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The financial technology (fintech) industry is currently undergoing an era of rapid transformation. This can be seen in the rapid emergence of digital payment and online banking companies. This is not the only reason why payment system licenses, which are so well-known in different regions of the world, have been so influential. Of these, it is important to distinguish between the Electronic Money Institutions (EMI license), Money Service Business (MSB), and Money Transmitter Licenses (MTL). Each of them performs a vital function in legitimizing and facilitating innovative payment solutions. Below, we will show what these licenses entail, their direct impact on the market, and most importantly, the rapid growth of the fintech industry in different jurisdictions: Europe, Canada, and the United States.
Understanding payment system licenses
Electronic Money Institution
An Electronic Money Institution (EMI) is an individual or legal entity that has the official right to create quasi-money, electronic money. It is also possible to make payments using these assets.
The most important difference between an EMI and a regular bank is that an electronic money institution does not have the right to issue loans or accept deposits. They are primarily there to make payments and serve businesses or individuals.
The legal provisions governing this issue are constantly changing around the world, which is why it is worth doing a clarifying study for each project that is new.
Within the European Union, every entity responsible for issuing licenses to electronic money institutions adheres to Directive 2009/110/EC. This directive serves as the foundational legal framework for the issuance of e-money.
What is a Payment Institution License?
PSD2 (Payment Services Directive 2) regulates the Payment Institution (PI) license and is also a permit that allows companies to provide a wide range of payment services. For companies that want to successfully operate in the EU, this license will be one of the best options.
- Its main features are legal legitimacy and access to a huge market.
- In addition, the license is a cornerstone if the company plans to provide direct debit services, payment transactions, money transfers, and account information services.
- In turn, PDS2 acts as a guarantee that payment services are defined as technology-neutral, encouraging continuous innovation.
Main Differences between EMI and PI License
EMI (Electronic Money Institution) and PI (Payment Institution) licenses serve distinct functions in financial services. An EMI license, including variation like the e-money issuance license, permits the issuance of electronic currency and the creation of various payment instruments, such as e-wallets and payment cards. In contrast, a PI license is limited to managing accounts and facilitating money transfers, without the ability to issue electronic funds.
With an EMI license, businesses can secure client funds for longer durations, innovate in transaction speed, and reduce payment fees, thereby enhancing customer loyalty. These advantages make it a strategic move for businesses looking to establish themselves in the digital payments space with a digital payment license.
EMI vs. MSB Licenses
While a PI License covers a wide range of payment services, an EMI license (Electronic Money Institution) is regulated by the Electronic Money Directive 2 (EMD2). It authorizes the issuance of electronic money that has a digital value stored electronically. This license is required in order to provide electronic storage of customer funds and payment services. EMIs have higher financial obligations related to the security and protection of electronic funds and financial interests of customers.
In turn, Money Service Business (MSB license) is important in Canada and covers financial services such as currency exchange, money transfers, and operations with virtual currencies. Those who wish to obtain this MSB license are required to comply with anti-money laundering and anti-terrorist financing regulations. This is all in accordance with the Anti-Money Laundering and Combating the Financing of Terrorism Act (PCMLTFA). It is vital to ensure the integrity of financial transactions, so a high level of operational transparency and compliance is important here, as it is in EMI.
The regulatory environment for EMIs and MSBs is currently evolving rapidly. Authorities are emphasizing consumer protection, financial stability, and the fight against crime in this niche. Therefore, we have both new challenges and opportunities for business in the fintech sector. The development of the digital economy is becoming more important not only in Europe and Canada, but also in many other countries and regions of the world, such as the United States, Australia, Singapore, and so on.
Thriving European Payment Services Market
It is already predicted that the European payment services license market will grow by 15.8% CAGR from 2022 to 2027. All this is solely due to innovation and the growing popularity of real-time solutions, such as SEPA’s instant credit transfers. A sustainable approach to fintech development is expressed in a strong emphasis on environmentally friendly financial products.
The Best Jurisdictions for Fintech in Europe
Europe offers a dynamic competitive environment for fintech companies. Countries such as Lithuania, the Netherlands, and Spain boast a favorable regulatory climate and favorable ecosystems for the development of this industry.
Among them, Lithuania is worth mentioning, as it demonstrates flexible e money licensing options. Thus, this country is one of the most attractive centers for both new startups and existing businesses in this area. The Bank of Lithuania’s regulatory sandbox allows companies to test their innovations in a controlled environment. Lithuania’s approach to EMI license is particularly noteworthy for its accessibility and flexibility.
Fintech in Cyprus
Primarily due to its strategic location and favorable tax regime, Cyprus is making progress in innovative financial technologies. The number of companies that have obtained a PI license is growing, which is positively influenced by the regulatory environment. Cyprus has implemented PSD2, which has allowed it to have an integrated and, most importantly, efficient European payments market.
Fintech in the UK
The UK remains a global leader in the fintech sector, which regularly attracts significant investments. The Center for Finance for Innovation and Technology (CFIT) only proves the government’s proactive approach. The Center aims to eliminate everything that prevents this niche from being torn up and to promote high-paying jobs in the high-tech sector. The Financial Conduct Authority is most interested in the potential of open banking (FCA e money licence). The country is researching distributed ledger technologies and supporting the crowdfunding market. As for environmental, social and governance issues, they are also high on the UK government’s agenda.
The US Market: A Hub of Innovation
The United States holds a significant position in the global fintech sector. Its regulatory framework, though varied and complex due to state-specific regulations, creates a fertile ground for fintech innovation. The MTL (Money Transmitter License) is particularly crucial in the US, with each state having its unique set of rules and requirements. This multi-layered regulatory landscape offers both challenges and opportunities for fintech companies looking to scale their operations nationwide.
Some Important Benefits of Obtaining an EMI License
The potential to acquire an electronic money institution licence, ensuring all operations align with the prevailing emoney regulations.
- SWIFT Capability
- Institution clients are granted IBAN accounts.
- Clients can effortlessly open accounts from any location.
- Issuance of both Visa and MasterCard payment cards for clients.
- Capability to process payments with global banks in various currencies.
- AML department ensures all financial activities adhere to strict regulations.
- The company retains the liberty to make its own payment choices and can maintain correspondent accounts worldwide.
- The institution ensures necessary operations for payment account function, such as services for cash deposit, withdrawal, and more.
Compliance and consumer protection
Compliance with regulatory standards, such as GDPR (General Data Protection Regulation) in Europe and PCMLTFA in Canada, is of paramount importance. These regulations ensure consumer protection, data security, and financial stability, thereby building trust and integrity in the fintech sector.
Business Environment for Financial Licensing
The Czech Republic and Lithuania are currently EU leaders for businesses seeking EMI licence. By 2021, the Czech Republic housed 40 PSP/EMI and 104 smaller payment entities. Lithuania payment systems reached 112, a significant increase from 63 in 2018.
These jurisdictions attract businesses with their lower labor costs in the EU, streamlined EMI license procedures and transparent tax systems. While other EU countries like Germany and Malta take 6 to 12 months to process licenses, the Czech Republic and Lithuania are quicker. Lithuania allows license applications without a pre-established company.
The requirements for obtaining an EMI/PSP license across the EEA are nearly identical, ensuring a consistent process with only slight variations in formalities.
Assistance in Establishing a Business
- Tailoring documentation to apply for a financial service license, we can craft a full document set or refine existing files.
- We offer White Label as a simple and cost-effective solution to the documentation process.
- Consultation on team composition. There will be a breakdown of mandatory regulatory roles and optional roles according to your business model. If you hire a local director and MLRO, you can save money.
- Conduct an IT assessment to ensure that your software is compliant. It is recommended to use proven platforms such as SAAS or BAAS, and Crasula or Canopus are often used.
- Assistance in connecting SEPA to SWIFT via recognized third parties. This way, you can make transactions in more than 140 currencies, saving on development costs because of the existing integrations.
- White label release strategy to minimize costs and speed up the process. To realize this strategy, there is a collaboration with DECTA and Wallester.
Is it possible for European EMI or PI license holders to venture into markets outside the EU?
Absolutely. Holders of European EMI or PI licenses can utilize their regulatory standing and reputation to venture into non-EU markets. These licenses often bolster trust and open new avenues in various international regions.
How significant is the chosen jurisdiction in obtaining an EMI or PI license?
The regulatory authority of the selected jurisdiction is crucial in the EMI or PI licensing process. It is responsible for scrutinizing applications, guiding the process, and issuing licenses. Different jurisdictions might have distinct timelines and specific requirements for processing.
Could you give an example of what constitutes an MSB?
Prominent examples of MSBs include Western Union and MoneyGram, known for their global money transfer services. Broadly, an MSB encompasses any entity engaged in electronic payments, currency exchange, remittance services, credit provisions, and other financial transactions. These businesses range from large-scale financial institutions to emerging startups.
What are the essential prerequisites for obtaining an EMI license in Europe?
Key prerequisites for European EMI license aspirants encompass:
- Adequate initial capital
- Directors and shareholders meeting the ‘fit and proper’ criteria
- Adherence to Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) procedures
- Compliance with European Union regulations
- Robust technical infrastructure and efficient risk management
- Payment of application fees
- Submission of comprehensive and detailed documentation