So what exactly can a Payment Institution (PI) do?

A Payment Institution (PI) can choose to obtain an authorisation and offer a set of licensed services and activities. These are defined under the 2^nd Payment Services Directive (PSD2). Depending on the combination chosen of these services, will result in one of the many different business models within the payments industry as the payments team at SALVUS previously described here.

The PSD2 licensed services and activities (translated from CBC’s Annex I in Greek) are the below:

1. Services that allow cash to be placed in a payment account, as well as all activities required to maintain a payment account.

• Example: Payments of cash into a payment account over the counter and through an ATM

2. Services that allow cash withdrawals from a payment account, as well as all the activities needed to maintain a payment account.

• Example: Withdrawals of cash from payment accounts, for example through an ATM or over the counter

3. Execution of payment transactions, including capital transfers, to a payment account to the user’s payment service provider or to another payment service provider:
   1. execution of direct charges, including one-time direct charges;
   2. execution of payment operations with a payment card or similar device;
   3. execution of credit transfers, including fixed orders.

• Example: Transfers of funds with the user’s payment service provider or with another payment service provider
  1. Direct debits (including one-off direct debits)
  2. Transferring e-money
  3. Automated payments through standing orders

4. Execution of payment operations, when the money is covered by a credit opening for the user of payment services
   1. execution of direct charges, including a one-time direct charge;
   2. execution of payment operations with a payment card or similar device;
   3. execution of credit transfers, including fixed orders.

• Example:
  1. Direct debits using overdraft facilities
  2. Card payments
  3. Credit transfers using overdraft facilities

5. Issuance of means of payment and/or acceptance of payment transactions.

• Example: Card issuing and card merchant acquiring services (rather than merchants themselves)

6. Remittance services.

• Example: Money transfer/remittances that do not involve payment accounts

7. Payment startup services.

• Example: Consumers can allow a payment initiation service provider to initiate a payment order from their bank account. The payment initiation service provider then asks the bank to execute the payment order on client’s behalf, and the bank processes the payment order. This service is a new method for making online payments. It is an alternative for e.g. iDEAL, credit card and PayPal payments. Payment initiation services involve a transfer of money from the client’s account.

8. Account information services.

• Example: Online service which provides consolidated information on payment accounts held by a payment service user with payment service providers.

So what exactly can an Electronic Money Institution (EMI) do?

In short, an EMI is are permitted to do any of the above that the PI can offer and issue electronic money. The two key words here are electronic money and it is valuable to define them before proceeding further. Electronic money is a monetary value represented by a claim on the issuer, which is:

• stored electronically (e.g. in an electronic wallet), including magnetically (e.g. a debit card);
• issued on receipt of funds;
• used for the purposes of making payment transactions;
• accepted as a means of payment by natural or legal persons other than the issuer;

Again, as per the PSD2, Electronic Money Institution services are:

1. Issuance, distribution and redemption of Electronic Money

• Example: Monetary value represented by a claim on the issuer. Prepaid cards, e-wallets

2. Payment Services unrelated to the issuing of e-money

• Example: Same as the Payment Institution services above

For the uninitiated, an Electronic Money Institution (EMI) can be seen as the digital alternative of a traditional bank where the clients’ deposits are stored in an electronic wallet. The EMI will operate through an online platform and thus technology used is a key parameter in the EMI license application process. An EMI license allows for the issuance of debit cards and payment transactions can be carried out by the clients of the EMI, either via the online platform we mention or via the issued debit card.

The minimum technology requirements of a PI versus an EMI

There is no strict rule in answering this big question, however our approach and answer is based on logic.

As we have shown the licensed services and activities include both payment services and services unrelated to payments. Therefore, the first factor defining the minimum technology required for either a PI or an EMI license approval is the services for which the PI or the EMI license application is being sought. Naturally, it makes sense to anticipate the regulator to require the applicant for an EMI license to demonstrate their ability to deal with electronic money.

For example, an EMI not offering payments services, would be not be required to invest in any technology other than that of e.g. issuance, distribution, and redemption of electronic money and/or pre-paid cards and wallets. Again, if payment services are included then the relevant investment in technology will be needed.

Finally, the Business Plan submitted as part of the PI or the EMI application, must specify the relevant agreements with third parties covering the technology required for operating e-wallets, integration to Centrolink, SEPA, SWIFT, JCC, the processor of choice, the card bureau and so on.

Beyond technology: the overall legal framework and regulatory requirements of an EMI

As put together by the licensing team at SALVUS, the following are the key points in sequential order:

1. The authorization for the operation of a Cyprus PI or EMI is ONLY granted to a legal entity incorporated in Cyprus,
2. The management and control of the PI or EMI must be exercised by the headquarters, which shall be incorporated in Cyprus,
3. A business plan including the forecast budget of the first three financial years is required within the application, for the applicant to ensure its ability to employ resources and develop adequate systems and procedures for smooth operation of the PI or the EMI,
4. The initial capital of at least
   1. EUR 350,000 is required for the EMI
   2. And for the PI it is
      1. 20 000 EUR (money remitters)
      2. 50 000 EUR (mobile payments)
      3. 125 000 EUR (full-range payment services providers)
      4. at the time of the authorisation along with the proof of available funds for the three years of operations,
5. An EMI is required to maintain the minimum own funds of the 2% of the average value of electronic money in circulation, while the own funds may not fall (at any time) below the level of the initial capital,
6. Description of the outsourcing arrangements, the use of agents (if any) and the intention of the PI or EMI to provide its services in another EU member state via branch need to be specified within the application,
7. If agents are employed within the structure of the PI or the EMI, then it is required to ensure the agents meet the criteria and requirements to be listed in the public register maintained by the CBC,
8. The organizational structure of the PI or the EMI needs to be disclosed,
9. Detailed information of the systems and procedures governed in the Internal Operations Manual, including the creation of sound policies and procedures reflecting the operations of the accounting and payments, the risk management, the compliance and anti-money laundering departments,
10. It is highly important to establish adequate internal controls and mechanisms for the safe keeping of clients’ funds

How can SALVUS support you?

Though our licensing service, our Payments team will support you for the efficient and effective implementation of all the steps required for the establishment of a company authorized to act as a Payment Institution or an Electronic Money Institution. Our services cover;

• the Incorporation of a Company with special articles of association applicable to the PI or EMI license,
• the preparation of the PI or EMI license, tailored to the applicants’ business plan,
• the due diligence of the shareholders, directors and other stakeholders,
• assistance in relation to recruitment for the fulfilment of the necessary positions, as well as for any outsourcing arrangement,
• act as the promoter of the application until the license is obtained by the CBC.

Post-authorisation, SALVUS provides on-going consulting support services to the Senior Management to ensure compliance within the regulatory framework and we can also be appointed as the internal auditor. Finally, we remain available to guide the Senior Management through ad hoc requests, and in performing their responsibilities adequately in a timely manner.

Through our project management service, we take a hands-on approach to deliver tailor-made solutions to meet your needs. We document and design the project specifications and supervise a project’s implementation from scratch to full completion with a third-party vendor or in-house developers.  By extension, we can support in developing, leasing or buying the EMI platform, the processing system and payment system architecture.

We remain at your disposal should you have any questions on PIs or EMIs, or anything not covered in all the above. Please contact us via info@savlusfunds.com.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.