Over 270 electronic money institutions (EMIs) are operating in the United Kingdom, the highest number in Europe. To give you some context, the second on the list is Lithuania, with 75 institutions, and the total for the region exceeds 550. And the number is constantly growing, driven by immense demand. According to EY data for 2021, nearly 75% of consumers across 27 global markets used an e-money or fintech service.
In this article, we’ll discover how to join this booming market and what challenges and pitfalls may occur. We'll learn to act efficiently when establishing an e-money business and getting an electronic money institution license.
But first, let’s drill down to what an electronic money institution is and how EMI differs from the related concepts.
What is an electronic money institution?
To discern the hidden meaning of the EMI term, we should define e-money.
Electronic money is a digital monetary value we can use to make payments. A digestible example of e-money are funds on PayPal, or plastic gift vouchers that you can use in stores.
Electronic money institution definition
An electronic money institution, or EMI, is a legal entity entitled to issue e-money. It is licensed and regulated by the respective authority. For example, in the UK, EMIs are regulated by the Financial Conduct Authority. In Lithuania, these market participants are licensed by the country’s central bank.
Besides, there are small electronic money institutions (Small EMIs). They can issue e-money and provide some payment services, except payment initiation and account information. To register as a small electronic money institution, the company must meet specific requirements on its previous business activity.
How does an electronic money institution work?
An EMI is authorised to issue a digital monetary value, or electronic money. Customers can then use this money for purchases at other parties.
An institution stores e-money in a central accounting system or an electronic carrier. In other words, EMI may use servers or electronic chips.
Wondering if an electronic money institution is a bank or a payment institution? The quick answer is none of the above, but let’s learn how they differ.
How do electronic money institutions (EMIs) differ from banks?
E-money licenses and banking licenses are two completely different licensing regimes.
The essence and allure of the e-money license lie in allowing non-banks to provide payment and financial services and store clients’ funds. Yet, the list of banking activities available to authorised electronic money institutions is limited. Namely, unlike banks, electronic money institutions can’t provide investment, deposit, and credit services.
In their turn, banking license holders are authorised to act as EMIs to pursue the business of a credit institution.
Electronic money has a much lower entry barrier and simpler regulations than banking. It opens the doors to the financial market for tech-focused companies.
Besides, EMIs are more flexible and fast than traditional banks. For customers, it means an opportunity to get an account quickly and without going to the physical branch.
Electronic money institution vs Payment institution
A payment institution license is more limited than an EMI license. Payment institutions can provide services like payment initiation, processing and remittances. But they can’t issue e-money or hold customers’ funds without an identifiable payment order.
This limitation makes the PI market easier to enter than the EMI. Notably, electronic money institutions need higher initial capital, and their regulation is more strict.
Still, some companies that start with a PI license may later opt to apply for an EMI license. This happens when there’s a need to expand the range of services. For instance, when they want to issue their own cards.
What can an e-money institution do?
The EU regulation allows EMIs to offer such services as:
- Issuance of e-money
- Topping up and withdrawing cash from a payment account
- Performing transactions with e-money (remittances, transfers, etc.)
- Issuing payment instruments or acquiring payment transactions
- Payment initiation and account information services, etc.
Please see Directive 2009/110/EC for the exhaustive list of activities that EMIs are allowed to perform. Each EMI specifies what it would like to do in its application, and then only those activities are authorised.
Simply put, EMIs can usually open SWIFT, IBAN and SEPA accounts, remotely register banking accounts and issue cards for them, make and accept SWIFT payments, and much more.
Examples of authorised electronic money institutions
Let’s look at several widely known companies that hold EMI licenses to grasp better what they do.
How to start your own e-money institution
Now that we’ve brushed up on our knowledge of the e-money market and electronic money institutions, we’re ready to segue into practice.
You’ll have to undergo several steps with different levels of complexity to become an EMI. Here’s the generalised and simplified list:
- You’ll need payment software to function as an EMI. Plenty of time and resources are necessary to develop one, so you should start hiring developers and planning your future solution as soon as possible. Remember that if you plan to deal with card transactions, your software and infrastructure have to be PCI DSS-compliant.
- Find a licensing specialist or a third-party agency assisting with EMI licensing. They’ll help you choose the jurisdiction for your future electronic money institution, prepare all the documents needed for application, and ensure compliance with regulations. At least it’s a must to have a lawyer who can help you with all the paperwork and regulations interpretation.
- Once you’ve decided on the jurisdiction, learn the local regulation on EMIs, requirements, and how the authorisation procedure happens. You must have a minimum initial capital of €350,000+, safeguard your clients’ funds, and have insurance. Most EU regulators require EMI license applicants to have at least 2 top managers residing in the EU with financial or economic education. You may face other requirements related to AML, risk management, your technological base, etc. All in all, dive into the local peculiarities of the chosen country.
- Have the pre-application meeting with the regulator’s representatives. You’ll be asked tons of questions about your future EMI, but your work on the previous step will help you have all the answers.
- Prepare and submit your application. You’ll have to pay the fee to file your EMI license application, collect all the requested documents, show a detailed business plan, and elaborate on the activities you’d perform and internal procedures. You’ll have to provide documented evidence of meeting all the requirements and describe the company’s organisational structure, security measures, accounting systems, etc.
- Wait for the regulator to assess your application. Before approval, you may undergo several rounds of the regulator’s comments and your respective changes. The process usually takes no less than 3 months. When your application is approved, your company becomes an authorised electronic money institution.
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3 challenges you may face
You're likely to face certain pitfalls on a journey to becoming an EMI. Forewarned is forearmed, so let's learn about the 3 most common challenges and how to deal with them.
Firstly, choosing the jurisdiction and filing an application for the EMI license isn’t a piece of cake. You have to prepare piles of documents and cover dozens of requirements.
Secondly, there are certain restrictions for EMIs on transaction size and number per day.
We highly recommend hiring a specialist who can guide you through the world of legal peculiarities. It will save you tons of time and help you do everything correctly.
With the EMI market boom came allegations of money laundering and other financial wrongdoings. According to Transparency International UK, more than one-third of EMIs authorised by the FCA have red flags related to their activities, owners, or directors.
Of course, you won't be the subject of such scandals if you are not involved in any fraudulent or money laundering schemes. Still, the fact that there can be perpetrators among licensed EMIs stains the reputation of the market and affects clients’ trust.
Double-check all the companies you'll do business with to avoid being dragged into trouble.
We’ve already mentioned that you should have payment software and infrastructure to operate as EMI, which may be pretty resource-draining. The cost of developing your own payment solution will likely be measured in hundreds of thousands of euros. Speaking of time, you’ll need no less than half a year for the MVP and about a dozen months to move from basic functionality to a competitive product.
The good news is that you don’t need to waste so much time and invest so much money to have a robust full-fledged payment product. You can opt for a white label payment solution and receive advanced payment capabilities in a snap, with plenty of value-added features and services.
For instance, by choosing Corefy’s white label payment provider, you receive the following:
- An omnichannel payment platform with 300+ ready-made integrations,
- Support for hundreds of payment methods, flows, and currencies,
- Advanced analytics, reconciliations, and smart processing tools,
- An expert payment team that costs you less than the salary of one coder, and much more.