Electronic Money Institution vs Payment Institution (the difference is e-money)
If you are thinking about entering PayTech market in the EU or UK as a non-bank service provider you have a choice of becoming an Electronic Money Institution vs Payment Institution. If you are a new player, the difference between EMIs and PIs may not be so obvious to you. Fortunately for you, we got you covered. In this article, we will explain the practical and legal differences between these two types of licenses.
Electronic Money Institution vs Payment Institution (Services)
To understand what is the difference between these two types of financial service providers we will need to outline what is their respective rationale of creation and what specific services they can provide. It is a core aspect which differentiates between them, so pay close attention.
What is an Electronic Money Institution or a so-called E-money Institution?
Many people are still trying to understand what are Electronic Money Institutions a.k.a. E-money Institutions or EMIs. These terms refer to a legal person that has been authorised to issue electronic money under one of the Member State’s national implementation of Title II of the Directive 2009/110/EC, known as the Electronic Money Directive 2 (EMD2). While many types of financial institution are allowed to issue e-money (these institutions are called E-money Issuers), an Electronic Money Institution (EMI) is a type of financial institutions that was created specifically for the purpose of e-money issuance and there is a specific authorisation regime for EMIs.
Unlike banks, which can also issue e-money, EMIs are not subject to such strict prudential requirements (to understand better the difference between EMIs and banks read our article). Why would somebody want to create a specific regulatory regime for entities focused on the issuance of e-money? The answer is easy. Such a regime exists to spur innovation in the payments sector.
What is a Payment Institution?
A Payment Institution or PI, on the other hand, refers to a category of payment service providers that was created as a result of the adoption of Directive 2007/64/EC known as the Payment Services Directive 1. The activities of PIs are now broadly regulated under Directive (EU) 2015/2366, known as the Payment Services Directive 2 (PSD2) and its national implementation.
To read more about PIs you can read about PI license in the UK, PI license in Lithuania, and so-called Payment Initiation Service Provider license (PISP license) and money transmitter license in the UK.
What services can EMIs provide?
As it was explained EMIs can issue e-money. To understand this service you should know what is e-money and how it is different from scriptural money, fiduciary money and other types of monetary value. We advise you to read our article explaining what is e-money.
Besides issuing e-money, according to Article 6 of the EMD2 and its national implementation in each EU MS and UK, EMIs can also provide all payment services that can be provided by Payment Institutions as provided in Annex 1 to Directive (EU) 2015/2366, known as the Payment Services Directive 2 (PSD2), credit services as explained in Article 18 (4) of the PSD2, operational and closely related ancillary services such as ensuring the execution of payment transactions, currency exchange services, safekeeping activities, the storage and processing of data, and the operation of payment systems as explained in Article 18(1)(b) of the PSD2. Thus, conduct rules of the PSD2 and its national implementation are applicable to EMIs as well as PIs.
When we speak about payment services provided by EMIs you should understand two things. Firstly, when we say EMIs can provide all payment services provided in Annex 1 to PSD2 it does not mean that all EMIs provide such services or that EMIs are automatically allowed to provide such services. An applicant applying to be authorised as an EMI to one of the national regulators must indicate for what kind of payment services it wants to get the authorisation.
Secondly, it is important to understand what payment services are linked (related) to e-money issuance and what payment services are unrelated to e-money issuance. Such distinction is important as prudential requirements are different for related and unrelated payment services provided by EMIs. For instance, in the UK the FCA further clarifies that when e-money account holders use their e-money to make a payment or to simply transfer funds from their account, this would not constitute an unrelated payment service as it relates to the activity of issuing e-money.
What services can PIs provide?
PIs can offer payment services explained above, but they cannot issue e-money. The possibility to issue e-money is the difference between an Electronic Money Institution vs Payment Institution (EMI vs PI). Because of this one difference, PIs and EMIs have different business models due to the different legal treatment of payments accounts provided by PIs and EMIs as explained below.
Electronic Money Institution vs Payment Institution (E-money vs Payment account)
Under Article 4(12) of the PSD2, a payment account is defined as an account held in the name of one or more users of the payment service that is used for making payment transactions. Similarly, Article 2(3) of the Directive 2014/92/EU on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features, a payment account entails an account held in the name of one or more customers used for the execution of payment transactions.
Based on these definitions, so long as the account allows for payment transactions to be conducted by authorised users, it is considered a payment account.
Before delving into how a payment account is different from an e-money account, and thus, considering one of the most crucial differences between Electronic Money Institution vs Payment Institution, it is important to understand that EMIs, PIs, and banks are all able to provide payment accounts. Electronic money accounts (i.e. e-wallets), bank accounts, and accounts opened by PIs are all payment accounts as they are used for the execution of payment transactions.
Nevertheless, as the Bank of Lithuania has stated, the functionality of these payment accounts is different. This difference is important to distinguish as, although both accounts can be used to send money and make transfers, the nature of the transaction differs. To read more about the difference between a payment account and an e-wallet, read our article on the matter.
For instance, the user of an e-wallet is free to use his/her account as he/she wishes, meaning that he/she can withdraw money from it, make transfers to bank accounts, make purchases, pay for utility bills, and many other uses. It is worth clarifying however that as per Recital 13 of the EMD, e-money is not a deposit-taking activity. As such, although an e-money account can be used for a variety of activities, what distinguishes it from a deposit is the fact that e-money stored in an e-money account cannot be used by non-electronic means, i.e. it is generally the case that if cheques can be drawn from an account, chances are that that is a deposit rather than an e-money account.
Payment accounts provided by Payment Institutions are on the other hand more limited. The reason for that is the fact that in order to make use of your account, there must be an identifiable transaction for which the funds are sent to the entity processing the payment. Meaning that payment account requires a standing order based on which the funds will arrive to and leave from the account.
Electronic Money Institution vs Payment Institution (Business Models)
The EBA in its report on the risks and opportunities from fintech and their impact on business models stated that the business models of EMIs and PIs are shaped based on (a) customer expectations/behaviour, (b) competitive pressure, (c) technological advancements as well as (d) changes in regulation. These considerations play a core role in firms choosing which services they will offer.
A good example of the difference in terms of the business model and services offered between Electronic Money Institution vs Payment Institution is Transferwise. Transferwise started out as a PI but because with this license it was not able to issue its own cards to customers and hold customer money in payment accounts without an identifiable payment order, it switched from PI to EMI. Now, the business model of the company revolves around card issuance and the provision of borderless multicurrency accounts.
As you can see PIs can legally choose business models where they do not need to hold customer money in payment accounts without an identifiable payment order. Services that PIs usually provide are payment processing and money remittance. There are also PISPs which only provide payment initiation service.
Of course, there are more complicated business models. For example, even PIs can participate in a co-branding card issuance program or indirectly offer e-money accounts for its merchants. You should contact a professional consultancy like PSP Lab to be aware of all available options and decide between Electronic Money Institution vs Payment Institution.
Electronic Money Institution vs Payment Institution (Safeguarding Requirements)
Both EMIs and PIs are subject to specific safeguarding requirements set out in Article 7 of the EMD2 and Article 10 of the PSD2. Nevertheless, PIs that only offer payment initiation or account information services are not subject to safeguarding requirements.
Funds received by an EMI for both services related to e-money issuance and unrelated payment services, should not be held in the same safeguarding account.
Electronic Money Institution vs Payment Institution (Initial Capital requirements)
The difference between Electronic Money Institution vs Payment Institution (EMI vs PI) in terms of the differences between the payment account and the e-money account is important for highlighting regulatory requirements. Due to the risk, a payment user is subject to, the initial capital requirements for PIs are considerably lower than those for EMIs.
Under Article 7 of the PSD2, PIs have to hold at the time of authorisation an initial capital of:
- EUR 20,000 when a PI provides only money remittance
- EUR 50,000 when a PI provides only payment initiation services;
- EUR 125,000 a PI provides only services listed in points 1-5 of Annex I of the PSD2.
At all times, authorised PIs are also required to hold own funds equal to or in excess of the required initial capital required for the chosen services to be offered, or the amount of the own funds required as per method A, B, or C as explained in PSD2
Article 4 of the EMD2 on the other hand states that EMIs must have an initial capital requirement of EUR 350,000. Authorised EMIs are at all times required to hold own funds equal to or in excess of the greater of the amount of initial capital and the amount of own funds calculated as per method D which consists of the 2% of the average outstanding e-money issued by the EMI. However, for unrelated payment services, an EMI must use method A, B, or C.
Electronic Money Institution vs Payment Institution (EMI vs PI Licensing costs)
In the table below you will find information on the licensing fees for both authorisations in all the countries in which PSP Lab offers its services.
How can PSP Lab help?
Electronic Money Institution vs Payment Institution what will you choose? If you don’t know you can contact PSP Lab, which is a fintech consultancy that offers authorisation services not only for EMIs and PIs but also for small EMIS, for small PIs, Account Information Service Providers (AISP) and Payment Initiation Service Providers (PISP). Our experience will guide you through the process of selecting the right authorisation as well as through the application process in a swift manner.
Should you have any questions relating to the difference between Electronic Money Institution vs Payment Institution do not hesitate to contact us. We are happy to help!