What is an EMI?

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Electronic money institution, EMI, or e-money institution is a confusing term for many people partly because it is not mentioned in any regulation or legislation. If you regularly use digital services that offer financial services, you might come across the term regularly. EMIs are vital for small and medium-sized businesses and sole traders who feel the constraints around opening a business bank account with a traditional bank and looking for secure access to payments and greater economic efficiency.

Whether you’re looking to start a business, or already have one and are looking into alternative banking solutions and what they offer, or simply looking to understand how digital banking works, knowing what an EMI is will make a huge difference.

What is an EMI?

AN EMI is a type of financial institution that facilitates digital transactions on behalf of its clients. These are also called electronic money institutions. They mainly operate online, but some options might have physical locations which work more or less like a traditional bank.

EMIs have become common in Europe, proliferating after 2009 when the Directive 2009/110/EC, also called the E-Money Directive, allowed EMIs to operate.

What is Electronic Money?

In order to understand EMIs, you need to understand electronic money or e-money. It is a digital equivalent of cash stored in systems called e-wallets or banking computer systems to facilitate electronic transactions.

The value of electronic money is determined by the same financial factors as fiat currency and thus can be easily converted into a tangible form.

How is Money Held in an E-money Account?

The regulation of banks and EMIs is slightly different. In the case of banks, they have permissions that allow them to take deposits from customers and use that money by lending to borrowers to earn interest. However, the bank has to ensure it maintains enough liquidity for the customer to withdraw funds on request.

When an e-money receives money in exchange for issuing e-money, it must safeguard the money received and cannot lend it. It does this by segregating the money into a particular safeguarding account that is held separate from the firm’s own money or investing it in secure, liquid, low-risk assets approved by the FCA and held in separate accounts by a custodian.

The EMI may also hold an insurance policy or bank guarantee to safeguard the funds.

E-money firms are limited in using funds because of their lower capital requirements and lighter regulations than banks.

Benefits of an E-Money Account

An e-money account offers various benefits to the consumer or business that chooses to use an EMI:

  • An e-money account has lower transaction fees. However, you will pay more for cash withdrawals and deposits. The amount you pay depends on the specific service you use.
  • Some of the payment services available from EMIs might not be available from high street banks
  • You get innovative online and app-based banking features that allow easier account management.
  • Accounts can be opened quickly and within a short time
  • You can easily obtain a multi-currency account
  • You can integrate accounts with other services, such as bookkeeping, for easier accounting.

How is Money Protected in E-money Accounts?  

What is an EMI license?

An EMI license is a legal document granted to an institution by the FCA authorising the institution to operate and disburse electronic money.

The license must be obtained by all institutions establishing or setting up an EMI from the FCA. While a separate approval is not necessary for the EMI to provide payment services, the institution must notify the FCA of the services they intend to provide.

Companies operating in the UK only have the option of “Small EMI UK,” which also limits the firm’s monthly payment volume and average outstanding electronic money.

During the license application process, the intended EMI must denote that the company would like to disburse E-money and offer additional payment services. For this, the company should include data on the company’s operations and business plan, initial capital specifications, safety and security measures, internal controls, institutional frameworks, business continuity measures, data protection measures, AML/CTF compliance measures and information on shareholders and sub-contracting agreements.

These details provide the FCA with a clear picture of the institution’s operations and methods to secure e-money for its clients.

How are EMIs Regulated?

Besides licensing, financial authorities closely watch EMI authorities to ensure they operate safely and fairly. Even though they primarily work online, their rules are just as strict as those of traditional banks. Here is a look at how the regulation of EMIs works:

Licensing

Before starting operations, EMIs must get a license from the FCA. To get the license, they must show that they have robust systems to keep customers’ money and information safe.

Capital Requirements

EMIs often must keep a certain amount of money to support their operations. This ensures they have enough resources to work efficiently and protect customers’ funds.

Consumer Protection

EMIs must have adequate measures in place to protect customers. These include using secure technology for data and being transparent about their fees and services.

AML and CTF Protocols

EMIs must follow strict anti-money laundering and counter-terrorist financing activities. They have to watch transactions for suspicious and illegal activities and report them to the authorities.

Data Protection

EMI collects a lot of customer data during account opening and sending and receiving payments. They must follow laws to keep customers’ personal information confidential and safe. Most EMIs use data encryption tools to safeguard such information.

Complaint Handling

It’s also a requirement for EMIs to have ways to handle customer complaints and solve disputes fairly. This is crucial considering the sensitivity of their services and operations.

Audits and Inspections

EMIs are regularly checked by regulatory bodies to make sure they’re following all the rules and standards. These checks can include audits and inspections of their systems and policies.

Risk Management

Another requirement for EMIs is to have good policies to identify, assess and manage various risks like operational, financial and cyber risks. This is crucial in safeguarding information and customers’ funds.

Besides the highlighted regulation methods, the EMI must also use know-your-customer procedures to identify its customers and prevent fraud and crime.

It’s also worth mentioning that while EMIs are efficient and swift, they are subject to regular audits as well as security directives such as PSD2 and regulations governing the safeguarding of client funds.

What Services Do EMIs Provide?

The critical services performed by electronic money institutions include the following:

  • E-money issuing and distribution, which allows customers to keep their funds converted to e-money in the e-wallet and perform payments using those funds
  • Currency exchange services for customers who want to switch currencies
  • Direct debit or credit transfers
  • Money remittance
  • Providing account information
  • Payment, cash withdrawals and deposits

As important as it is to determine the services that an EMI can provide, it’s just as important to highlight the services that EMIs DO NOT provide, such as:

  • Bank accounts
  • Deposits or deposit transfers
  • International transactions
  • Cannot receive deposits

Benefits of Using an EMI Over a Bank

As a business, you’re tasked with choosing partners and service providers that benefit your establishment the most. Some of the services offered by EMIs are the same ones offered by banks, meaning that you will need to choose between an EMI or a bank at some point. Here are some of the benefits that make the case for EMIs.

Easier Account Opening Process

With EMIs, you don’t need to take the dreaded trip to the bank, wait in long queues and fill out endless forms just to open an account. With an EMI, the account opening process is done online and remotely. You can get through the process while having breakfast! The steps involved in opening the account are easy, making it easier and faster to set up, which is critical for businesses looking to start receiving customer payments.

Your Funds are Safer

Although EMIs are not considered banks, they are still monitored by regulators and other financial institutions. They must operate and comply with existing regulations that keep customer funds from the institutions. This lowers the risk of you losing your funds. If there is financial turmoil with the institution, banks may not be able to pay off, while EMI will be less likely to have a similar issue.

Convenient and Technologically Advanced

EMI’s are technology and innovation-focused. They develop the most convenient and advanced banking services that encourage convenience for their service providers. Every EMI focuses on helping you reach your financial goals, which is why they have more competitive rates that are often customised to the business’s financial needs.

Many EMIs also strive to stay ahead of the innovation curve by developing digital solutions like Internet banking and fostering speed and transparency in the financial space. These solutions provide practical solutions to any banking challenges a business might face.

Transparency

Compliance is a vital aspect of every EMI. One of the requirements of the EMI license is transparency and safety of funds. The EMI has to work closely with their regulator to ensure they provide quality, safe and secure services. They have to do this, led by the principles of transparency and integrity.

Innovation

The online banking industry is constantly changing. Only the EMIs that change with the teams and stay ahead of the innovation curve can survive and grow. Businesses are always looking for new ways to grow, and getting an improved banking experience is high among them. With financial technology and innovation, EMIs can quickly help businesses and other clients achieve their financial goals more easily.

Access to Advanced Financial Tools

Opening an account with an EMI gives you access to advanced financial tools. These can include virtual debit cards, mobile payments and online payment gateways that make receiving and sending payments easier.

These tools can help companies streamline payment processes, reduce costs, and improve customer experience.

Additionally, EMI offers APIs and developer tools that allow companies to integrate their payment services into other applications and platforms. 

Differences Between EMIs and Traditional Banks  

 

EMIs

Traditional Banks

Platform

EMIs rely on websites and apps to provide services and mainly operate online.

It offers services in its physical branches and online. You can meet with banking officers face-to-face.

Services Offered

Focus on offering services like e-money transfers, online payment processing and multi-currency accounts.

Traditional banks provide various services besides essential account management, such as loans, credit cards, mortgages, and investment products.  

Accounts Setup

Accounts are opened online using a quick and uncomplicated setup process that doesn’t require you to present yourself physically to the bank.

Account opening is more detailed, requiring you to fill out various documents, and almost always requires in-person visits.

Fees

EMIs have lower overheads than banks, translating to lower fees for international transfers and other services.

Some service costs are higher because of higher operational costs and maintenance of physical branches and employees.

Currency Management

You can easily manage multiple currencies in one account, significantly benefiting businesses operating in multiple currencies or across borders.

Traditional banks have more restrictive policies on holding or managing multiple currencies. Sometimes, the service involves higher fees for managing the account and high conversation fees.

Customer Support

Customer service is mainly offered through online channels, which can be more responsive and available round the clock.

Customer support is available through several channels, including in-person assistance at branches, which some customers prefer for personalised service.

Regulation

They must comply with security guidelines such as PSD2, regulations that oversee the protection of client assets, and licensing by the FCA, and they undergo comparable routine inspections. However, the extent of enforcement and regulation is generally more relaxed than that of banks because of their straightforward business structure.

They are subject to stringent regulations and oversight by central banks and other financial regulatory bodies, offering higher security and trust.

Personal Financial Management Tools

Most offer integrated budgeting and financial management tools as part of their services.

Most don’t offer these tools. The tools are not as user-friendly and easily integrated in those that do.

Final Remarks

Electronic Money Institutions are a vital addition to the banking sector. Not only do they provide an alternative to conventional banking, but they’ve also breathed new technology and innovation into banking, allowing businesses to be more flexible and take advantage of the global village that the world has become.

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