For any company wishing to enter the payment industry, one of the inevitable decisions they’ll need to make is whether they’ll apply for an Electronic Money Institution (EMI) license or operate as a Payment Service Provider (PSP).
Each of these has its specific requirements that companies need to take into account depending on the services they want to offer to their customers. For example, the initial capital requirements for each differ significantly. Likewise, the payment accounts companies are able to provide their customers also varies.
What makes it challenging is that there’s so much information available, it’s often difficult to know where to start. Fortunately, we’re here to help, and with this post, we’ll delve deeper into the respective licenses, their requirements and what services they entitle companies to offer.
What Is a Payment Service Provider (PSP)?
A Payment Service Provider, also known as merchant service providers, help merchants to accept payments through debit or credit cards and bank transfers. To do this, they typically provide merchants with a merchant account and a payment gateway that allows businesses to accept their payments.
A Payment Institution (PI) is a specific type of payment service provider that was created in terms of Directive 2007/64/EC, also known as Payment Services Directive 1 (PSD). The activities of payment institutions are now regulated in PSD2 and its national implementation by the EU Member States.
In terms of PSD2, payment institutions can offer their customers the following services:
- The execution of payment transactions which includes credit transfers, direct debits through payment cards or similar devices.
- The issuing and/or acquiring of payment instruments
- Money remittance services Forex services
- Ancillary services related to their primary services
- The granting of credit.
Broadly speaking, payment institutions can provide the same services as electronic money institutions. The main difference between the two is that payment institutions are unable to issue electronic money.
What Is an Electronic Money Institution (EMI)?
An electronic money institution is a company or organisation that has been authorised to issue electronic money in accordance with a specific EU Member State’s implementation of Title II of the directive 2009/110/EC, Also known as the Electronic Money Directive 2 (EMD2).
In addition to the services offered by traditional PSPs, electronic money institutions are able to issue electronic money. The account holder then has a claim against the issuing institution for the amount in the account and can be used by the account holder as a payment instrument to effect payment transactions.
Besides being able to issue electronic money as described above, electronic money institutions can also provide payment services that can be provided by payment institutions as provided for in Annex 1 to the Payment Services Directive 2 (PSD2), also known as Directive (EU) 2015/2366.
These services include:
- The execution of payment transactions,
- Currency exchange and conversion services,
- Safekeeping activities,
- Storage and processing of data, or
- Operation of payment services as provided for in Article 18(1)(b) of the PSD2.
It’s important to note that not all EMIs can provide all these services because not all EMIs are automatically authorised to provide these services when a licence is granted. As a result, companies or organisations who apply to be approved as an EMI with one of the national regulators in the EU must indicate in the application what type (or which types) of payment services it wants to get authorisation for.
It’s also important to understand what payment services are related to the issuance of e-money and what payment services are unrelated to that. This is because the prudential requirements differ for related and unrelated payment services provided by electronic money institutions.
What is Electronic Money?
To understand this difference and distinguish between EMIs and PIs, it’s essential to understand what electronic money is.
According to the European Central Bank (ECB), electronic money is a monetary value stored electronically, whether on a card, phone, or the internet. It represents a claim against the issuer of electronic money.
The definition of electronic money in the EMD2 also includes a magnetically stored monetary value that can be used as a form of payment and is supported by other entities, not including the issuer. As a result, the devices on which the monetary value is stored must be commonly accepted and used as a payment method.
In simple terms, according to these definitions, electronic money is a digital alternative to cash.
Due to the above, any company or organisation that wants to issue an instrument that qualifies as electronic money in terms of the above definitions would need to apply to be licensed as an EMI.
Although, at first glance, the issuing of electronic money seems to be the only difference between an electronic money institution and a payment institution. There are, however, several other distinctions between the two.
Article 4(12) of PSD2 provides that a payment account is an account held in the name of one or more users of a specific payment service to make payment transactions. Likewise, Article 2(3) of the Directive 2014/92/EU provides that a payment account is an account held in the name of one or more customers and which is used to execute payment transactions.
Under these definitions, an account used for payment transactions is considered a payment account. It’s important to note that EMIs, PIs, and banks can provide their customers with payment accounts. The functionality of these accounts, however, differ based on the relevant institution.
So, for example, when an EMI opens an e-wallet for a user, users are entitled to use the e-wallet as they wish, and they can withdraw money from it, make purchases, pay their bills, or transfer amounts to other bank accounts. What distinguishes it from a deposit-taking account with a bank is that electronic money stored in an e-money account cannot be used by any non-electronic means.
What distinguishes the payment account held with a payment institution from an account held with banks or electronic money institutions is that the account is far more limited. This is simply because there has to be an identifiable transaction for which the funds are sent to a payment processor.
So, in simple terms, then, when money is transferred to a payment account held with a payment institution, there has to be a specific payment transaction for that money.
This, ultimately, means that, unlike an electronic money institution, a payment institution cannot hold money on behalf of an account holder.
Initial Capital Requirements
Because payment institutions cannot hold money on behalf of account holders and that there has to be an identifiable transaction for transferring the money into the account, payment institutions have far lower initial capital requirements than electronic money institutions.
Here, Article 7 of PSD2 requires payment institutions to have initial capital of:
- EUR 20.000 when the payment institution only offers money remittance services
- EUR 50.000 when the payment institution offers only payment initiation services
- EUR 125.000 when the payment institution offers only the services listed in points 1 – 5 of Annex I of PSD2.
In addition to the above initial capital requirements, payment institutions are also required to hold their funds equal to or above the initial capital requirements based on the services they wish to offer.
In contrast, Article 4 of the EMD2 requires that electronic money institutions have an initial capital of EUR 350,000.
Besides the initial capital and other capital requirements relating to the licensing of electronic money institutions or payment institutions, there’s also a difference in the respective application fees that need to be paid.
Here, we’ll look at these application fees in more detail. The respective application fees for some different countries are listed below:
- Belgium. In Belgium, the application fee for an EMI licence starts at EUR 1.500 for each payment service and goes up to EUR 4.500. The application fee for a PI licence is EUR 1.500
- Cyprus. The application fee for an EMI licence or a PI license in Cyprus is EUR 5.000
- Czech Republic. The application fee for an EMI licence or a PI license in the Czech Republic is EUR 1.850
- Estonia. The application fee for an EMI license or a PI license in Estonia is EUR 1.000
- Germany. The application fee for an EMI license in Germany is EUR 11.900. The application fee for a PI license is EUR 6.150 when only one payment service is provided and EUR 8.515 when several or all payment services are provided
- Lithuania. In Lithuania, the application fee for an EMI licence is EUR 1.463, whereas the application fee for a PI licence is EUR 898
- Luxembourg. In Luxembourg, the application fee for an EMI licence or a PI license is EUR 15.000
- The Netherlands. The application fee for an EMI licence or a PI license in the Netherlands is EUR 6.800
- United Kingdom. In the United Kingdom, the application fee for an EMI licence is GBP 5.000, and the application fee for a PI licence varies between GBP 1.500 and GBP 5.000.
It goes without saying that each application for an EMI license or a PI licence involves legal fees, in addition to the application fees listed above. Such legal fees vary from case to case, and can be assessed on the basis of the scope of work.
Electronic money institutions and payment institutions must comply with the specific safeguarding requirements set out in EMD2 and PSD2. However, it’s important to note that payment institutions that only offer payment initiation or account information services are not subject to any safeguarding requirements.
Also, regarding safeguarding, funds received by electronic money institutions for services related to e-money issuance and unrelated payment services are not allowed to be kept in the same safeguarding account.
Frequently Asked Questions
Navigating the EMI and PI landscape can be complex. As a result, we’ve compiled a list of some frequently asked questions.
1. Can only electronic money institutions open e-wallets?
The current legislation does not make any provision for the definition of an e-wallet. It does, however, specifically define a payment account. As stated above, both EMIs and PIs can offer customers payment accounts, with the payment account for a PI being more limited compared to that of an electronic payment institution.
2. Can both EMIs and PIs issue prepaid cards?
Cards will only be issued through a payment system like Visa, Mastercard, or similar. Both electronic money institutions and payment institutions can then issue “co-branded” prepaid cards, which will be issued by the card issuer but under the name and branding of the payment or electronic money institution. Keep in mind, though, that only electronic money institutions can issue and store electronic money.
3. Is it easier to get a PI license?
The process to apply for authorisation is about the same for both PIs and EMIs. However, as stated before, EMIs have more stringent and more significant initial capital requirements than PIs. Also, regulators tend to scrutinise their applications more carefully.
4. Are banks more willing to work with EMIs?
Banks may be more willing to work with electronic money institutions because of the more intense scrutiny of their applications and the higher initial capital requirements.
5. Can a PI license be upgraded to an EMI license?
Many regulators do offer this option. However, it’s important to note that companies who want to do this will need to comply with the requirements like the initial capital requirement and submit the required documents.
The Bottom Line
Hopefully, this post helped illustrate the different licenses available to companies in the payment industry. Ultimately, the choice which to apply for depends on the goals and requirements of the company concerned. For example, if the company only wants to offer payment services, a PI license would be the appropriate option.
Likewise, if a company wants to issue electronic money and offer its clients the option of having an account, an EMI license would be a perfect choice.