What is an e-money institution UK? Best plain English explanation of 6 top questions.

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What is an e-money institution UK ?

We wrote this article as many people still do not fully understand the meaning of the term “e-money institution UK .” This term is not used in any legislation or regulation and it is quite a confusing term for many people. If you want to fully understand what an e-money institution UK is or start using the correct terminology, you will find this article helpful. In this article, you will find a lot of additional resources that can help you to understand the answer to the question “what is e-money institution UK?”. If you read all the additional articles that we mentioned here, you will become an e-money institution expert.

You should note that this article is based on the laws and regulations of the United Kingdom. However, our article is still relevant for a person seeking information about e-money institutions in the EU. Furthermore, it is not absolutely useless for those seeking information about e-money firms’ regulation outside of the EU or UK as they can have certain resemblances. 

So, what is an e-money institution UK?

When somebody uses the term “e-money institution”, there are two options. Most likely, this person uses the term to refer to an authorised electronic money institution such as Monese. Such usage is correct, but we would still recommend using the term “authorised electronic money institution UK” instead of “e-money institution UK,” as there is also a term “small electronic money institution UK.” Therefore, an e-money institution UK is an entity that is an authorised electronic money institution or small payment institution licensed in the UK by the Financial Conduct Authority.

However, it is also possible that one may mistakenly use the term “e-money institution” speaking about an e-money issuer such as Paypal, which is neither an authorised electronic money institution nor a small electronic money institution.

Let’s deal with all these terms step-by-step.

P.S. There are also distributors of e-money, that can be mistakenly called e-money institutions. This topic is quite broad and we recommend you to read our article dedicated to explaining EMI Distributors in more detail.

What is an e-money issuer?

The term electronic money issuer or e-money issuer is explained in the UK law regulating UK e-money institutions (the Electronic Money Regulations 2011). Without going into too many details, an e-money issuer is an entity that issues e-money and is legally permitted to do so. In the UK there is an exhaustive list of such entities. Authorised electronic money institutions UK and small electronic money institutions UK are included in this list.

However, many more entities can issue e-money. For example, even the Post Office Limited, government departments and local authorities, when acting in their capacity as public authorities, may be electronic money issuers. In practice, any entity except for electronic money institutions UK and small electronic money institutions UK rarely issue e-money. Still, there are examples of banks issuing e-money, so they are considered e-money issuers and can be mistakenly called e-money institutions.

What is an authorised electronic money institution?

We have written plenty of articles on the topic of e-money institution UK. You will find the list with our articles below, and after the list. If you want to become an expert on this topic, you should read it. Those who do not have a lot of time to go deep into the concept can read a brief explanation of the concept of authorised e-money institution UK after the list.

Simply put, an authorised e-money institution is a limited version of a bank that can only provide payment services and hold funds of its clients. It means that without a separate authorisation, an authorised e-money Institution UK cannot provide investment, deposit and credit services. As this type of financial institution has fewer permissions, the regulatory requirements for authorised e-money institutions are not that strict compared to the regulatory requirements applicable to banks.  

When you hold an account with a UK authorised e-money institution, you should understand that your funds are not protected by the Financial Services Compensation Scheme. However, the institution must protect your funds by using one of the so-called safeguarding methods (95% of the time, so-called segregation methods is used). If you need more information, you can read our E-money Institution Safeguarding guide or learn about the top 5 mistakes relating to safeguarding requirements of e-money institutions.

Basically, e-money institutions can only accept funds in exchange for e-money. E-money is a specific type of claim that is different from a bank deposit as an e-money issuer cannot award interest in respect of the holding of electronic money and any other benefit related to the length of time during which an electronic money holder holds electronic money. To understand the topic better, read our article answering the question “what is e-money?” 

However, in a jurisdiction where integration between various service providers through API is quite common, the difference between e-money institutions and banks sometimes may be no that clear. Some e-money institutions in the UK offered access to deposit accounts via their platforms. For example, when this article was written, Revolut offered a GBP deposit account through Paragon Bank PLC, a USD deposit account through Investec, while Tide allowed through its platform to open a Clearbank bank account, which is unlike Tide’s e-money account was protected by the Financial Services Compensation Scheme.

There are not many practical differences in the usage of an account of an e-money institution compared to the account of a bank apart from interest rates, Financial Services Compensation Scheme protection and safeguarding of funds. In terms of payment services, an e-money institution UK may be as good as a UK bank (or even better).

Can an e-money institution UK provide credit services or issue credit cards?

While an e-money institution may not take deposits, after getting relevant permission from the Financial Conduct Authority, it may execute payment transactions where a credit line covers the funds for a payment service user, i.e., execute direct debits, including one-off direct debits; execution payment transactions through a payment card (credit card) or a similar device (credit), execute credit transfers, including standing orders. It should be noted that then the Consumer Credit Act will be applicable to such transactions.

If you want to set up an electronic institution in the UK providing credit or you are a customer of such an institution, you should note the following:

  • Credit is ancillary and granted exclusively in connection with the execution of a payment transaction. It means that you cannot get a loan directly from an e-money institution if you do not make a payment transaction unless this institution has a separate authorisation to provide this type of loans.
  • An e-money institution UK cannot grant credit from the funds received in exchange for e-money or held to execute payment transactions.
  • The institution’s own funds are and must continue to be adequate in light of the overall amount of credit granted. It means that own funds requirements (see FCA Our Approach Chapter 9) must be complied with at all times.

You must note that in some instances to provide credit services, including credit card service, an e-money institution may need an additional authorisation under the Financial Services Market Act 2000, which is the key statute regulating the financial services industry in the UK.

What is a small e-money institution UK?

You can read our article with comprehensive explanations of Small Electronic Money Institution UK (Small EMI UK). To sum up, a small e-money institution UK is a limited version of an authorised e-money institution UK. A small e-money institution UK has a limit relating to e-money issuance and an average monthly payment transactions limit. However, initial capital requirements are lower. For a user, there are not many differences between a UK small e-money institution and UK authorised e-money institution except that a small e-money institution cannot be authorised to provide payment initiation or account information services.

Is there an example of an e-money issuer that is not an e-money institution?

You could hear about e-wallets, and you may think that e-wallets are provided by authorised e-money institution or small e-money institutions. However, this is not exactly true. The most well-known e-money issuer and e-wallet provider is not an electronic money institution within the meaning of UK or EU laws. We think you know the company we refer to. Yes, this is PayPal.

In the EEA and UK, PayPal operates as a Luxembourg Bank (after Brexit, it operates in the UK under the so-called Temporary Permissions Regime). However, PayPal does not take deposits and provides a bank account service in the same manner as UK banks. Instead, it issues e-money in exchange for its clients’ funds.

To understand what we man, please, see excerpts from PayPal’s user agreement below.

E-money issuer which is not an authorised e-money institution UK
Paypal e-money issuer but not an authorised e-money institution UK
What is e money institution Not deposit protection for e money issuers

How can PSP Lab help you?

PSP Lab is a company that is specialised in e-money institutions and other PayTech companies. We can help you to become an authorised e-money institution or a small e-money institution in the UK or EU. We also provide ongoing consulting services for PayTech companies including e-money institutions. Do not hesitate to contact us and request a consultation. 

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