal application management team was closely supported by the team of external lawyers led by Ms Kirsti Pent from TGS Baltic AS.
Changes in the management structure
The licensing process has resulted in some changes in Crowdestate’s governance structure:
– the founder and the former CEO Mr Loit Linnupõld has taken the position of the Chairman of the Supervisory Council;
– Mr Kristjan Mauer, the country manager of Crowdestate Estonia, has taken the position of Group CEO;
– Mr Robert-Mihai Butoi, the country manager of Crowdestate Romania, has taken an additional role as a member of the Group Management Board and the Group Chief Risk Officer.
Becoming a fully licensed payment institution has a number of benefits for both Crowdestate as well as for all its investors.
Being a regulated payment institution provides clear assurances to our investors that all their funds held on Crowdestate’s investment accounts are kept and managed safely. Crowdestate’s capital requirements are now officially related to the Group’s business volumes – the higher the number of monetary transfers, the more capital we have to provide. Quarterly reporting allows the Estonian FSA to monitor our business activities and capital adequacy ratios.
All investors’ investment accounts with Crowdestate will parallelly become payment accounts, and we will roll out the functionality to execute payouts to third-party bank accounts soon. Additionally, all investment accounts will have their unique IBAN numbers soon (Crowdestate has been assigned with EE**55 prefix for its investment accounts), so adding funds to the investment accounts becomes even simpler than before. Compared to the other crowdfunding platforms using outsourced payment service providers, Crowdestate’s solution will eliminate the need for the clients to have an additional payment account with the third-party payment institution, allowing us to keep the processes simple and clear.
Our API, which is currently used between our back- and front-end applications as well as for exchanging information with LHV Bank AS, will be publicly available for the regulated third parties according to the Open Banking principles. We hope that the opening of our API to third parties will allow them the create new exciting services and, thus, increase the overall satisfaction of the customers.
Obtaining a payment institution license has been a great learning exercise for Crowdestate, forcing us to review and update a large part of our internal rules and regulations. Looking forward to the upcoming crowdfunding license application process, we are feeling confident that our house is in order and that we have done at least half of the preparations needed for the crowdfunding license application process.
Businesswise, we will passport our brand-new European payment institution license to other European Union member states, starting from our current countries of operations.
Crowdestate is one of the very first real estate crowdfunding platforms, established in early 2014.
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