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These days, electronic money distributor and payment initiation service provider (PISs) play bigger roles in financial services. This is especially true as fintech and digital banks have grown. The digital payment ecosystem regulates both fintech and digital banks differently, and each plays a distinct role. This article goes into excellent detail about EMDs and PIS, including what they do, how to register for them, and how they affect the financial services business.
E-Money Distributor (EMD)
Function of EMD:
EMDs are entities that distribute or redeem electronic money (e-money) on behalf of an Electronic Money Institution (EMI). They do not issue e-money themselves but act as intermediaries between EMIs and customers.
Their role includes facilitating the use of e-money products, such as prepaid cards or digital wallets, provided by a licensed EMI. This process includes the distribution and redemption of e-money, ensuring smooth transactions for users.
Registration and Compliance:
EMDs must register with the financial regulatory body in their jurisdiction, such as the Financial Conduct Authority (FCA) in the UK.
They must comply with relevant regulations, particularly in areas like anti-money laundering (AML) and know your customer (KYC) standards.
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Examples of EMD Activities:
Selling or distributing prepaid cards to consumers or businesses.
Facilitating top-ups of e-money accounts or wallets.
Assisting in the redemption of e-money for cash or other forms of payment.
Managing supplier payments on behalf of businesses, ensuring timely and accurate transaction processing.
Cost of the E-Money Distributor (EMD) Licence in the UK
The cost of obtaining an E-Money Distributor (EMD) Licence in the UK varies based on the specific type of licence and the scale of operations. Here's a breakdown of the costs involved:
Authorised E-Money Institution (AEMI) Licence:
Application Fee: GBP 5,000
Initial Capital Requirement: EUR 350,000
Ongoing Capital Requirement: The greater of EUR 350,000 or 2% of the average outstanding e-money.
Small Electronic Money Institution (SEMI) Licence:
Application Fee: GBP 500
Initial Capital Requirement: No minimum capital requirement for firms with average outstanding e-money of up to EUR 5 million and monthly average payment transactions not exceeding EUR 3 million.
In addition to these fees, companies must also consider costs related to:
Documentation and Legal Support: Preparing the necessary documents and handling communications with the regulator can cost between EUR 75,000 and EUR 150,000.
Safeguarding Accounts: Establishing accounts to safeguard client funds can add between GBP 3,000 and GBP 10,000.
Staffing and Compliance: Depending on the size and complexity of the business, staffing costs can also be significant, especially for roles required by the regulator such as compliance and risk officers.
Annual fees are also applicable after the licence is granted, which are determined by the Financial Conduct Authority (FCA) based on the business's scale and scope of operations.
Note: The initial capital requirement for obtaining a EMD licence in the UK is often quoted in euros because the regulations are derived from the EU's Payment Services Directive 2 (PSD2), which standardises requirements across EU member states.
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Examples of E-Money Distributors
Revolut: Though primarily known as a fintech company offering a range of financial services, Revolut also acts as an EMD by distributing e-money through its digital banking platform. Users can top up their Revolut accounts, which is essentially storing e-money for future transactions.
Prepaid Card Companies: Many companies offer prepaid cards that are loaded with e-money for various uses, such as travel or gift cards. An example is the Post Office in the UK, which offers a Travel Money Card – a prepaid card that users can top up in various currencies.
Retail Chains: Some retail chains partner with EMIs to offer branded prepaid cards or e-money solutions. For instance, a supermarket chain might offer a prepaid card that can be topped up at checkout and used for future purchases in-store or online.
Mobile Wallet Providers: Companies like Google Pay or Apple Pay can be considered EMDs when they facilitate the storage and use of e-money through their digital wallet services, even though the actual e-money is issued by partner banks or financial institutions.
What is the difference between EMI agent and distributor?
An EMI agent acts on behalf of the EMI to provide electronic money services directly to customers. The EMI's regulatory framework and branding authorise these agents to issue e-money, process payments, and handle transactions. They need to register, adhere to stringent regulatory standards, such as anti-money laundering (AML), and understand your customer's KYC requirements. EMIs have significant control over their agents, ensuring they adhere to operational procedures and compliance standards, and the EMI is liable for the agent's actions.
In contrast, a distributor's role is more focused on the sales and marketing of e-money payment solutions, like payment card, rather than direct service provision . Distributors help promote and sell products such as prepaid cards and e-wallets, but they do not manage customer accounts or handle transactions. While they are not subject to the same level of direct regulatory scrutiny as agents, they must still comply with certain AML and KYC regulations. Distributors operate more independently, governed by commercial contracts that outline their compliance obligations and performance standards. This distinction highlights the complementary roles agents and distributors play in the ecosystem of electronic money services.
Payment Initiation Services (PIS)
Function of PIS:
PIS are services that initiate a payment order at the request of a consumer from their bank account to a third party. These services are a part of the open banking ecosystem, providing an alternative to traditional payment methods like credit cards or bank transfers.
PIS providers facilitate transactions directly between bank accounts, often enabling faster and potentially cheaper payments.
Registration and Regulatory Framework:
Similar to EMDs, PIS providers must register with a relevant regulatory authority.
They are subject to stringent regulations regarding data protection, customer consent, and secure transaction processing.
PIS providers must ensure robust cybersecurity measures to safeguard customer data and transaction details. This streamlines the payment process for both consumers and businesses, enhancing the efficiency of accounts payable systems.
Examples of PIS Activities:
Enabling e-commerce purchases directly from a customer’s bank account.
Facilitating bill payments directly from a user’s bank account without the need for credit/debit cards.
Offering an interface for consumers to manage and initiate various payments across different bank accounts.
Examples of Payment Initiation Services
Klarna: Known for its "buy now, pay later" service, Klarna also offers direct payment options that allow users to pay for online purchases directly from their bank accounts, bypassing traditional card payments.
Trustly: Trustly is a European payment service provider that specializes in direct bank payments. Users can make online purchases or fund online accounts directly from their bank accounts using Trustly’s service, without needing a credit or debit card.
PayPal: While primarily known for its e-wallet service, PayPal also offers features that could be classified under PIS. For example, users can make online purchases or send money to others directly from their linked bank accounts.
GoCardless: This is a UK-based company that specialises in direct debit services. GoCardless allows businesses to collect payments directly from their customers’ bank accounts, which is particularly useful for recurring payments.
Cost of the PIS Licence in the UK
In the UK, the cost for obtaining a Payment Initiation Services (PIS) licence involves several components. To become an authorised payment institution (API) that provides PIS, a firm must have a minimum of €50,000 in initial capital. Additionally, the firm must hold professional indemnity insurance (PII).
The application process also requires that the firm demonstrate robust governance arrangements, internal controls, and risk management procedures. Furthermore, the firm must comply with the Financial Conduct Authority (FCA) guidelines, including those pertaining to anti-money laundering regulations.
Note: The capital requirements for obtaining an a PIS licence in the UK are often quoted in euros due to their origins in the EU regulations, even though the UK is no longer part of the EU.
Impact on Financial Services
Enhanced Consumer Convenience: Both EMDs and PIS offer consumers more options for managing their finances and making payments, often with greater convenience and efficiency.
Fostering Innovation: These services are at the forefront of fintech innovation, challenging traditional banking models and offering new pathways for financial transactions.
Supporting Financial Inclusion: EMDs and PIS can play a role in financial inclusion by providing alternative financial services to those who may not have full access to traditional banking.
Data Security and Trust: Given the digital nature of these services, maintaining high standards of data security and earning consumer trust are paramount for EMDs and PIS providers.
The roles of E-Money Distributors and Payment Initiation Services are integral to the evolving digital financial landscape. As fintech continues to grow and reshape the way we interact with financial services, understanding the functions, regulatory requirements, and potential impacts of EMDs and PIS becomes increasingly important. For businesses in the financial sector, leveraging these services can lead to more efficient operations and enhanced customer experiences, while for consumers, they offer more control, flexibility, and options in managing their finances.
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