Electronic Money Institution (EMI) – License, Definition, Software

What is EMI?

EMI is an advanced and digitally-enabled system of offering financial services across the globe. Being a financial service institution, an EMI differs from banks both in regulation and operations. In essence, an EMI is a legal entity or body that has obtained an operating license to disburse electronic money. The license allows EMI to provide the services that traditional PSPs offer, plus issue electronic money.

What is electronic money?

Electronic money, also known as e-money, is a digital equivalent of cash money stored in EMI computer systems ewallets) or banking computer systems to facilitate electronic transactions. Because of the enormous efficiency of this technology, electronic money is mostly used for electronic activities. Its value is usually determined by the same financial factors as fiat currency and can thus be converted into a tangible form.

How does an electronic money institution work?

An EMI can operate only after receiving an EMI license from the relevant bodies. It operates as a bank – but it’s important to understand – EMI is NOT a bank. Considering the limited amount of information available on the concept of EMI, most people who have conducted businesses using e-money did so without even knowing.

What services do EMIs provide?

The key services performed by electonic money institutions include the following:

• E-money issuing and distribution (customers keep their funds converted to e-money in the e-wallet (their online account) and perform payments with those funds)
• Currency exchange services
• Direct debit or credit transfers
• Money remittance
• Payment account cash withdrawals and depositing
• Providing account information

It’s also important to highlight the services that EMIs DO NOT provide:

• Bank accounts
• Deposits (or offer deposit guarantees)
• Offer bank accounts because they cannot receive deposits;
• International transactions

EMI license explained 

An EMI Institution license is a legal document granted by relevant regulatory bodies to an institution, authorizing the latter to operate and disburse electronic money.

In establishing or setting up an electronic money institution (EMI), intending EMIs owners must obtain licensing from the FCA.

Although a separate approval to provide payment services is not required, the EMIs must notify FCA of the payment services they intend to provide. The “small EMI UK” option is also available in the UK, where the firm’s activities are limited to the UK and also limited by the monthly payments volume and average outstanding electronic money.

When applying for an EMI license, the intended EMI must denote that the company would disburse e-money and offer allied payment services. As a result, it should include data on the company’s operations and business plan, initial capital specifications, safety measures, institutional frameworks, and internal controls, the institution’s practices and processes, business continuity measures, data protection measures, AML/CTF compliance measures, and information on shareholders and subcontracting agreements.

What are the advantages of EMIs for customers?

In 2014, the EU made over 2.1 billion e-money purchases, which grew to over 4 billion in 2018. In 2019, there were roughly 4,6 billion e-money transactions.  So, what’s driving the increase?

• Easy accessibility
  The EMI’s customers will value the convenience of electronic banking. They don’t need to go to a physical bank to transact; we can do most things from home, saving more time.
• Payment services round the clock
  Customers may decide when to access specific financial information and when to make transfers or other operations.
• No credit risk
  Since EMIs don’t use their customers’ money to lend it, unlike banks, the customers’ funds are safe, encrypted and secured on their accounts.
• Lower fees
  Since the transactions are processed easier and faster by EMIs, it results in their being cheaper, which translates to the customers as well.

Electronic money institution vs. bank: which is better? 

While banking institutions fuse (mix) client funds with their funds and utilize both in running their businesses (e.g., “to extend loans on the own account”), electronic money institutions must ring-fence all funds received from clients and keep them distinct from their own on “stratified accounts.”

Additionally, despite an EMI possessing access to clients’ funds, it is not licensed to divert the funds into anything other than purely transactional objectives such as e-money disbursement and repayment.

In respect to deposits, electronic money institutions, unlike banks, are also not authorized to receive deposits and offer loans from funds received in exchange for e-money. And in circumstances that they do, it must be supplementary and disbursed primarily in conjunction with the fulfillment of a payment process.

Electronic money institutions vs. authorised payment institutions 

Before we delve into the differences between both terms, let’s understand what API, or authorized payment institution, entails.

What is authorized payment institution (API)?

A Payment Institution is a class of payment gateway established under Directive 2007/64/EC, often known as the Payment Services Directive 1 (PSD1). Now, PSD2 and its national implementation by the EU Member States control the activity of payment institutions.

PIs are entities created with the primary goal of providing payment services but may also engage in other economic activities (hybrid payment institutions). They are institutions classified as self-sustained financial service providers who play an essential and critical role in the financial system.

Below are some of the key services APIs offer:

• payment transactions, such as credit transfers and direct debits via payment cards or similar devices;
• disbursement of payment instruments;
• money transfer services;
• currency exchange services;
• ancillary services (associated with their principal services);
• loans.

EMI vs API: Differences between electronic money institutions and payment institutions

Now that we are familiar with both EMIs and APIs, let’s take a peek at some of the disparities between both concepts:

• Money issuing

The ability to issue e-money is the ground difference between EMIs and PIs. Only electronic money institutions are allowed to issue e-money, while PIs aren’t. At the same time, EMIs can provide all the services that PIs do (but it doesn’t mean they are automatically allowed to do so – this area is strictly regulated, so they need authorization from a national regulatory agency to provide specific kinds of payment services

• Safeguarding specifications

electronic money institutions and Payment Institutions must follow the special safeguarding measures set out in EMD2 and PSD2. Payment Institutions that provide payment initiation or account information, on the other hand, are not subject to any safeguarding obligations. Furthermore, the amount of cash an EMI institution receives for services linked to e-money disbursement and unrelated payment services cannot be held in the same safeguarded account.

• Accounts

According to Article 4(12) of PSD2, a payment account is used to make payments in the name of one or more users of a specific payment service. Article 2(3) of Directive 2014/92/EU also states that a payment account is held in the name of one or more clients and used to perform payment transactions.

In basic terms, when funds are transferred to a payment account held by a payment institution, that money must be accompanied by a specific payment transaction.

Unlike an electronic money institution, a payment institution cannot store money on an account holder’s behalf.

• Start-up capital requirements 

Authorized payment institutions have considerably curtailed start-up capital requirements than electronic money institutions since they do not store money on behalf of customers and thereby must transfer money into the account through a traceable transaction.

• Costs of licensing

There is a variation in the different application costs that should be paid by EMI and API aside from the start-up capital requirement and other capital requirements connected to the licensing.

Ewallet software for EMI license holders

Considering the rapid growth of digitalization and the evolution of the finance industry to meet up with this growth, it can be said for sure that electronic money institutions are here to stay.

And as such, players in the industry must acclimatize with recent technological tools to remain relevant. In that regard, having adaptable software payment products to tackle the growing needs of consumers is imperative.

If you’re applying for or have already obtained an EMI license, SDK.finance can save your company a great deal of time and resources for developing a competitive ewallet solution. You can use our digital wallet platform that comes with the source code license to cut your time-to-market in half (or more) and base your product on a high-performance transactional core.