Difference between E-money Institutions and Payment Institutions in Europe
Many companies contact us in pursuit of starting their brand new FinTech venture or because they’re looking to expand their activities to the European market. European FinTech scene is booming — a lot of E-money institutions (companies like Revolut, TransferWise, Monese, N26, etc) have popped up in recent years, and the landscape is increasingly competitive. It’s not an easy process to obtain the required licenses and attract clients, especially for new startups. Any “money business” is a business of trust, and without a prior track record, it’s a challenge to earn that trust. While the most important part of the planning stage is coming up with a unique value proposition and viable niche, it’s also important to understand which license the business will actually need: the E-money institution license or the Payment institution license. Let’s break down the key differences below.
Payment institution under the PDS2 Directive (Directive 2015/2336/EU) offers services of execution of payment transactions, including credit transfers and direct debits, issuing or acquiring payment instruments, money remittances, foreign exchange services, and similar services. A payment Institution license is suitable for credit card processors, payment account operators, remittance businesses, foreign exchange businesses, payment initiation companies, and so forth. The capital requirement is 125 000€.
E-money institution is almost identical, which makes it confusing. E-money institutions under EMI Directive (Directive 2009/110/EC) is a business very similar to Payment Institutions, but there’s a key differentiator. E-money institutions (EMI) can issue electronic money (the digital equivalent of cash stored on an electronic device). EMI can do all the things the Payment Institution can do and is also is allowed to provide IBAN accounts, payment cards and e-wallets. The capital requirement is 350 000€.
You can also send money to the Payment Institution account, so what’s the difference exactly? The difference is in the nature of the transaction. If the user can deposit money on the account and keep the money on the account for indefinite use, for example, receiving a salary, buying everyday stuff like food or shoes or paying for electricity, and can send money to other (bank) accounts, withdraw money from ATMs — then it’s an EMI license that is required. If you want to enable your clients to use the money on the deposit account as they wish, you should apply for the E-money institution license.
Payment institution account is more limited. There has to be an identifiable transaction for which the funds are sent to the payment processor. The purpose of the deposit has to be predefined. So if money is transferred to the Payment account, it has to be used for some predefined concrete payment transaction, i.e you can’t use the Payment account to receive a salary and buy stuff like you could with an EMI account. If your business idea is to provide payment services, for example, check-out solutions for online stores, then this would be the right license to apply for.
These are not trivial things, because there’s an almost three-fold difference in capital requirements. If your business plan does not explain how the e-money is issued, then your application may be declined. Or if you want to issue e-money under a PI license, you will end up in trouble and may lose the license altogether. In Estonia, an EMI license can be obtained for both a public limited company (PLC) and a limited liability company (LLC), while a PI license can only be obtained for the PLC.
Hence, it’s very important to have a detailed understanding of what business are you going to do.
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Comistar provides business, legal and tax support for e-residency companies. Our core focus is on Fintech licensing, e-commerce companies, the blockchain industry and affiliate marketers. We’ve been operating for over 5 years and have helped more than 300 companies to get started in Estonia.