There are many challenges and advantages that come with acquiring an electronic money institution (EMI) licensing, Aaron Carpenter, COO of Transact Payments, explores this further as he looks at the growth of the sector.
The “death” of cash might garner some engaging headlines, but physical notes and coins are hanging on. According to an ECB report, 59% of transactions in the Eurozone area in 2022 were made using cash, making it the most frequently used payment method.
Yet, last year’s figure is down from 72% in 2019 and electronic money (e-money) transactions within Europe have also jumped to seven and a half billion in 2021, compared to just four billion in 2018.
This points to a deep change in consumer behaviour when it comes to how consumers make purchases, with the COVID-19 pandemic being a key reason as to why the use of e-money has accelerated so rapidly in the last number of years, coupled with the digitisation of the shopping experience across all sectors.
With the shift to e-money, there has also been significant growth in the number of electronic money institutions (EMIs) – now numbering 585 within the EU alone. In an ecosystem once predominantly dominated by traditional banks, a host of innovative organisations, ranging from challenger banks, fintechs and even non-banking operators, have emerged seeking to benefit from an EMI License to issue and manage e-money.
Licensing: How EMIs and banks differ
In a nutshell, an e-money licence allows for the issuance, distribution and redemption of e-money, services that allow for transactions to be performed and also the ability to issue payment cards.
Meanwhile, a banking licence, on its most basic level, enables an organisation to call itself a bank. But of course, it means much more than that – such a licence entitles an entity to offer a comprehensive level of banking services and is typically sought by larger corporations that operate at scale.
A banking licence can also take up to 12 months to obtain and a licensed bank must hold cash reserves at a strict percentage of the size of its total deposits. These organisations are required to share regular reports to the regulating body in its jurisdiction in order to confirm it has in place rigorous policies and procedures to comply with the regulations in place.
While this highlights the overall differences in licensing, lending is the critical issue that defines which licence is which. EMIs are strictly mandated to abstain from providing lending services and the regulations governing e-money mean client funds are isolated in a separate account in order to keep them secure.
Additional guardrails to keep deposits safe also require an organisation to maintain a minimum capital requirement for their services. EMIs must also have a percentage of “own funds” concerning the average outstanding e-money issued. This stands in stark contrast to the conventional banking model, wherein profit margin relies on generating income on deposits through offering lending products.
Deciding which licence is best for your organisation
It is hard to understate the role that EMI licensing has played in the financial sector since being introduced in 2009. It has spurred growth, innovation and opened up a more level playing field by offering smaller operators the ability to provide payment services while removing onerous regulatory requirements and hefty capital requirements.
EMI licences offer many operational advantages also. Given that most EMIs are solely online operations, cost savings can be passed onto the customer, while account openings and transactions can also be processed much faster.
Another key selling point of EMIs is the breadth of product innovation they can offer, from a variety of card offerings (prepaid, corporate, travel and more) to e-wallets and cryptocurrency services. Many banks are burdened by legacy technology that hinders their ability to innovate and curtails their ability to be responsive and agile to changing customer demands.
A third option is available: BIN sponsorship
Yet there is no getting away from the fact that obtaining an EMI licence is not only time-consuming but also costly. A faster solution is at hand through partnering with an EMI-licensed entity that provides BIN sponsorship. This is a perfect route used by many non-regulated businesses and fintechs who wish to offer payment services.
By working with an e-money institution partner, these organisations are sponsored by the licence holder, meaning they can perform many of the operations of a financial institution without needing their own EMI licence. In operation, this approach enables new payment products to be brought to life in just weeks, without making concessions on compliance or security.
Making the choice on which licence to pursue is not an easy matter and many factors should be assessed before a decision is made. However, it is hard to ignore the ease and speed offered by BIN sponsorship.