Entering the EU payments market requires a careful regulatory strategy due to the complexity of the supervisory framework.
In order to operate in the EU-market where payment services, processing of payments, or e-money solutions are being provided, a firm has to adhere to main authorization models under EU law – the Electronic Money Institution (EMI), Payment Institution (PI) and AEMI license.
Each of licensing regimes has an overall spectrum of activities, operational and supervisory norms and strategic aspects. These distinctions are essential to realize when entering the market with compliance focus or to sustain the business-nature.
Essential Peculiarities of EMI and PI-Licensing Finance Models
EMI/PI-licensing models are both regulated under the EU financial law, nevertheless, they fulfill different functions in the payments ecosystem.
EMI licence allows an institution to issue electronic money and offer payment services connected to e-money accounts or online payment processors.
It forms the foundation for Fintech firms playing off online banking or multi-currency payment systems, in different forms of application as they operate as online banking facilities or payment processors. A PI licence in contrast, allows for the provision of payment services without issuing e-money.
Payment institutions are, in contrast, the providers of payment services who will not be issuing e-money but execute transactions on behalf of clients.
Payment institutions usually deal more generally in the processing of payment services, provision of payment processing, acquiring services, which are carried out by the payment institution, and acquisition & transaction execution on behalf of its clients. Major differences between 2 models:
- issuing of e-money: EMI (permission granted under EMI but prohibited under PI);
- client funds administration: EMIs may issue and redeem electronic money and hold client funds in exchange for e-money issuance, whereas PIs may execute payment transactions without issuing e-money;
- capital requirements: higher for EMI compared to PI;
- operational scope: broader financial functionality under EMI authorization.
Appropriate type of licensing model should be chosen based on the business-model and revenue models and target for the long term in addition to its market development.
Problems And Obstacles In Choice Of Licence
Decision between EMI and PI licensing is full of strategic options but regulatory hurdles. Businesses frequently underestimate the supervisory value of their business -model which is where the licence scope and use is misaligned with their way working in practice.
Common challenges include:
- misclassification of services as payment or electronic money activities;
- underestimation of required compliance and reporting;
- underdeveloped share capital planning;
- regulatory restrictions limiting scalability and acquiring services.
Supervising bodies focus not just on formal descriptions of what services are offered but also the actual performance of those payment flows.
Businessholders of inappropriate permits would face regulatory enforcement, permit refusal, or financial restructuring at a later date.
How Professional Advisors Help Overcome These Barriers?
Expert advisers are key resources in understanding the intricacies of EU licensing system complexity. They don’t only work on rules and regulations, but also on the interpretation of norms and direction and strategic alignment, in addition to the process and the execution of regulation, their role goes beyond just procedural advice and consists of supervisory interpretation and strategic alignment. What usually comes in the form of expert support typically includes:
- analysis of the business-model under European Union supervisory definitions;
- decision as to whether EMI/PI-authorization is needed;
- coordination of services to stay within permissible scope;
- formation of an approved licensing and expansion plan that meets the rules, and development of a permit compliance plan.
Advisors also help to control supervisory risk, by identifying operational plans and licensing restrictions and conflicts of interest to protect assets before they can be transferred to authorities and to minimise regulatory risk.
EU Financial Authorities Interaction Process
Course of contact with EU financial authorities is developed in a systematic or formal order. It’s authorized by a national competent authority with common standards, which are followed in the EU from the Member States.
Common features of the process of supervising bodies interaction were:
- submission of a licensing application;
- assessment of completeness and formal eligibility;
- substantive review of compliance, governance and financial resources;
- request for clarification or additional documentation;
- authorization issuance or regulatory refusal.
At any time along the way, regulators could be monitoring payment flows, and the safeguards in place and internal controls.
Expert advisers act as intermediaries to ensure that regulatory communication is consistent and accurate and adheres to supervisory practices.
Documents And Compliance Norms
Documentation is at the heart of the EMI/PI-licensing applications. Authorities need substantial documentation detailing readiness for operation, financial stability and the ability to ensure compliance are sufficient.
Core documentation typically includes:
- its incorporation papers;
- ownership composition;
- payment and acquiring activity detailed in the business-plan;
- compliance with AML, risk control, internal mechanisms;
- safeguarding arrangements for client funds;
- evidence of share capital and financial resources.
Continuous reporting and auditing in the form of regulatory reporting, transaction monitoring, and supervisory audits also exist. EMI-licence holders have more obligations for electronic money issuance and the level of safeguarding intensity.
Compliance Scope and Operational Differences
While two licensing systems are subject to EU compliance criteria, the scope of obligations differs. EMI providers face closer scrutiny because the issuance of e-money and holding of client value balances is their remit.
Some of the major compliance differences are:
- higher capital adequacy rules for EMI-organisations;
- more stringent safeguarding and reconciliation norms;
- broadened reporting requirements to the financial authorities;
- more comprehensive supervisory oversight.
PI-license holders enjoy the advantage of a more limited compliance profile but are restricted in their ability to expand services or diversify their product offerings.
Practical Recommendations for International Payment Firms
Licensing decisions should inform a wider regulatory and commercial strategy for firms entering the EU payments market.
Some of the practical recommendations include:
- determine core services before choosing a licence type;
- evaluating expansion and passporting plans for the future;
- preparing share capital and compliance resources;
- utilizing professional advice during licensure, and during post-authorization phases.
Those businesses that treat licensing like a strategic underpinning, rather than just a procedural obligation, are more likely to have supervisory stability and market confidence.
Passporting Rights and Global Service Expansion
When deciding between EMI/PI-licensing, one of the big strategic factors is whether passporting rights in the EU exist.
Availability of these licensing models within the EU-market while granting access is open to each, however, there are key differences concerning the level and type of global service provision regulation.
Passporting means that, for licensed entities, it’s possible for payment services to be provided in other EU member states by way of notification procedures (rather than complete local authorisation at that time).
Operational aspect of passporting will depend on which permit is issued. Some essential passporting considerations are:
- EMI-licence holders can passport e-money issuance and affiliated payment services;
- PI-license holders may passport payment services, where there is no issuance of e-money;
- host regulators maintain local market governance oversight;
- extra reporting norms may be warranted in cross-border activities.
Expert advisers support organizations when planning for passporting and preparing notification filings and when it comes time to make operational models suited to host state regulation.
Long-Term Licensing Strategy and Supervisory Scalability
There’re costs associated with initial market entry but even more, businesses need to be able to easily and long-term scale their regulatory authorizations.
Choice between EMI/PI-licensing has immediate influence over product development and in its own right on areas including revenue and compliance expansion. Strategic licensing considerations include the following:
- potential transition from a PI licence to an EMI licence;
- scalability of internal controls and compliance systems;
compliance costs from expanded supervision; - alignment of licensing model with future e-money or acquiring services.
Supervising bodies assess not only the current operations but also whether it’s sustainable. Support from professionals helps businesses foresee the supervisory landscape, adjust governance arrangements, and achieve compliance continuity with the expansion of operations within the EU payments market.
Conclusion
The first thing to know in entering the EU payments market when comparing EMI vs PI licensing models. Both of these authorizations have their own unique privileges and constraints; it impacts directly upon business-activities, the ability to conduct business-deals, compliance, and scalability and compliance norms.
An analysis of licences with professional advice and support makes it possible for firms to ensure that the right licensed authorization will align the operational strategy with supervisory mandate.
Under an extremely controlled financial environment, planning licensing decisions for strategic decisions is essential for enabling compliant and sustainable payment service development in the EU.
The author of this article is Denys Chernyshov – CEO of Eternity Law International.
