The Rise of Digital Banks: Navigating the Regulatory Landscape in Georgia

The financial world is undergoing a profound transformation, with digital banks emerging as powerful disruptors challenging traditional banking models. These institutions, often without physical branches, leverage technology to offer banking services entirely online or via mobile apps, promising greater convenience, lower fees, and innovative user experiences. But how are they regulated, especially in a dynamic market like Georgia?

What Defines a Digital Bank?

Digital banks, also known as neobanks or challenger banks, are financial institutions that operate primarily, or exclusively, through digital channels. They typically offer services like:

• Online current and savings accounts

• Digital payments and transfers

• Budgeting tools and financial insights

• Loan products, often with streamlined application processes

Their appeal lies in their agility, customer-centric approach, and often lower operational costs, which can translate into more competitive pricing for consumers. They leverage technologies like artificial intelligence (AI), machine learning, and cloud computing to create seamless and personalized banking experiences.

The Global Regulatory Approach to Digital Banks

Regulators worldwide face the challenge of supervising these agile, technology-driven entities within frameworks traditionally designed for brick-and-mortar banks. Common regulatory approaches include:

• Dedicated Digital-Only Licenses: Some jurisdictions have introduced specific banking licenses tailored for digital-only institutions, often with adapted capital and operational requirements.

• Existing Banking Licenses: In other markets, digital banks operate under traditional banking licenses, requiring them to meet the same stringent prudential and conduct regulations as conventional banks, but with adaptations for their operational model.

• Regulatory Sandboxes: Many regulators provide "sandboxes" or innovation hubs, allowing digital banks and fintechs to test new products and services in a controlled environment, often with temporary relaxations of certain rules.

The consistent global theme is the need to balance fostering innovation with maintaining financial stability, consumer protection, and robust AML/CFT safeguards.

Digital Banks and Regulation in Georgia: A Strategic Path

Georgia, with its strong emphasis on digital transformation and a forward-looking National Bank of Georgia (NBG), presents an intriguing landscape for digital banking. While Georgia does not currently have a separate, specific "digital bank license," the NBG's approach allows for the operation of digitally-focused financial institutions under the existing regulatory framework, demonstrating flexibility and a willingness to embrace innovation.

Key aspects of how digital banks are regulated and operate in Georgia's context:

• Existing Commercial Bank Licensing: A digital bank aspiring to offer full banking services (like deposit-taking and lending) would typically need to obtain a commercial bank license with loosened minimum capital requirement (that, over the course of three years will gradually increase to that of a commercial bank) from the NBG, adhering to the requirements set out in the Law of Georgia on Commercial Banks and related NBG ordinances. This means meeting:

  • Prudential Requirements: Including capital adequacy, liquidity, and risk management standards.

  • Governance Standards: Strong corporate governance and internal control frameworks.

  • Consumer Protection: Adherence to robust consumer rights and data protection regulations.

  • AML/CFT Compliance: Rigorous Anti-Money Laundering and Combating the Financing of Terrorism protocols.

• Focus on Technology and Cybersecurity: The NBG places significant emphasis on the technological infrastructure, cybersecurity resilience, and operational continuity of all licensed financial institutions. For digital-first entities, demonstrating cutting-edge yet secure technology is paramount.

• Fintech Innovation Focus: The NBG actively promotes fintech development and engagement. While not a specific "digital bank" license, the NBG's openness to technology and its ongoing work in areas like Open Banking, Instant Payments and CBDC research creates a conducive environment for digital-first financial services.

• Future Adaptations: As the digital banking landscape evolves globally, the NBG continues to monitor international best practices. It's plausible that future regulatory adjustments could introduce more tailored frameworks, balancing agility with necessary oversight.

Clarsen's Role in Empowering Digital Banking in Georgia

Establishing or operating a digital bank in Georgia requires a deep understanding of the NBG's multifaceted regulatory expectations and a strategic approach to compliance. At Clarsen, our unique structure and expertise position us as the ideal partner for institutions navigating this space.

We offer comprehensive advisory services for digital banks and aspiring digital financial innovators, including:

• Licensing and Authorization Strategy: Guiding through the NBG's licensing process for commercial banks or relevant payment service provider licenses.

• Regulatory Compliance Frameworks: Developing and implementing robust prudential, conduct, consumer protection, and AML/CFT compliance programs tailored for digital operations.

• Technology and Cybersecurity Advisory: Ensuring your digital infrastructure meets the NBG's stringent security and operational resilience requirements.

• Governance and Risk Management: Establishing sound corporate governance and comprehensive risk management frameworks for a digital-first model.

• Strategic Regulatory Engagement: Facilitating proactive and effective communication with the National Bank of Georgia.

The digital banking revolution offers immense opportunities for financial innovation in Georgia. By partnering with Clarsen, digital banks can ensure they build a foundation that is not only innovative but also robustly compliant and strategically positioned for long-term success.