Bank account opening in Estonia - Fintech vs. Bank
In this article we will illustrate the main differences between account opening in standard banks (credit institutions) and Fintechs. This is certainly the TOP question that everyone creating a company in Estonia has.
For the sake of this article it is important to say that by Fintechs we understand financial institutions that are opening IBAN accounts for their customers and are not considered as credit institutions. For example, TransferWise (or Wise now), Paysera, Revolut Payments (before switching to the banking license in Lithuania). By “standard” banks we understand institutions that are operating under banking license and are defined as a credit institution - for example - Swedbank, SEB, Luminor, JP Morgan Chase. etc. There are several differences between Electronic Money Institutions / Payment Service Providers and Credit Institutions. This article will illustrate the main differences that could be important for business owners when opening accounts in these institutions.
Safety
The most popular difference between Fintechs and Credit Institutions is assumption that Fintechs do not protect their customers' money.
According to the EU regulations (Directive 2014/49/EU) credit institutions are required to protect money of their customers by a so called Deposit Guarantee Scheme. According to the EU rules Deposit guarantee schemes:
1. protect depositors' savings by guaranteeing deposits of up to €100,000;
2. help prevent the mass withdrawal of deposits in the case of bank failure, which can create financial instability.
The logical question here is why does standard banks protect customers' funds, but Fintechs don't? Answer is quite simple. The main reason for protecting customers' money for standard banks is that they are operating with it. Standard banks make profit by lending customers' money and therefore they are required to insure it up to a certain amount in case if something goes wrong.
According to EU Regulations, licensed Payment Service Providers are required to store the money of their customers separate from their own operating money (Directive (EU) 2015/2366, Article 10.1). The main reason is that customers' money can't be used for Fintech's operating needs. Basically, if Fintech will go under and won't be able to pay salaries to their employees, Fintech won't be able to use customers' funds to finance their own operations.
Conclusion from a safety point of view is that there is a reason why standard banks have to participate in Deposit Guarantee Schemes and Fintech's don't. That reason is that standard banks are using customers' funds to make profit and therefore they must apply a certain insurance for that. In a situation if Fintech will become insolvent and will be forced to close down its operations, the customers won't lose their funds, because they will be kept separate from the funds of the Fintech. Technically this means that your funds in Fintechs are insured for the whole amount while in credit institutions they would be insured for up to EUR 100.000.
However, another important aspect that should be mentioned here is what happens if the credit institution where Fintech stores customers' money becomes insolvent? Theoretically Fintech customers should be able to apply for Deposit Guarantee Scheme for the insured amount in the credit institution. However, this has never happened before and there is no precedent on what would happen with funds of Fintechs' customers if Tier-1 credit institution would become insolvent.
2. Ability to open an account (remotely)
This point in fact could be even more important than the 1st one, because it all comes down to whether or not a customer is able to open a bank account in a standard credit institution in Estonia.
As a general rule all Estonian credit institutions are requiring a local connection with Estonia for companies willing to open business accounts with them. Local connection could be one or several of the following:
Employees in Estonia;
Physical office in Estonia;
Several business partners in Estonia. In most cases accountant and legal service provision company won't cut it;
Additionally to physical connection to Estonia, most of the credit institutions in Estonia will require a personal visit of the Ultimate Beneficial Owner for identification purposes before opening an account. All the documents and account opening forms customers will be able to fill in remotely, but for the last step - Identification - customers will have to physically arrive in the bank. This is the situation on February 4, 2021. Hopefully remote ID will soon be possible for credit institutions in Estonia as well.
All Fintechs that are opening corporate accounts are opening accounts remotely. None of fintechs has the requirement of physical connection to Estonia, however most of them will ask for a proof showing that your company operates in Estonia. As proof you can use invoice for a certain service (utility bill) or a tax certificate showing the registered address of your company.
3. Legal aspects (share capital contribution, tax payments, etc.)
According to the Commercial Code of Estonia § 520 (4) share capital of the company can be contributed from the account that is opened in credit or payment institutions within EEA. Therefore, it means that the share capital can be contributed also from Fintechs that are registered in EEA.
In order to increase the share capital via Company Registration Portal online, it is necessary to submit digitally signed statement in Estonian showing that the company has received the share capital to its account. Obviously it is unreasonable to expect that all Payment Service Providers registered within EEA are able to issue digitally signed statements in Estonian. Therefore, it would be important to make sure that the Fintech where you are opening an account is able to issue at least digitally signed statements. This would mean that you would have to translate it with a sworn translator in Estonia for approximately EUR 50.00. However, there are several Fintechs that are operating in Estonia and are able to issue digitally signed statements in Estonian (Transferwise, Paysera) which are valid to be submitted immediately to the Company Registration Portal.
All Estonian credit institutions (standard banks) are able to automatically issue such statements at no extra cost.
4. Other aspects to be considered when choosing Fintech vs Standard Bank
Fee comparison is an important aspect when you choose your financial service provider. By default Fintechs are known to be cheaper than the standard banks, especially when it comes down to international transfers which are important for e-Resident Estonian companies.
International vs SEPA payments. Several Fintechs are able to provide IBANs only for SEPA transfers. This means that for all international payments customers will have to use IBAN of the payment institution by showing the payment institution as the beneficiary of the transactions. While this shouldn't be a big issue for companies that are working within the EU, this can get uncomfortable for companies engaging in international transfers. Our recommendation for companies working with international customers is to open accounts with payment service providers who are able to provide you with international transfer options (Transferwise, Revolut Business).
All standard banks in Estonia are able to provide international transfer options by applying additional transfer fees.
Loans for business. None of the Fintechs will be able to issue a loan for your business. Therefore, if this is important to you, then you should open an account with credit institutions.
CONCLUSION
For non-resident Estonian company owners our recommendation is to start their business with a payment account in Fintech. As we showed in this article, your funds will be safe and you will save some time and money which you would spend while going through the account opening process in standard banks.