With the PSD2 now in full force, the movement to transform the landscape of the modern payment system is underway. Complying with this revolutionary regulation, however, requires more licensing authorization than ever before.
The payment institution license was born with the PSD, the first incarnation of the EU-mandated directive. PSD2 then built upon that regulation, mandating the electronic money institution (EMI) license — the regulation that allows companies to work with e-money.
Today, the number of authorized EMIs are expanding rapidly across the EU. These are facilitating the creation of innovative financial platforms that provide customers with a variety of new electronic payment options.
As part of our application to become licensed under PSD2, Unnax has obtained an Electronic Money Institution license and has therefore become a “regulated company.” Given the complexity and impact of new licensing regulation, we’ve compiled a list of the most frequently asked questions about EMI in the context of the revolutionary Open Banking movement.
What is an electronic money institution (EMI)?
What kind of products do EMIs offer?
How do EMI payment products work?
What is the difference between a bank and an EMI?
What is the purpose of an EMI?
What are some benefits of an EMI?
Do EMIs provide cryptocurrencies?
What are the requirements to become an EMI in Spain?
What is an electronic money institution (EMI)?
An electronic money institution (EMI) is a “regulated company” that’s authorized to issue e-money as a digital equivalent of cash, stored on a financial platform or on electronic devices, such as mobile phones. The EMI license is issued by a relevant authority in a given nation or region; in the case of Spain, the Banco de España. The license effectively grants the PSP the ability to offer the same services as traditional PSPs, with the added right to issue electronic money. However, to operate and issue e-money, the EU requires a higher level of capital to be licensed: €350,000 for EMI licensing, compared to €125,000 for a standard Authorized Payment Institute (API) license.
What kind of products do EMIs offer?
EMIs are authorized to issue e-money. Perhaps the most common type of e-money is the now ubiquitous eWallet, which serves as a storage place for e-money, just as regular wallets do for cash. EMIs also offer money remittance services, process payment transactions, direct debit or credit transfers, as well as carrying out most financial operations common to standard PSPs.
In general, the concept of e-money encompasses a range of technologies from complex eWallet systems with mobile apps to the provision of money transfer and FX services. The intrinsic culture of innovation within the EMI ecosystem promises to continuously generate e-money products in the near future, as competition ramps up due to the growing number of EMI license holders across Europe.
How do EMI payment products work?
EMIs are authorized to store this pre-paid monetary value on customers’ electronic devices and/or on conventional internet platforms. Whether through electronic or magnetic technology, e-money is stored on a central accounting system or within an electronic carrier, such as an EMV chip. This means payments can be made using other parties than the original one that issued the e-money balance.
Each EMI operates using their custom app, which clients download and use on their smartphones in order to gain quick and convenient access to their accounts. Such e-money apps can, as noted, serve as popular smartphone eWallets. Using account aggregation services as mandated by PSD2 regulation, these can enable users to house and access all their accounts in one place. Such products allow financial customers to take control of their personal finances in a fluid, secure and efficient manner.
What’s the difference between a bank and an EMI?
As previously mentioned, there’s very little difference between a traditional banking institution and an EMI. However, three main differences set EMIs apart from traditional institutions. Namely, EMIs are not authorized to sell or promote advice about banking projects, sell or promote investment products, or take credit risk.
This last difference is perhaps the most important. When a customer places their money into a traditional bank, they take up credit risk. This is because banks are authorized to use customers’ money and lend it to someone else. EMIs are not.
What is the regulatory purpose of an EMI?
Created as part of the PSD2, EMIs are a cornerstone of the EU’s strategy to promote a Single Euro Payments Area and, therefore, greater competition within the bloc’s financial system. The PSD2 also requires any company wishing to become an authorized EMI to meet higher transparency standards and comply with the new two-factor payment security protocol, namely the Strong Customer Authentication requisite. All holders of the EMI license, therefore, can be considered essential players in the building of an efficient, secure and innovative payment system within Europe.
When the embedded vision of EMI licensing is realized, customers essentially gain access to a portable personal banking platform that places user experience at the heart. Within this, the user acts as their own personal banker, conducting fast payments and transfers, reviewing transaction history, performing money remittance and FX conversions, and more.
What are some benefits of an EMI?
Fully authorized EMIs can offer a number of benefits to their customers. These include zero credit risk (as mentioned above), a higher observance of financial standards through the PSD2 mandate, higher quality of service via fully regulated company guarantees, and a broader spectrum of services that can be expected from working with e-money specialists.
Transactions made with EMIs are also generally processed in a fast, secure and convenient way, which results in lower fees being passed onto customers. Moreover, the nature of e-money allows for round-the-clock availability of payment options via EMI-based accounts. EMI also paves the way for streamlined accounting and increased security, since users can program payments using their digital accounts, therefore eliminating the need for constant (and risky) sharing of credit card details.
The fact that EMIs do not pass on credit risk is a benefit that cannot be understated. By not taking credit risks, EMIs can assure their customers that their money is safe within the central accounting system or an electronic carrier operated by the company. This is because EMIs only place money deposits from users on trusted accounts – safely encrypted and secured through new security layers stipulated by PSD2.
Do EMIs provide cryptocurrencies?
Some of them do. Cryptocurrencies, such as bitcoin, are a kind of e-currency and thus offer digital storage for monetary value. However, bitcoin is not issued and controlled by central banks and has no fiat (legal tender). Although there are advantages to using cryptocurrencies, such as rapid transfers, similar advantages are being created through the PSD2 regulation framework that promotes security and real asset backing in ways that cryptocurrencies cannot. Indeed, many cryptocurrencies are still highly volatile, and therefore not a reliable way to store value online.
What are the requirements to become an EMI in Spain?
In Spain, EMI licenses are issued by the Banco de España, the country’s national bank, where they are designated as E-Money Institutions.
EMIs are regulated by Law 21/2011 of 26 July, and Royal Decree-Law 11/2018 of 23 November, which establish a series of requirements for companies wishing to become accredited Electronic Money Institutions.
These requirements are:
- Divide share capital into shares, participations or nominative contribution titles.
- Have a minimum base capital of 350,000 euros and also maintain a sufficient volume of available capital at all times in relation to certain business indicators.
- Good administrative and accounting organization or adequate internal control procedures, which guarantee the sound and prudent management of the entity.
- Suitability of shareholders or partners that have significant participation.
Companies that have already acquired EMI authorization in other Member States of the EU may also establish branches in Spain — they are free to provide services using the so-called EU passport procedure.
Our next chapter: becoming an authorized EMI
As a key proponent of the PSD2 regulation and all that it entails, Unnax has embarked on a mission to become an authorized EMI. This move signals a big win for us and our customers because it will allow us to provide a new portfolio of services and increase our market coverage. Not only that, but our EMI license brings with it a higher level of security, cementing our commitment to exceptional quality of service for our customers. This authorization therefore strengthens our position at the forefront of digital finance.
