Electronic Money Institution (EMI) and Payment Service Provider (PSP) licenses have become increasingly important in the financial services industry. These licenses allow companies to legally provide various digital financial services and payment solutions across Europe.
These licenses are the keystones of the fintech industry, enabling businesses to revolutionize how we handle money digitally. EMI licenses are your gateway to issuing and managing electronic money, while PSP licenses open doors to various payment services.
This article will explain EMI and PSP licenses, their fundamental differences, the benefits of holding them, applicable regulations in Europe, requirements to obtain and maintain them, and the application process.
What is an EMI license?
An EMI (Electronic Money Institution) license allows a financial institution to issue electronic money and provide associated payment services. Electronic money refers to the monetary value represented digitally and stored electronically, for example, on payment cards or digital wallets.
Critical services an EMI license holder can provide:
- Issue electronic money
- Facilitate online payments and money transfers
- Provide digital wallet and payment card services
- Process national and international payment transactions
EMI licensees play a pivotal role in driving innovation in financial services through digital payment solutions and online banking platforms.
What is a PSP/PI license?
A PSP (Payment Service Provider) or PI (Payment Institution) license permits a company to offer various payment services to customers. These services facilitate transactions and money transfers between buyers and sellers.
Critical services a PSP/PI license holder can provide:
- Payment Processing and Management Services:
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- Payment processing services specifically for merchants, including transaction handling.
- Deposit-related services, encompassing all activities involved in depositing cash into a payment account.
- Withdrawal-related services, focusing on enabling cash withdrawals and managing related transactions.
- Management of payment accounts, covering a broader range of account-related operations beyond deposits and withdrawals.
- Direct debit transactions and bill payments, facilitating automated payments and regular bill settlements.
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- Money Transfer and Remittance Services:
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- Execution of payment transactions, including fund transfers within accounts at the payment service provider or across different providers.
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- Credit and Payment Initiation Services:
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- Payment transactions under a credit line, where funds are provided to users as part of a credit arrangement.
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- Account Services:
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- Payment account aggregation services, offering a consolidated view of multiple accounts.
- Account information services, providing detailed data on account status and history.
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- Issuance and Processing of Payment Instruments:
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- Issuance of payment instruments, enabling users to initiate transactions.
- Processing of incoming payments, handling the receipt of funds.
By enabling a smooth flow of payments, PSP/PI licensees allow businesses, consumers and organizations to send and receive funds conveniently.
Differences Between EMI and PSP Licenses
The fundamental difference between an Electronic Money Institution (EMI) and a Payment Service Provider (PSP) license lies in the ability to issue electronic money.
Electronic Money Issuance
EMIs are authorized to issue electronic money, which can be used to store monetary value electronically. For example, an EMI can provide digital wallets, prepaid cards, and other payment instruments where funds are represented electronically. This electronic money facilitates various payment transactions and financial services.
On the other hand, PSP license holders cannot issue electronic money. They focus on enabling transactions through conventional payment methods.
Range of Permitted Services
Due to the ability to issue electronic money, EMIs can provide a broader and more diverse range of financial services than PSPs. These typically include:
- Operation of digital wallets to store electronic money
- Issuance of IBANs
- Prepaid cards that hold electronic money
- Mobile payment solutions and operation of online core banking system
- As well as all the PSPs services indicated below
PSPs specialize in a narrower segment of payment facilitation services, such as:
- Online payment processing
- Payment processing services for merchants
- Facilitating domestic and international money transfers
- Mobile payment handling
- Direct debit facilitation
- Payment gateway service
- POS transaction management
- Merchant account provision
- Fraud prevention measures
So, while PSPs play a pivotal role in processing and transmitting payments, EMIs integrate payment services and electronic money issuance and management.
Participation in the Financial Ecosystem
Despite their differences, EMIs and PSPs enable legal participation in the European financial ecosystem by meeting rigorous regulatory standards. These complement each other – EMIs cater to e-money and related payment services, while PSPs facilitate conventional payment processing.
Together, EMI and PSP licensees spur innovation and efficiency in Europe’s payments landscape and advance financial inclusion goals under a regulated environment. Thus, both license types are critical components that shape Europe’s financial services industry.
Benefits of EMI and PSP licenses in Europe
1. Access to the Massive EU Market
EMI and PSP license holders can pass their services across all 27 EU member states. It allows them to offer permitted services across the EU without establishing a local entity in each country. Companies can tap into the 500 million strong customer base in the massive Single Euro Payments Area (SEPA).
2. Enhanced Credibility & Trust
Obtaining an EMI or PSP license from a reputable European regulatory body, bolsters trust and credibility among customers, partners and investors. It signals compliance with strict EU regulations safeguarding consumer interests. It accelerates business growth opportunities.
3. Participation in Europe’s Thriving Fintech Ecosystem
The EU is a global hub for innovation in financial services technology. EMI/PSP licensees can integrate with or leverage technologies from neo-banks, wealth tech platforms, insurtech, and regtech players tapping into new digital banking models and payment rails. This ecosystem delivers the chance to create new revenue streams and differentiated offerings.
4. Streamlined EU Expansion via Passporting
EMI and PSP licensees can tap into passporting rights to expand services across EU states without added licensing costs and legal hassles. They can quickly set up operations, enter new geographies, access local partner networks and build market share through acquisitions of EU-licensed fintechs.
5. Legal Protection from Compliance
Stringent EU regulations and oversight from experienced regulators significantly de-risk potential legal issues, fines and reputation damage. It offers legal protection while expanding innovative services that are not shackled by legacy systems. Authorities also provide regulatory guidance on new offerings.
6. Guidance from Experienced Authorities
European financial authorities have decades of experience fostering innovation while safeguarding stability and consumer interests. They provide regulatory guidance to licensees for developing compliant offerings. It allows testing and perfecting cutting-edge payment services before expanding internationally.
7. Expansion Opportunities Beyond EU
The credibility, trust and experience gained in Europe enables licensees to readily expand into non-EU countries in Asia, the Middle East, Africa and Latin America. Companies can leverage EU compliance rigor, technology infrastructure and risk management capabilities to grow internationally. It also opens up collaboration avenues with overseas regulators.
8. Regulations for EMI and PSP Licensees
EMIs in Europe are regulated under EMD2 (Electronic Money Directive), while PSPs come under PSD2 (Revised Payment Services Directive). Additionally, regulations like GDPR govern data protection, and AMLD enforces money laundering defenses.
Some essential requirements include:
- Maintaining robust cybersecurity and anti-fraud measures
- Safeguarding customer funds through mandatory insurance
- Implementing Strong Customer Authentication methods
- Securing customer data privacy as per GDPR
- Monitoring transactions and reporting suspicious activities to combat financial crime
- Maintaining capital reserves as a buffer against risks
- Filing periodic reports with the regulator to demonstrate compliance
9. Access to the CENTROlink
These Licenses provide access to CENTROlink for efficient European (SEPA) transactions from the Bank of Lithuania. By accessing the CENTRElink payment system, Fintech or other banking service providers can make almost free and instant EU transactions. It makes the EU market (including Lithuanian) an attractive destination for global financial institutions seeking advanced banking infrastructure and a supportive environment.
By adhering to these strict but necessary regulations, EMIs and PSPs uphold high compliance standards and promote stability in Europe’s financial ecosystem.
Applying for an EMI/PSP License
Determining the Optimal Jurisdiction
- Analyze key factors like regulatory timeframes, compliance complexity, access to talent, passporting rights, and expansion goals.
- Popular jurisdictions include Lithuania, Estonia, Malta, and the UK.
- Seek legal guidance on the optimal fit.
Establishing a Legal Entity
- Set up an authorized legal structure like a Private Limited Company
- Allocate appropriate initial capital – roughly €125K to €350K for EMIs and €20K to €125K for PSPs
- Appoint directors and shareholders meeting fit and proper criteria
Preparing Mandated Documents
- Craft comprehensive business plans, financial projections and service descriptions.
- Furnish details on technical systems, data security and AML/KYC policies
- Provide information on shareholders, ownership structure and organization chart
- Get required statements and reports to demonstrate access to capital
Submitting License Application
- Complete the application form and submit it to the regulatory body with the documentation.
- Be responsive to additional queries from the regulator during the review process.
Maintaining an EMI/PSP License
Adhering to Ongoing Compliance Requirements
- Implement stringent checks per AML, KYC and GDPR norms
- Monitor transactions to combat financial crime
- Performed periodic independent audits on systems, data security, and compliance.
- Submit regular reports with financial statements and operations data
- Maintain positive net worth and liquid assets as capital reserves
Updating Regulator on Business Changes
- Keep the regulator informed of any changes to services, products, technical systems, data practices or ownership.
Seeking Approval for Major Decisions
- Obtain prior regulatory approval for amendments to capital structure, transferring ownership stake, mergers and acquisitions, changes in management team or appointment/removal of board members.
By proactively working with regulators on evolving business needs while ensuring continuous compliance, EMI/PSP licensees uphold high regulatory standards and reinforce trust.
Conclusion
EMI and PSP licenses enable innovative companies to participate legally in Europe’s thriving digital payments landscape. Though the licenses differ in services permitted, both advance the development of improved financial solutions through regulatory oversight.
Financial institutions can leverage these powerful regulatory tools to drive progress in financial services by understanding license benefits, application processes, and ongoing obligations. Expert legal guidance helps maneuver complex compliance frameworks smoothly.
Ready to explore the world of fintech licensing? Contact Fintech Balance today, and let’s embark on this exciting journey together.