You’ve just discovered that there is an option to become an EMD Agent or E-money Distributor and provide payment services without a license. You smile, you imagine launching in a few months, and you feel on top of the world. You decided to do more research, and here you are, browsing this page.

Well, we have bad news and good news for you.

The bad news is that what we call the “No-license Path” is not for every company that wants to enable its customers to access payment services or manage a payment card or payment account directly from its web or mobile app. If you want to build a  new crypto bank app, upgrade your marketplace, create a new payment service provider, expand your financial service offering or join the embedded finance industry,  you may need one or a combination (for some business models) of the following:

  • obtain a  non-bank PSP License (e.g., get an Electronic Money License in Lithuania, or become authorised as UK Electronic Money Institution) and build your payment infrastructure by entering into Banking-as-a-Service (BAAS) agreements and agency banking agreements and partnering with various other financial services provider.
  • enter in EMI Agency agreement;
  • enter in EMI Distributor agreement;
  • enter into PSD Agency agreement;
  • enter into an agreement with a white label fintech platform provider and embedded its service into your app without becoming an EMD Agent or Distributor.

The good news is that PSP Lab has got you covered. Below, we explained EMD Agent and E-money Distributor concepts. It’s so easy that even a person who doesn’t’ know what “non-bank-PSP” is will understand it. We also made sure that you know the difference between the various options you have and understand the pitfalls and benefits of each.

Do you want to avoid a wrong decision that can lead to a huge number of risks for your business: loss of revenue, loss of reputation, loss of competitive advantage, fines, penalties, and even a complete shutdown of your business? Then, read this page carefully and in 15 minutes potentially save yourself from a big mistake.

If we forgot to clarify anything or you still don’t understand something, just contact us.

Click, if you are a PRO or competitor and just want to learn more about PSP Lab services.

Simply the best explanation of EMD Agent and E-money Distribution concepts

Why do lawmakers often fail to implement clear and concise legislation? Every time they try to regulate something, they make things more and more complicated. Even regulators dealing with these laws often do not have a deep understanding of the concepts in detail. Fortunately, some brave consultants fight for the sake of clarity in very complex matters.

To explain what EMI Agency (EMD Agent) and E-money Distribution (EMI Distributor) are, we’ll start with definitions and then deep dive into the concepts themselves. Finally, we’ll compare EMD Agents and EMI Distributors.

Seems like an easy task for us? Well… not really. Read to find out why.

EMD Agent Definition explained.

What is an EMD Agent?

An EMD Agent is an unofficial term that refers to a person (usually a company) who provides one or more payment services on behalf of an EMI.

You can also use the term EMI Agent, or if you talk about agents of Lithuanian EMIs, you can use the term EMI Intermediary.

What payment services can an EMD Agent provide?

Services that an EMD Agent can provide are usually defined in a contract between the EMI Agent and EMI Agency Provider (Principal, holding an EMI authorisation). These services are one or more services listed in Annex 1 of PSD2, including such services as the execution of payment transactions, operation of a payment account (i.e., top-up and withdrawal), payment instrument (e.g., card) issuance, payment instrument acquiring, money remittance (i.e., transfers without a payment account), payment initiation and account information service.

What does the provision of payment services on someone else’s behalf mean?

To sum up, it means the following:

  • there must always be a contract between the EMD Agency provider (Principal) and the client (i.e., the end-user is always a client of both the EMD Agent and the Principal EMI);
  • it must be apparent to the user that the EMD Agent is providing payment services on the Principal’s behalf, and there is a criminal liability for false claims to be a payment service provider yourself in accordance with Regulation 139 of the PSRs 2017 (in the case of the United Kingdom);
  • the Principal is responsible and liable for the acts of its EMD Agents (the Agent then may be liable to the Principal in accordance with the EMD Agency Agreement);
  • the services are provided in accordance with the scope and in a manner indicated in the EMD Agency Agreement.

Can EMD Agents issue e-money?

For some reason, this question is asked quite often. The answer is NO! Article 3(5) of the EMD and Regulation 33 of the EMR 2011 (in the case of the United Kingdom) state that the Principals cannot issue e-money through agents.

What does it mean exactly? In practice, it means that the Principal is responsible for safeguarding (protecting) customers’ funds. Once the funds reach the Principal, it should issue e-money (basically, update the user’s account balance).

Elucidation of EMI Distributor, Electronic-money distribution and redemption concepts

The EU lawmakers are rarely consistent when it comes to groundbreaking legislation like the provision of payment services by non-bank PSPs. They have once again succeeded in creating a perfectly confusing concept with electronic money.

Unfortunately, it was not enough for them, and they made the concepts of EMI Distributorship and EMI Agency equally confusing. As a result, two concepts have managed to thoroughly confuse the general public and ensure that only a select few will understand how everything should work.

Definition

The term distributor is neither defined in the EMD nor the PSD2. That is why in some jurisdictions (e.g., UK, Ireland), the term is defined, while in some, it is not defined (e.g., Lithuania). Moreover, definitions are not identical as well.

As we don’t want to confuse you, let’s use the following definition:

EMI Distributor is a person who distributes or redeems electronic money on behalf of an EMI.

It is correct to use this one, but regulators and market participants may use an alternative name in some jurisdictions.

What is e-money distribution?

The EU Lawmakers simply stated that EMIs could distribute e-money “…through natural or legal persons on their behalf, according to the requirements of their respective business models.” Most local legislators decided not to bother themselves with a proper description at all. Not so lazy lawmakers decided that defining a distributor as a person who distributes e-money is enough.

Yes, it’s that confusing. But, no, regulators did not provide adequate guidance too.

Why? Because the EMD was adopted in 2009, and lawmakers drafted its text even earlier. Nobody could fantasise that an iPhone, which was released just before the Global Financial Crisis, would evolve into a gadget that EMIs would use to provide a service alternative to payment services provided by banks. A full-fledged payment account with personal account details and a card loaded with e-money that works like a debit card are offered by many contemporary EMIs.

More than ten years ago, nobody could envision such a development in the FinTech industry. Back in the days when there were only 30 licensed e-money issuers, in lawmakers’ minds, an e-money distributor was similar to a distributor of L’Oréal products.

Of course, nobody thought about door to door e-money sales. At that time, the most famous example of e-money distribution business models were gas stations and retail shops selling prepaid cards, machines allowing to top up an e-wallet by collecting cash from clients, and websites selling e-money.

Let’s have a minute of nostalgia. Look at the screenshot, which we found in the FATF 2010 report, taken when Skrill was still Moneybookers.

Old school e-money distribution

Hopefully, memories from 2010 soothed your pain caused by unclear regulations. So, it’s time to get back to the present.

In a nutshell, according to some regulators, a person distributes e-money when it helps the e-money issuer to bring electronic money into circulation. This explanation may also be confusing, but we got it from the FCA’s Our Approach Guide, so you should not blame us for it.

Let’s look at some modern distribution examples. The most current example of an E-money Distributor is a website/app that onboards customers and provides them with options to top up an e-money card or account maintained not by the website/app owner, but by the Principal.

There are less sophisticated business model examples. For instance, you can still find websites with old-fashioned designs distributing prepaid cards. More sophisticated examples include companies that provide users through a website/app with a fully functional multi-currency account and debit card without their own license.

Finally, it’s essential to differentiate Distribution from some “white-label” solutions. For example, some EMIs (sometimes also EMD Agents and Distributors) embed a payment functionality module into third-party apps. This module is branded similarly to the app. Nonetheless, the main difference between Distribution vs simple provision of space to place an interface is access to information by the distributor and its contracts with a user stating that it is responsible for such as function.

What is e-money redemption?

Basically, you can do two things with e-money. First, you can spend it (make payment a transaction) or redeem it (i.e., receive payment from the issuer of an amount equivalent to the amount of e-money you want to redeem).

Thus, following the FCA’s logic used to explain e-money Distribution, a Distributor is also a person that helps the Principal to remove e-money from circulation. Still, a merchant that merely accepts e-money as a payment for goods or services is not a Distributor.

Can EMI Distributor issue e-money?

Similarly to EMD Agents, EMI Distributors cannot issue e-money. It is a common misconception that they can. Only Principals can operate safeguarding accounts and issue e-money once the customer’s funds through Distributors reach them.

Can E-money Distributors appoint another distributor?

We have seen a surge in business models where an EMI Distributor offers a “white-label payment platform” service. Indeed, according to the European Commission, an EMI Distributor can use sub-contractors to distribute e-money on behalf of its Principal.

However,  the following conditions must be met:

  • the possibility of sub-contracting is regulated in the contract between the EMI Distributor and the Principal;
  • there is an indication in the agreement between the EMI Distributor and the Sub-distributor (Sub-contractor) that the latter is also acting on behalf of the Principal;
  • all other legal obligations must be complied with, including transparency requirements and passporting notifications.

Ideally, there should be a tripartite agreement between EMI Distributor, Principal and Sub-contractor.

Please note that the sub-distributorship arrangement must be presented in a non-confusing manner to the end-user. Moreover, local regulators may have different opinions on this matter than the European Commission does (because Commission’s interpretations are not binding).

What does distribution/redemption of e-money on someone else’s behalf mean?

In a nutshell, it means the following:

  • there must always be a contract between the Principal and the client (i.e., the end-user  is always a client of both the Distributor and the Principal);
  • it must be made clear that the Distributor acts on the Principal’s behalf;
  • the Principal is responsible and liable for the acts of the Distributor;
  • distribution/redemption is provided in accordance with the scope and in a manner indicated in the Distributorship Agreement.

Please, note that financial regulators supervise neither EMD Agents nor EMI Distributors. Even if a regulator assessed an EMD Agent or a Distributor, it has a registration code, and is registered in the financial services, it does not mean that it is supervised. As the French regulator (the Autorité de Contrôle Prudentiel (ACPR) underlines, these EMD Agents and E-money Distributors are not subject to supervision but rather fall within the scope of their Principal’s internal control mechanism because the Principal bears ultimate responsibility for the payment services/e-money redemption/distribution offered through its EMD Agents and Distributors.

The ACPR underlines that operation as an EMD Agent or Distributor may be a way towards becoming an EMI or even a bank, but it does not make you one. Please,do not state that a company is “regulated” if it is simply an EMI Agent 0r a Distributor and do not call it a neobank if it does not have a banking license.

Further reading: Payment sub-license (EMI/PI Agent and EMI Distributor): 4 myths that have to be debunked  (this article elaborates more on what you can do and cannot do as an EMD Agent or Distributor)

EMD Agent vs Distributor difference (theoretical and practical)

The distinction is blurred, especially if we speak about different jurisdictions. In many jurisdictions, one entity can be registered as an EMD Agent and Distributor simultaneously. See, for example, an edited excerpt from the register of Cyprus Central Bank’s register of PIs and EMIs).

EMD Agent and Distributors in Cyprus

A rule of thumb is “a person who merely loads (distributes) or redeems e-money on behalf of a Principal is a Distributor and does not need to be registered as EMD Agent.” However, if a person provides payment services on behalf of a Principal, it is an EMD Agent.

For example, a person providing only Payment Initiation service on behalf of EMI is only an EMD Agent, as this arrangement does not involve the distribution of E-money. On the other hand, when a person integrates into its website/app an e-wallet service or card issuance service of a Principal and interacts with clients, it is usually registered as a Distributor, an EMD Agent or both.

Unfortunately, there is no clear guidance explaining when a person should be an EMD Agent and Distributor and when only a Distributor. Companies providing EMD Agency services have their own interpretation of the law, and practices vary from company to company.

Moreover, the regulator’s approach is similar, and there is no clear consistency among them. We have seen two companies with exact business models, but one acted as a distributor and another as an agent. A payment company group can have one entity, a Distributor in the UK and another entity, an EMI Intermediary (Agent) in Lithuania.

EMD Agent vs PSD Agent vs EMI Distributor

The difference between these two concepts is critical in such countries as Ireland and UK, where Distributors do not need to be approved. However, EMD Agents must receive approval from a regulator (still, it does not mean that they are regulated, and it is false to say so). However, in such jurisdictions as Lithuania, where Distributors must be registered as well, there are not many practical differences between EMD Agents and Distributors.

Becoming an EMD Agent or EMI Distributor. Crucial things you should pay attention to

To launch as an EMD Agent or E-money Distributor, you need to choose a Principal, sign a contract, integrate your IT systems, wait for approval from a regulator (not required for Distributors in some jurisdictions), and test everything before you go live.

It’s not as simple as it may seem, so let’s discuss some nuances.

Is there a best jurisdiction to become an EMD Agent/ Distributor?

First of all, there are not many EMI Agency providers, and you do not have much choice. Secondly, you should not think about jurisdiction but rather about the choice of Principal.

Indeed, regulations and attitudes of regulators vary from country to country. However, EMD Agents and persons that simply distribute e-money are not supervised per se by regulators. It means that as an EMI Agent or Distributor, you will deal only with your Principal and should get the list of do’s and don’ts from it directly.  Obviously, knowing local laws and local regulators’ practices is essential, but they won’t be decisive factors for you if you choose the Non-License path.

Thus, you should perform a KYP (Know-Your-Principal) exercise and also speak with somebody who has already dealt with various EMI Agency providers.

You should beware that after Brexit, EMD Agents and Distributors of UK EMI Agency providers do not have a right to provide services in the EU under the EU law framework.

Further reading: What is PSD Agent UK (payment sub-license)? (this one explains the registration process and suitability requirements).

How can PSP Lab help you?

We’ve seen entrepreneurs wasting hundreds of thousands of pounds or euros on becoming EMD Agents/ Distributors without much result. We have also seen companies that should have chosen the No-licence Path.  These companies wasted time and money on becoming a regulated entity in a situation where they should have focused on developing their core business line while becoming E-money distributors or EMD Agents to expand their product and services offering with additional services.

Clearly, you don’t want to join the list of those who made critical misses in the Game of FinTech Battleship. Contact us, if you need some insider information on  the right square (path) for you. One may say it’s cheating the Game, but we simply call it “Service.”

Once you decide what you want we will also help you with it. We ensure that our clients feel confident during the rigorous onboarding process that Principal EMIs conduct or any authorisation procedure.

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