The beginning of 2019 was marked by an important event for Europe, the Payment Service Directive 2 (PSD2; Directive (EU) 2015/2366) administered by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) of the European Commission (EC), an institution that is responsible for proposing and implementing of the new EU legislation and upholding the existing EU treaties, finally has entered into full force and effect. It is believed that this landmark document should create a new level of openness and transparency of the payments market in Europe. As a result, the European market is expected to undergo a number of fundamental changes and some believe that traditional banking institutions should give way to the growing influence of the FinTech companies with disruptive technologies and groundbreaking business solutions.
The foundation for the rapid development of the EU FinTech industry and for SEPA (Single Euro Payments Area) was laid back in December 2007, when the first Payment Service Directive (PSD) was adopted. PSD has become the catalyst for the swift growth of organizations related to the payment market. It should be emphasized that these newly formed entities and undertakings are not banks. These are new startups creating payment systems using Internet technologies. In this way, a new separate industry was established in the form of FinTech companies that are not banks, but act as providers of traditional banking services.
The emergence of such providers has necessitated the introduction in the EU of a new set of rules that would contribute to a qualitatively new level of customer protection and security of payments. In order to resolve these issues, as well as to create equal conditions for market participants, to stimulate competition and develop innovations, in 2015 the European Parliament adopted the Second Payment Service Directive PSD2.
It took several years to align the EU members’ national legislation to the provisions of the Payment Services Directive 2 (PSD2). Basically, the transition period ended on January 13th, 2018, but many PSD2 rules came into force just recently.
One of the key points of the new regulation is the possibility of access by third parties to the bank accounts of customers. Access to customer data (upon customer’s consent) through the API (Application Programming Interface) can be obtained by FinTech companies and used to develop and launch new specialized products related to the financial services market.
The PSD2 lays the foundation for regulating payment services, key consumer rights and principles for the interaction of market participants. Below are some of the most relevant provisions of the directive:
- The directive introduces into the regulatory field new types of financial intermediary institutions:
- Payment Initiation Service Provider (PISP) provides interfaces for making payments and act as intermediary between the consumer and the holder of the funding source.
- Account Information Service Provider (AISP) on behalf of a client requests information about client’s payment accounts from financial institutions and consolidates the data in one place.
- The directive obliges financial institutions to provide information to financial intermediaries even without entering into a separate contract, but with the customer’s explicit consent. In 2017, common data exchange standards with financial intermediaries entered into force, mandatory for use throughout the EU.
- The European Union has created a pan-European registry of organizations that have the status of payment institutions, as well as their agents. The register includes the following natural persons and legal entities that can provide payment services and/or electronic money services:
- “PI (Payment institutions)” as defined in Article 4(4) of PSD2;
- “Exempted payment institutions” under Article 32 of PSD2;
- “Account information service providers” under Article 33 of PSD2;
- EMI (Electronic money institutions)” as legally defined in Article 2(1) of EMD2;
- “Exempted electronic money institutions” under Article 9 of EMD2;
- “Agents” as legally defined in Article 4(38) of PSD2;
- “EEA (European Economic Area) branches” as legally defined in Article 4(39) of PSD2;
- “Institutions entitled under national law to provide payment services” under Article 2(5) of PSD2
- The directive still allows for the provision of payment services by "payment institutions" - a special category of organizations that are not banks. Prudential requirements for payment institutions remained mostly unchanged. The authorized capital of payment institutions is fixed at 125,000 euros. Money remittance services – 20,000 euro. Payment initiation services – 50,000 euros. Differentiated requirements for the minimum amount of own funds (capital) are also imposed on participants in the payment market.
- States have the right to exempt payment institutions with an annual turnover of up to 3 million euros from prudential and a number of other requirements.
- The directive prescribes the use of enhanced authentication when receiving online access to the account, when transferring orders for the transfer of funds in electronic form, as well as in the presence of fraud risks.
Payment Institution (PI) License
Payment Institution (PI) license as the name implies, is a license that allows you to provide various financial intermediation services. This license is valid without being strictly tied to an online business, such as in the case of EMI. However, it can also be used in various Internet projects.
Payment Institution (PI) license scope of use:
- Provision of services for the user accounts replenishment in other systems, including the use of all the necessary tools for managing such accounts (opening / closing);
- Provision of services for the withdrawal of funds from the accounts of individuals and legal entities, including the use of all the necessary tools to manage such accounts (opening / closing);
- Ensuring payment transactions between client accounts, including the reassignment of transactions to third-party payment systems;
- Withdrawing funds from the client’s account without his consent, including one-time transactions;
- Conducting transactions using bank cards and other financial tech tools;
- Making payments on customer loans, including regular (periodic) payments
- Execution of payment transactions in the case when the funds used are covered by the client’s credit line
- Direct debit transactions, including non-recurring transactions;
- Conducting transactions using bank cards and other financial tech tools;
- Making payments on customer loans (repayment of one loan at the expense of another), including regular (periodic) payments;
- Creating your own and attracting third-party payment instruments;
- Money transfers;
- Execution of payment transactions in cases when the payer's consent to perform the operation is given through any telecommunication, digital and computer devices, while the payment itself is made in favor of the telecommunications IT system or network operator also playing the role of intermediary between the payer and the supplier of goods and services.
The operating company that receives the PI license must be registered in the jurisdiction that issues the Payment Institution license.
To activate a license, a company applying for a Payment Institution license must deposit capital into a bank account opened in the same jurisdiction, which will serve as a guarantee of the future law-abiding nature of the payment institution.
Base capitalization must be at least:
- EUR 20,000 (see supra item 6);
- EUR 50,000 (see supra item 7);
- EURO 125,000 (see supra items 1 to 5).
The final capitalization amount is determined by the relevant financial authority based on the following factors:
- Planned turnovers;
- Number of clients served;
- Number of operations;
- Characteristics of beneficial owners;
- Experience in managing financial companies;
- Other business characteristics specified in the business plan.
Additional capitalization cannot be made at the expense of working capital or clients’ funds.
Package of documents for Payment Institution license:
- A detailed description of the actions that will be performed during the provision of payment services;
- Business plan with a financial plan for 3 years;
- Availability of funds for capitalization;
- Description of measures aimed at ensuring the safety of customer funds in accordance with the current legislation in a particular jurisdiction;
- Descriptions and justifications for the appointments of the company's management, internal control mechanisms for the activities of directors, their administrative functions, as well as risk management methods, methods of accounting and organization of company management;
- Description of mechanisms to counter money laundering in accordance with current legislation;
- Description of the applicant's participation in any national or international payment systems. Description of the applicant’s structural organization, schemes for outsourcing involved, as well as information on existing agents and branches of the company;
- Information about individuals who directly or indirectly control the activities of the company. As well as information about the financial solvency of these persons, their positions, as well as other data confirming their competence and suitability in terms of management of a financial company or payment institution;
- Information about all directors, as well as employees responsible for the activities of the payment institution. Proof of their impeccable reputation, as well as proof of their knowledge and experience necessary for the provision of payment services, namely: a certificate of good standing, no bankruptcies in the past, a description of professional skills, academic titles, a list of previous jobs describing job responsibilities;
- Information about auditors;
- Memorandum and Articles of Incorporation;
- Address and location of the head office of the applicant’s company
To comply with the aforesaid requirements, the applicant must provide financial audit results. As well as a description of organizational measures aimed at protecting the interests of consumers of payment services, maintaining the proper quality of services, as well as the consistency and continuity of their provision.
It is to note that the number of employees of a financial company operating under the Payment Institution license must be at least 5 people.
The leading positions in terms of issuing PI licenses for provision of financial services as a Payment Institution (PI) on the territory of the European Union are firmly taken by Germany, France, the Netherlands, Malta and Lithuania respectively. Specialists fromYB Case will advise you on the choice of jurisdiction, provide you with comprehensive legal support by collecting the necessary documentation and accompany you to the financial regulator's office for successful initial registration of your application and subsequent issuance of the Payment Institution (PI) license or Small Payment Institution (SPI) license.
Electronic Money Institution License
Electronic Money Institution (EMI) license is a license for issuing electronic money. This type of license will allow you to issue your own near money or quasi-currency. The e-currency can be used outside the site of the payment system. It can be withdrawn and converted into any other currencies. The Electronic Money Institution license also allows you to use your quasi-currency to service third-party payments. Typical example is PayPal. Electronic Money Institution (EMI) is practically a bank, but only without the right to issue loans. The license allows you to open sub-accounts to customers within your own bank account and create an “e-Wallet” or “e-Purse”.
Restrictions imposed on operations on client sub-accounts, as a rule, depend on the degree of identification of the client and differ depending on jurisdiction.
The EMI license allows you to bind existing payment bank cards to client sub-accounts. It is also possible to use cards of the major credit card issuers (VISA, MasterCard). In addition, by operating an EMI, it is possible to create your own card payment system.
The Electronic Money Institution (EMI) license is required when you plan to create a user's electronic wallet on the site with the possibility of withdrawing funds, or the wallet's currency is supposed to be used for conducting settlements on other sites (websites owned by third parties). In the case when the internal currency is created without the need to withdraw funds from the system, an EMI license is not required to create an electronic wallet.
The Electronic Money Institution (EMI) license includes all features provided by the Payment Institution (PI) license. A broader financial toolkit gives only a banking license.
Such things as your own electronic money provides ample opportunities for fraudulent operations and money laundering. In connection with this peculiarity of the electronic money, the owners of the company applying for an EMI license are subject to strict scrutiny, which may take from 3 to 12 months.
Basic requirements for the EMI end beneficiary:
- The absence of tax arrears;
- The absence of unexpunged or unserved sentence;
- Personal account in the bank.
In order to control licensed activities, there is always a requirement to establish a financial company and its head office in the licensor’s jurisdiction, as well as to include several directors from among the citizens/subjects of this jurisdiction in the licensee’s management. The number of directors varies from two to five people. In addition, if not all, then most of the directors must necessarily be citizens/subjects of the licensor’s jurisdiction.
To provide additional financial guarantees of licensee’s subjection to law, after the approval of the owners and directors, to activate the license, it is necessary to capitalize the company’s account. The amount of capitalization may vary, however, within the European Union for licenses such as EMI license; it is fixed at - EUR 350,000. These funds must be in the account at the local bank for the entire period of the duration of the license.
PSD2 is adopted with the sole purpose of harmonizing the payment services market in the EU countries, so that a company licensed in the UK to carry out financial activities (by the way, 146 duly licensed electronic money institutions (EMIs) currently operate in the United Kingdom) could easily provide cross-border services or carry out its commercial activities on the territory of other members of the European Union and the countries of the European Economic Area (EEA) through the so-called “passporting” process that is carried out by the central financial authorities of European countries.
If you want to get an EMI license in England, or on the territory of another European Union member state, consult our specialists who have extensive experience working for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
We are positive that specialists from YB Case will provide you with qualified legal assistance in the following matters related to prompt and seamless obtaining a PI, a SPI or an EMI licenses:
- Preparation of a “pass-through” set of documents;
- Consultation of the beneficiary for the interview;
- Submission of documents to the supervisory authority;
- Assistance with recruiting and hiring directors;
- Negotiations with the licensor;
- Assistance with preparation of a business plan;
- Support with preparation of financial forecasting for the first three years of your business.