An electronic money institution (EMI) is a symbol of the evolution of financial services.
The advent of new niches in the financial sector, such as Banking-as-a-Service, (BaaS), has led to new directions in fintech. Neobanking is taking on a new iteration with the rapid development and adoption of digital currencies based on the blockchain.
However, such financial services require special licensing and integration into the global conventional financial and banking system. The need for an Electronic Money Institute licence (EMI) thus becomes mandatory for a digital banking service to comply with existing legal norms and regulations. Financial Conduct Authority (FCA) is responsible for issuance of EMI licence in UK.
What is an Electronic Money Institute (EMI) Licence?
The concept of digital money relates to the stored monetary value of digital assets. The issuer releases electronic money based on the funds received from individuals and other entities in equal amounts to the monetary value issued. Such a means of payment must also be recognised as valid by organisations.
An EMI licence ensures the compliance of digital money within said frameworks. The EMI is a digital system that allows financial services to be rendered around the world. EMIs differ from banks in the forms or their operations and the regulations they abide by. Such organisations are legal entities that operate based on a special licence that allows them to work with and disburse electronic forms of money.
EMI licence holding entities have the right to issue electronic money and provide payment services and other options. Among them are client funds holding for unlimited periods based on IBAN accounts.
The licence also connects the entity to the Single Euro Payments Area (SEPA), giving clients the ability to receive payments in Euros at low fees and on equal terms across all of Europe.
The Difference Between an EMI licence and a Payment Institution (PI) Licence
Two types of licences apply to institutions dealing with electronic money – the EMI licence and the Payment Institution, or PI licence. The main difference between the two is that EMI licence holders are entitled to issue electronic money, and the range of services that PI licence holders provide. EMI licence holding entities can store their clients’ finds for more extended periods than PI licence holders, as the latter are not allowed to do so.
The EMI licence allows holding entities to issue various payment cards, electronic wallets, and financial services. The supporting storage allows users to store and transfer their funds electronically.
Who Needs an EMI licence?
With the growing adoption and popularisation of digital currencies and the blockchain-based platforms supporting them, the services that cater to the ever-increasing decentralised finance, or DeFi, infrastructure is growing in number. However, to have their services integrated into the European and international financial frameworks and to cater to more users, startups in these emerging sectors must consider applying for an EMI licence.
Card Payment and Processing Services
Given the introduction of new 3DS2 regulations and the growing fees imposed by gateways like MasterCard and VISA, many businesses seek alternatives to their payment and financial solutions in neobanks. A BaaS certified by an EMI licence will allow non-financial entities to provide financial services on par with mainstream giants, and provide clients with branded cards, as well as cashout and funds storage opportunities. The licence allows merchants relying on BaaS solutions to accept direct bank transfers and vastly expand their payment methods at lower fees.
The peer-to-peer basis for lending deployed by many BaaS solutions also promotes the use of digital currencies as a means of backing deposits and credits, thus providing financial leverage and collateral in transactions.
Companies in need of KYC (Know Your Customer) benefit from the licence, as the EMI licence foresees the implementation of strict regulations and oversight over cybersecurity and client identification. The underlying KYC will reduce fraud, less identity theft and greater transparency, thus attracting new clients and retaining loyal customers.
Compliance comes next as a mandatory requirement for all financial services operators. The EMI licence automatically ensures compliance with legal and regulatory norms via its maintenance’s strict application and reporting procedures.
Fraud reduction is a crucial element of ensuring the success of a BaaS. The framework of the EMI includes numerous security layers designed for combating fraud and ensuring proper risk management.
The Admin of Self-Licensing
On average, it takes a business 4-5 months to obtain its own EMI licence – a long time to wait. And there is a stringent list of all documents, policies and procedures that need to be submitted to the FCA.
Some of the documents needed are:
-A business plan, including a forecast budget calculation for the first three financial years which demonstrates that the applicant is able to employ appropriate and proportionate systems, resources and procedures to operate soundly
-Programme of operations
-A business organisation structure description
-Evidence of starting capital
–Descriptions relating to internal control mechanisms, security incidents, access to sensitive payment data, business continuity arrangements, critical operations, effective contingency plans, collecting statistical data on performance, transactions and fraud and how the business will safeguard user funds
-A statement of the applicant’s security policy
-A description of the internal control mechanisms which the applicant has established in order to comply with AML requirements
-Details of shareholders and management board
-Processes for filing, monitoring, tracking and restricting access to sensitive payment data
The initial capital needed to implement such a procedure and obtain the EMI licence is around €350,000.
Or, Partner With Mercuryo
A shortcut to overcoming the lengthy and costly procedure of obtaining an EMI licence is partnering with a reliable service provider already operating in the domain. This industry moves at a fast-pace, and any time spent waiting in licencing can allow competitors to step in.
Mercuryo partner Monetley Ltd. is a licensed financial services provider, this allows its partners to slash the application procedure and fast-track operations in the industry. The service also takes the admin side of application out of the equation by leveraging its own licensing facilities.
As a well-known name in the industry and a partner trusted by numerous merchants on the market, Mercuryo is ready to provide support for its partners and allow them to scale their businesses globally.