E-money regulation in the EU

Do you wonder about how e-money functions and how is it regulated? Maxpay‘s team is here to explain all that and more!

What is E-money?

E-money is an electronic substitution for cash. Electronic money is not an ordinary digitized currency that is stored in a bank account. The difference between traditional money and e-money is that the last one stands in the financial system only as an equivalent of available funds in the bank account. 

Electronic money is considered a digital and, at the same time, monetary medium of interchange that is operated on electronic platforms, including software solutions and hardware devices.

Electronic money must meet three main requirements to be valid: 

1. E-money must be stored on the electronic device such as computer or payment credit or debit card; 
2. E-money must be issued under the claim of funds in an amount, not less in value than the monetary value obtained;
3. E-money must be accepted as funds of payment by assignments other than the issuer.

The European Union rules on e-money focus on:

• facilitation of the arrival of modern, innovative, and well-secure e-money services;
• enabling new enterprises an entry into the e-money market;
• empowering productive competition among all market participants.

Hardware and software-based products

Electronic money items can be hardware-based or software-based. It depends on the exact technology used to store the value of it in the monetary equivalent. 

When it comes to hardware-based products, the ability to make a transaction is manifested through a physical device, such as a chip in a credit or debit card, along with special hardware-based security measures. 

Software-based products request supplementary software to process the transaction. This software should work on the most popular devices such as laptops, computers, smartphones, and tablets. A device should be connected online to the financial networks, that maintain the payment processing to make the transaction. 

By the way, here we have an article that explains in all details how payment processing works: “The basics of online payment processing”.

E-money institution

An electronic money institution or EMI is a financial institution, which was given legal permission to issue electronic funds. In comparison to traditional banks, the electronic money institution has some particular advantages.

For one, EMIs are not obliged to take part in deposit guarantee schemes. Just as banks, they are subjected to KYC/AML and other compliance requirements, but for EMIs those are simplified and usually in a digital form. 

EMIs commonly provide a broad range of services, solutions, and products in the field of payment processing and alternative finance for private clients, business clients, and merchants. 

Thanks to more simple regulatory demands and compliances, electronic money institutions usually offer their services, solutions, and products at cheaper prices and with reduced fees in comparison with traditional financial institutions. Also, EMIs are known to establish an easier onboarding process. 

Services, solutions, and products commonly offered by EMI:

• personal accounts with IBANs;
• payment cards;
• expense management;
• business accounts with IBANs;
• money transfers;
• merchant accounts;
• cryptocurrency operations.

E-money license in the European Union

E-money license in Europe or electronic money license in Europe is a license delivered by national financial regulators and supervisory authorities of the European Union member states to financial institutions, which are called electronic money institutions. 

The electronic money license is a precondition for the release of electronic money. E-money license Europe might be viewed as a second choice to a traditional banking license in the European Union since it enables the offering of most of the daily banking services, solutions, and products. 

Commonly, it is easier to obtain an e-money license and to become an electronic money institution in the EU than to get approval for establishing a traditional banking institution. But at the same time, it is good to keep in mind that EMIs can not offer all the same services, solutions, and products as traditional banks do.

EMIs are legally not allowed to vending or advertising counsel regarding the banking financial projects, vending or advertising investment products (note: under certain conditions, EMIs can invest clients’ funds into low-risk assets), and taking credit risks. The last distinction is probably the key one. When a client puts the money into an account in the traditional bank, they take up credit risk. In fact, traditional banks are authorized to use the money of the client lending it to someone else. Electronic money institutions are not able to do that.

What are business models requiring an E-money license in Europe?

The business model that requires obtaining an EMI license is the e-wallet system. The e-wallet business requires the establishment of a digital wallet to operate with funds digitally. In most cases, an e-wallet is a type of account that is linked to a certain payment account. It enables a client to securely accumulate funds and perform transactions without interrogation with a physical branch.

The next business model includes payment facilitation for a merchant, offering a range of merchant services. The business, in this case, is subscribing a merchant, launching a merchant account, and enabling payment services. The main goal is to enable an opportunity to accept payments online with various payment methods like payment cards, e-wallets, mobile payments, etc. Find out more about merchant accounts in this article: “Why do you need a merchant account and what do you need to know”.

Electronic Money Directive

The electronic money directive (EMD) and PSD2 create the obligations for the business operations and management of electronic money institutions (EMI). The directive focuses on creating the basis for a single market for electronic money services in the European Union.

The electronic money directive has been aimed at:

• ranging the European Union requirements for electronic money services and keep in order a coherent assortment of requirements for having a license as an electronic money institution;
• easing access for new parties to the electronic money market by guaranteeing judicious rules are corresponding to the risks met by electronic money institutions.