The European market is a hotbed for Electronic Money Institutions (EMIs) with around 500 such institutions established. Designed for the digital era, EMIs offer innovative access to core financial services across numerous industries.
EMI's are known to provide online payment systems. Normally e-payment is done via debit, credit cards, direct bank deposits, and e-checks, other alternative e-payment methods like e-wallets, bitcoin, cryptocurrencies, and bank transfers are also gaining popularity.
There is also a growing movement in cryptocurrencies which are technically electronic money. However, in this article, we shall deal with more traditional methods of payment.
A fast-growing digital payments system
EMIs are an important part of Europe's financial system as they help consumers and businesses manage their money.
In this blog post, you will find answers to key questions relating to the EMIs, including:
What is an electronic money institution?
Where do electronic money institutions operate?
How do EMIs differ from banks?
Is my money safe with an EMI?
What are the pros and cons of working with an EMI?
There are several factors to consider when choosing the right electronic money institution for you. The abilities to offer online accounts, institutional money services, and closely related ancillary services are definitely important when you are selecting an EMI to work with.
What is an electronic money institution?
To learn what an EMI is, we have to first consider what e-money actually is.
E-money is a digital alternative to cash. E-money allows its holder to make cashless payments via money stored on a phone, prepaid card, or online account. As a result, an EMI is a type of financial institution which is authorized to issue and manage e-money on behalf of its users.
Accessibility of financial services
EMIs make financial services more accessible and efficient for a broad range of commercial and private customers.
EMIs also provide services that are similar to banks. They may offer bank accounts and since they are licensed money institutions they are governed by the applicable law regulating minimum initial capital.
European Scenario on EMIs
The European Union and the European Central Bank are seeing a growth in the number of EMIs as these financial institutions become more mainstream. Applying for an EMI license involves a rigorous application process and EU member states must ensure that the Electronic money institution is of sufficiently good repute.
With the current debate on cryptocurrencies all the rage, electronic payments have become quite topical within the EU scenario. Whilst there is also the issue of taxation and financial regulatory requirements, it seems that EMIs will be expanding rapidly in the future as businesses and individuals turn to faster payment services.
Where do electronic money institutions operate?
EMIs are a relatively recent addition to the world of global finance and emerged within the EU financial market after 2009 after the EU Parliament passed Directive 2009/110/EC.
Large numbers of EMIs have since been established within particularly forward-thinking financial jurisdictions like the UK, Lithuania, Malta, and Ireland.
Cross border transactions are facilitated with EMI's
EMIs can offer domestic and international payment services, allowing businesses to operate across borders more easily than traditional banks typically allow.
How do EMIs differ from banks?
While they have similarities, EMIs and banks differ considerably in the range of financial services that they offer.
EMIs provide e-money payment accounts that allow customers to accept and execute payments without the need for a bank account. Using e-money technology, EMIs facilitate transactions like credit transfers, direct debits, remittances, and foreign exchange services.
In Europe, EMIs are expected to satisfy a minimum initial capital requirement of €350,000. This enables EMIs to enter the market more affluently when compared to the previous restrictive regime which required an initial capital of €1,000,000.
EMIs also provide support services with credit-related tasks and opportunities. E-money issuance remains important while there should be robust control of customers' funds and proper financial projections. The EMI's own funds are kept segregated from clients' funds.
But are these differences substantial?
In contrast, banks generally offer a wider range of financial services beyond payment services. Such activities may include lending and investment services.
However, on an organizational level, most EMIs are smaller than traditional banks and they are often more agile and technology-savvy. This makes it easier for them to develop certain product capabilities that many banks do not offer.
Electronic Money Institutions should also offer comprehensive consultancy as well as the ability to issue electronic money and conduct relative payment transactions.
The length of time to open accounts is a major difference
For example, whilst opening a business bank account with a traditional bank can take months including trips to a physical branch, opening a business account with an EMI can take place in a couple of weeks or even a few days.
Furthermore, some EMIs such as FinXP are more business-friendly especially when it comes to serving corporate clients that regularly suffer from financial discrimination from more established financial institutions.
Are EMIs reliable as financial institutions?
Since EMIs are smaller and generally more efficient than traditional financial institutions, they seem to hold the upper hand over other bank-related activities.
Background checks on EMI's are important
As already indicated, it is always important to check if the EMI had past fines from regulators such as the Malta Financial Services Authority. The natural or legal person at the Electronic Money Institution is a crucial cog in the machine.
It is also important to conduct online research on the EMI which you will be doing dealings with to check out their reputation, business plan, and permitted financial activities.
Is my money safe with an EMI?
EMIs must abide by increasingly demanding regulatory standards and similar to banks they undergo several inspections, review meetings, and risk assessments by the regulator. This should reassure customers that these institutions are being run according to standards of good governance.
The e-money directive determines e-money licensing and supervision rules within the EU, while the FCA oversees EMI standards within the UK.
Additionally, while national governments set consistent frameworks for EMI standards, individual institutions are free to offer additional guarantees and provide better user protections.
Furthermore, like any organization, EMIs are also free to implement additional data security features within their services, like strong encryption standards and strict privacy policies.
When dealing with senior managers at an EMI it is always important to ask for a business model and to evaluate the operation on its own merits.
What are the pros and cons of working with an EMI?
EMI pros:
EMIs can provide an alternative route to access vital payment services. Companies in industries with a ‘high-risk’ reputation that face routine financial discrimination can make use EMIs payment services.
Electronic money institutions often also have specialized knowledge of niche industries thus enabling them to offer more tailor-made solutions.
EMIs are generally cheaper to use than the processing and handling services that traditional banks offer. EMIs are largely digital institutions (unlike banks that often have brick-and-mortar premises).
Additionally, Electronic Money Institutions often have fewer overheads and capital expenses. For example, acquiring an e-money license is less expensive than acquiring a banking license.
EMI cons:
EMIs lack in-house lending capabilities (as opposed to banks who offer features like overdrafts and access to loans). EMIs are unable to offer lending services as e-money licences only permit EMIs to issue and manage debited funds. Businesses may need to work with third parties to access additional credit.
No two EMIs are the same and that is why it is important for businesses to carry out their research before engaging with an EMI. For example, it is good to check if an EMI has suffered from past fines from their regulator as this may be a worrying sign of mismanagement within the company.
An Electronic Money Institution may also suffer from a lack of personalized service. It is always good to keep this in mind when doing business with EMIs.
Modernise your money management with an EMI partner for payment services
In conclusion, many EMIs are robust, trustworthy institutions offering safe and innovative solutions allowing businesses to manage their money effectively. Despite being a recent addition to the world of global finance, certain EMIs can offer more holistic and custom payment solutions than banks.
Do you require payment solutions?
If you work with a corporate entity operating in a high-risk industry and you are in need of payment solutions, it is recommended that you speak to an Electronic Money Institution who can be your payments partner and provide you with expert advice on how to improve your payments strategy.
EMIs can help facilitate a comprehensive range of transactions, from accepting customer payments to making cross-border payments to suppliers.
Furthermore, if your industry faces routine financial discrimination, they offer viable alternatives to accessing vital financial services that are necessary to operate your business.
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FinXP is a leading EMI based in Malta that provides payment services to corporates in niche industries that traditionally find it challenging to work with more traditional finance institutions.
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