Electronic money institutions (EMI) are an example of the growth of the financial sector.
They are most famous for electronic money disbursement and payment intermediaries, which help improve the total value of digital payment by approximately $6,752,388 by 2021 and will likely reach $10,715,390 in 2025.
So it is vital to be aware of the basics of what EMI Institutions are, how they function, and how they differ from other financial services.
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What’s EMI?
EMI is a sophisticated and digitally-enabled system that provides financial services worldwide. As a financial institution, an EMI is different from a bank in its operations and regulation. In the simplest sense, the definition of an EMI is an entity legally recognized as a body that has received an operating license to distribute electronic money. The license permits EMI to offer the functions that the traditional PSPs provide and also issue electronic currency.
Is electronic money a form of currency?
The term “electronic money,” also referred to as e-money, is the digital version of cash that is kept in EMI electronic systems electronic wallets) or banking computer systems that aid in electronic payments. Due to the incredible effectiveness of this technology, electronic money is used primarily for electronic transactions. The value of electronic money is typically determined through the same financial elements as fiat currencies and can, therefore, be converted into an actual form.
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What exactly is an electronic institution of money work?
An EMI can only operate after it has obtained an EMI license from the appropriate organizations. It functions as a bank, but it is important to know that EMI is not an institution. Given the lack of information on the idea of EMI, many individuals who conducted business with e-money did it without knowing.
What kind of services do EMIs offer?
The main services offered by electronic money institutions comprise the following:
- E-money distribution and issuing (customers keep their money transformed into e-money within the electronic wallet (their accounts online) and then make transactions using the funds)
- Services for currency exchange
- Credit or debit transfers via direct debit
- Money remittance
- Cash withdrawals from the payment account and deposits
- Giving account details
It’s also essential to emphasize those services EMIs do not offer:
- Bank accounts
- Deposits (or offer deposit guarantees)
- Provide bank accounts for clients who can’t receive deposits
- International transactions
Electronic Money Institution: EMI licence explained
An EMI Institution license is a legal certificate issued by the relevant regulatory bodies to an institution that permits the institution to run and distribute electronic money.
When setting up or creating any electronic financial institution (EMI), The EMIs that are planned to become owners need to obtain a license from the FCA. FCA.
While a separate authorization to offer services for payment cannot be required, EMIs must inform FCA of the services they are planning to provide. A “small EMI UK” option is also available in the UK and the UK, where the Company’s operations are restricted by the UK and are also restricted by the monthly volume of payments and the average outstanding electronic funds.
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If trying to obtain the EMI license, the purpose of the EMI should indicate that the Company will provide e-money to customers and offer services in the field of payment. In turn, it must include information about the business’s operations as well as a business plan, its initial financial specifications, security policies, institution frameworks, in addition to internal checks, institutional’s procedures and practices and business continuity plans, security measures for data AML/CTF compliance procedures, as well as information about shareholder and subcontracting arrangements.
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What are the benefits of EMIs to customers?
In 2014 the EU had more than 2.1 billion transactions using e-money which increased to more than 4 billion in 2018. The year 2019 saw around 4,6 billion transactions made with e-money. So, what’s behind the growth?
- Easy access
- Customers of EMI will appreciate the ease of using electronic banking. There is no need to travel to a bank to make transactions. We can complete most transactions from the comfort of our homes, saving time.
- Services for payment 24/7
- Customers can decide when they wish they should access financial data and when to perform transfers or perform other actions.
- Credit risk is not a concern.
- Because EMIs don’t make use of their customers’ money to lend it, as do banks, customers’ funds are secure, protected, encrypted, and safe on their accounts.
- Lower costs
- Because the transactions are processed more easily and quicker by EMIs, this is a result that they are cheaper, which is beneficial to customers too.
Electronic money institution is different from Banking: which one is more effective?
When banks combine (mix) client funds with their funds and make use of both for running their businesses (e.g., “to extend loans on their own accounts”), Electronic institutions have to ring-fence all client funds and separate them. From their own “stratified account.”
In addition, even though the EMI has access to customers’ money, it is not authorized to channel the funds to any other purpose than transactions, such as the disbursement of e-money and repayment.
With regards to deposits, Electronic money institutions, in contrast to banks, cannot accept deposits and provide loans using funds they receive as electronic money. If they do, they must be used as a supplement and predominantly in conjunction with completing a payment procedure.
Electronic money establishments in comparison to authorized payment institutions
Before diving into the differences between these two definitions, let’s first understand what API (also known as the authorized credit institution means.
What is an authorized payment establishment (API)?
The term “Payment Institution ” is a payment gateway established in Directive 2007/64/EC. It is also known as Payment Services Directive 1 (PSD1). Today, PSD2 and its national implementation by the EU Members States supervise the operation of payment institutions.
They are entities that aim to offer payment services but could also engage in various other actions (hybrid financial institutions). They are classified as autonomous financial service providers who have a crucial part in the banking system.
Below are a few of the API’s most popular services they provide:
- Payment transactions, for instance, direct debits and credit transfers through payment cards or other similar devices;
- the disbursement of payment instruments
- Money transfer services;
- Currency exchange services;
- Additional service (associated with their main services);
- Loans.
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API vs EMI There are differences between electronic banks as well as payment establishments
After we’ve become acquainted with the two concepts of EMIs as well APIs, we can take a look at some of the differences between the two concepts:
- The issue of money
The capability to issue electronic money is the main distinction between EMIs and PIs. Only the electronic money institutions are permitted to issue e-money. They aren’t. However, EMIs can provide all the services that PIs offer (but this doesn’t mean that they can offer them – this sector is strictly controlled, requiring authorization from an agency that regulates nationally to provide certain types of payment-related services.
- Specifications for Safeguarding
Electronic money institutions, as well as Payment Institutions, must follow the special safeguarding procedures outlined by EMD2 as well as PSD2. However, payment institutions that provide the payment initiation processor account details do not have any protection obligations. Additionally, the cash that an EMI institution receives in exchange for services linked to e-money distribution and other payment services that are not related to it cannot be stored in the same account that is secured.
- Accounts
By Article 4(12) of PSD2, a credit card can process payments on behalf of the user or users of a particular payment service. Article 2(3) in Directive 2014/92/EU also declares that a paid account is maintained by one or more customers and used to conduct payment transactions.
In simple terms, when money is transferred to a bank account owned by an institution that deals in payments and the funds are transferred, they must be accompanied by an explicit payment transaction.
Contrary to an electronic money establishment, a payment institution cannot keep money on account on behalf of the account holder.
- Capital requirements for startups
Authorized payment institutions have significantly fewer capital requirements to start up than electronic money banks since they don’t store funds on behalf of their customers. They, therefore must transfer funds into the account via an identifiable transaction.
- Costs for licensing
There’s a difference in the various application fees that should be paid through EMI and API and the initial capital requirement and other capital requirements associated with the licensing.
Software for eWallet for EMI license holders
With the rapid expansion of digitalization and the development of the financial industry to be able to keep up and the rapid growth of digitalization, we can say with certainty that electronic financial institutions will be around for the long haul.
As such, the companies in the field need to be able to adapt to the latest technology to stay relevant. To do this, it is essential to have flexible payment software products that meet the changing requirements of consumers is crucial.
If you’re attempting to apply for or already have the EMI license, SDK.finance will save you and your business time and money in designing a cost-effective e-wallet solution. It is possible to use our electronic wallet service, which comes with the source code license that can cut down your time-to-market by half (or greater) and create an application on the highest-performance core transactional.
