In recent years fintech activity in the European Union (EU), especially in the United Kingdom (UK), has rivaled the leading US market. As a result, Europe has become a leading fintech hub, known for its well-structured regulatory landscape and vibrant startup ecosystem.
The EU has invested significant resources in developing a favorable and innovative regulatory framework by revising the Payment Services Directive (PSD2) and issuing various instructive guidelines (i.e., European Banking Authority Guidelines).
In addition, the EU passporting system for financial institutions enables firms authorized in any EU or European Economic Area (EEA) Member State to operate freely in any other with minimal additional authorizations. These regulatory tools helped level the playing field for international fintechs wanting to operate in the EU.
The Increasing Interest of US Money Transmitters to Obtain a Payment or E-Money License
Considering the above, it’s no surprise that over recent years, many US-based money transmitters have become interested in expanding their services to the EU, the UK, or in some cases, even to both. A good example of such a fintech is Stripe which currently holds an E-Money license granted by the UK Financial Conduct Authority and an EU E-Money License granted by the Central Bank of Ireland. By virtue of the latter and the passporting system, the company also provides its services in all other EU and EEA countries.
A company wishing to expand its financial services to EU/UK markets, must inevitably decide whether to apply for a Payment Institution License (Payment License or simply “PI” license) or an Electronic Money Institution License (E-Money License or simply “EMI” license).
The overwhelming amount of available information alone can make knowing exactly where to start challenging. That’s why we’re shedding more light on the topic by exploring the primary differences between the two licenses and by presenting the preferred jurisdictions.
Payment Institution vs. E-Money Institution: What Are the Main Differences?
Both Payment and E-Money Licenses have specific requirements that should be taken into account. For instance, the initial capital requirement and the scope of services offered are among the most critical aspects to consider during the initial planning phase.
The license requirements of Payment Institutions and E-money Institutions are contained in Directive (EU) 2015/2366, known as the revised PSD2, and Directive (EU) 2009/110/EC, known as the “E-Money Directive” or “EMD2,” as well as in their national implementations by the EU Member States. The EU Directives give certain discretion to the Member States regarding their implementation into national laws. This means that each EU Member State has its own version of the PSD2 and the EMD2, which may differ slightly from one another.
What is a Payment Institution Under the PSD2?
The Payment Institution License is arguably the most popular license-providing solution for payment platforms and online merchants all around Europe. Obtaining a PI license is an ideal solution for payment service providers processing corporate payments and money transfers of private individuals. Legally defined in the PSD2, the payment institution is “a legal person that has been granted authorization… to provide and execute payment services throughout the Union.”
Under Annex 1 of the PSD2, payment institutions are permitted to offer the following services:
- Payment account cash withdrawals and depositing;
- Execution of payment transactions (including direct debits, payment transactions through a payment card, credit transfers, and standing orders);
- Issuing of payment instruments and/or acquiring of payment transactions;
- Money remittance;
- Payment initiation services; and
- Account information services.
A great example of a payment institution is the Dutch fintech company, Mollie.
What is an E-Money Institution?
To define an E-Money Institution, we should first consider the concept of electronic money itself. The European Central Bank (ECB) defines e-money as an electronically-stored monetary value that may be widely used to pay entities other than the e-money issuer. In simple terms, e-money is the digital alternative to cash. It enables users to make cashless payments with money stored on a card, phone, or internet.
According to the above definition, a company wishing to issue e-money must apply for an e-money license.
E-money institutions provide their users with access to innovative financial services. EMIs offer e-money payment accounts that allow customers to execute payments without needing a bank account. E-money institutions are fintechs authorized to issue e-money in accordance with their specific EU Member State’s implementation of the EMD2.
What differentiates PIs from EMIs regarding services is that in addition to the services offered by PIs, EMIs can also issue electronic money. However, it’s important to note that EMIs are not able to:
- Offer bank accounts and
- Receive deposits (or offer deposit guarantees).
Central Register of Authorized PIs and EMIs
To increase transparency and ensure robust consumer protection within the European Single Market, EBA established a central register containing information about PIs and EMIs authorized or registered within the EU and the EEA.
Nowadays, the European market hosts around 500 licensed EMIs. For instance, the widely-known fintech company Wise is authorized as an Electronic Money Institution by the UK Financial Conduct Authority (FCA). In addition, Wise is a Payment Institution – authorized by the National Bank of Belgium – with passporting rights across the EU and the EEA.
At first glance, it may seem that e-money issuance is the only substantial difference between PIs and EMIs. However, there are other important distinctions between the two.
What is the Difference Between PI and EMI Accounts?
PIs and EMIs accounts are not identical to bank accounts, contrary to what many customers may think. Therefore, let’s examine account functionality by the type of institution that offers them.
For instance, a PI account is much more limited than an EMI account because it cannot hold money on behalf of its users.
- Funds entering a PI account are expected to be spent, transferred, or withdrawn fairly quickly.
- In contrast, the EMI license allows users to open e-wallets and use the account as they wish, e.g., to make online purchases, withdraw money, pay their bills, etc.
These significant differences in functionality translate to significant differences in capital requirements for establishing each institution.
What are the Capital Requirements for PIs and EMIs?
The initial capital requirements for PIs are far lower than the ones for EMIs.
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; and
- EUR 125,000 when the payment institution offers only the services listed in points 1 – 5 of Annex I of PSD2.
In addition, the payment institution’s own funds shall not fall below the amount of its initial capital.
In comparison, Article 4 of the EMD2 requires that EMIs have an initial capital of not less than EUR 350,000.
What Are the Safeguarding Requirements for PIs and EMIs?
In addition to the initial capital and fund requirements, PIs and EMIs should also comply with the so-called “safeguarding requirements.” However, PIs that only offer payment initiation or account information services are not subject to any safeguarding requirements.
Pursuant to the safeguarding requirements, PIs and EMIs should segregate the user’s funds from all other held funds. If the funds are still held at the end of business following the day of receipt, the funds must be deposited in a separate safeguarding account with an authorized credit institution or invested in liquid assets.
Simply put, this segregation aims to protect users’ funds in the event the PI or EMI goes bankrupt. The segregation also ensures that the funds can only be used to complete the transaction as instructed.
What Are the Preferred Jurisdictions from which to Obtain a PI or EMI License?
Europe is home to some of the world’s most vibrant and innovative fintechs. However, a question most frequently asked by fintech executives is, “What are the preferred European countries from which to obtain a license?” This is a legitimate question because certain countries stand out from the rest.
Some of the European countries that emerged as the best jurisdictions from which to obtain a license are:
- The Netherlands;
- The United Kingdom;
- Estonia; and
This article focuses on the first two: the Netherlands and the United Kingdom.
Both stand out for various reasons, but compared to the others, they are mainly known for their regulator efficiency and overall political and economic stability. Their regulators are known for their “gold standard” practices in terms of regulatory compliance and AML/CFT - the ultimate strategic advantage for the long-term performance of any fintech.
While countries like Lithuania and Estonia charge relatively low fees for license applications, they do not offer the same high level of regulatory and compliance oversight.
PI or EMI License From the Netherlands
Among the EU countries, the Netherlands consistently ranks high in the ratings. The country is known for being one of the most fintech-friendly jurisdictions in Europe. It has a clear regulatory framework and an efficient financial regulator. For instance, in most European countries, the timeframe for obtaining a license varies from 12 to 15 months. The Dutch regulator, however, is known to issue licenses more quickly. Anticipating a nine-month period is realistic; even six is a possibility. The fintechs with Dutch licenses operate mainly in the Digital Payments, Investment, and Alternative Lending industries.
The license application can be submitted in English, which is a significant advantage compared to most other European countries that accept applications only in the local language. Last but not least, a Dutch license opens the doors to the financial markets of the rest of the EU and EEA countries.
The fee for an EMI or PI license in the Netherlands is EUR 6,800.
PI or EMI License From the United Kingdom
As the leading European fintech hub for the past several years, the UK has set the global benchmark for regulatory innovation, with key initiatives such as the FCA’s Regulatory Sandbox, Global Financial Innovation Network (GFIN), and the Open Banking framework. Over the past few years, the Financial Conduct Authority has taken measures to reduce the regulatory burden for fintechs through its Innovation Hub scheme.
Post-Brexit, the UK still follows most PSD2 and EMD2 legislation and guidelines, with minor changes. However, after the UK left the EU, UK fintechs could no longer benefit from the EU passporting rights. Therefore, a fintech wishing to operate in the EU and the UK must apply for two separate licenses. The Financial Conduct Authority is also particularly known for its regulatory-friendly approach.
For a complete application package – and without needing further information – the FCA will make a decision within 3 or 12 months for an incomplete application. The application fee for an EMI license is GBP 5,000, while the application fee for a PI license varies between GBP 1,500 and GBP 5,000.
All of the above make the Netherlands and the UK two very attractive fintech jurisdictions.
Key PI and EMI License Takeaways
As there are key differences between the Payment Institution License and the E-Money License. Ultimately, deciding which one to go for primarily depends on the envisaged service offering.
For example, if a fintech only wants to offer payment services, a Payment License would be sufficient and less costly. However, if it wants to issue electronic money and hold funds on behalf of its customers, then it should apply for an E-Money license.
From a geographical perspective, the Netherlands and the UK are the most effective options for a US-based money transmitter seeking to expand its services to the European market.
How Can InnReg Help You Obtain a PI or EMI license?
InnReg can help determine the best regulatory structure for your needs and articulate your unique business profile to regulators. As a regulatory compliance subject matter expert, we can help you with the following critical components of a PI/EMI license application:
- Drafting of a business plan and related policies and procedures;
- Helping with the ancillary applications of “fit and proper” assessments;
- Helping implement the necessary compliance controls;
- Developing and managing your compliance and operational workflows;
- Communicating with regulators and following up on additional info requests, etc.
InnReg is a team of over 20 Regulatory Compliance and Innovation Consulting experts helping fintechs succeed in highly regulated markets since 2013, globally. “InnReg - Compliance and Operations for Technology-Based BDs” is listed in the FINRA Compliance Vendor Directory.
If your business needs our support, do not hesitate to get in touch.