There has been a substantial shift from Banking to Fintech, which has brought about new players into the market. These new stakeholders are causing major disruptions to the Banking scene and, in addition to relatively new legislation in the field of payment, have resulted in the emergence of new products and services. Overall, the payments industry is now more competitive and technologically-drive.
One of the new players in the industry is the electronic money institution. Commonly referred to as EMI, it is a company that has a license to provide financial services to third parties and store their money on a customized segregated account. These institutions are the poster child of how financial service provision has evolved.
EMIs are best known for payment intermediation and disbursement of e-money. Since they have become an integral part of the industry, it is vital to understand what they are, how they work, and their services.
E-money
Before diving into what EMIs do, it is important to grasp what electronic money is since this is the basis of the entire operation. E-money is the digital equivalent of cash, and it is stored in banking computer systems or e-wallets (EMI computer systems) to enable electronic transactions.
Because of their efficiency, organizations and individuals often use e-money for electronic transactions and activities. The same factors shape the value of e-money and fiat currency. Therefore, it is possible to convert the former into a tangible form.
How does EMI work?
Because EMIs are more agile and facilitate fast operations, they present a great alternative to the traditional banking systems. Account opening is faster with EMI, and you need fewer documents. Furthermore, you don’t have to be physically present at this institution to open your account. With just a few steps, you will receive an IBAN that you can use to receive and send money.
Apple Pay, PayPal, and Google Pay all fall under EMIs and, in certain circumstances, can emit funds independently. Licensing of these products and companies is mandatory. An EMI can only become operational after being licensed by the right bodies. Although it operates as a bank, it is not.
Since there is limited information on EMIs, most people have unknowingly used them for their e-money transactions.
EMI licensing
An EMI license is a legally-binding document conferred by the relevant regulators to an institution. It authorizes the institution in question to operate and also disburse e-money. When establishing an electronic money institution, aspiring owners must obtain a license from the FCA. Although they don’t have to obtain a separate approval to offer payment services, they must provide the FCA with information on the services they intend to render.
When applying for licensing, the EMI has to denote that the firm would distribute e-money and provide allied payment services. The information provided by the aspiring EMI must include:
- Institutional frameworks
- The business plan and company operations
- Internal controls
- Business continuity measures
- Data protection measures
- Safety measures
- Initial capital specifications
- CTF/AML compliance measures
- Information on subcontracting agreements and the company’s shareholders
Services provided by Electronic Money Institutions
Key services that EMIs provide include:
- E-money distribution and issuing: Customers can convert their fiat funds to e-money and store them in their e-wallets. They can also use the electronic currency to transact and perform payments.
- Direct credit or debit transfers
- Providing online account information
- Currency exchange services
- Money remittance
- Cash deposits and withdrawals for the payment account
EMIs don’t provide the following services:
- Providing bank accounts: They cannot receive deposits
- Bank accounts
- Deposits or deposit guarantees
- International transactions
Advantages of banking with EMIs
1. Safety
Although EMIs are commercial bodies, they follow stringent regulations instituted by the government. They also have all the necessary measures to ensure customer financial security. Electronic money institutions always keep customers’ information confidential. They are responsible for the safety of customer funds and encrypting transactions.
2. They offer better compliance
Compliance laws heavily regulate all financial service providers, but the laws are less strict with EMIs. Therefore, the latter can introduce advanced and modern compliance procedures that present better protection against fraud with minimal paperwork.
3. Flexibility
Instead of imposing their own solutions that are usually far from ideal, EMIs adopt potential payment options and give their clients the freedom of choice. While traditional financial institutions usually work with wire transfers and card payments, they offer several payment options, making it more convenient for their clients.
Limitations
EMIs have two main downsides compared to traditional financial institutions:
- Governments have enforced a maximum transaction limit, and the volume of transactions per customer is also restricted. Still, these restrictions are generally beyond real transaction needs.
- EMIs have a differentiation in the payment system, which may be disadvantageous for the business. Institutions might be left to deal with the money distributed across different platforms when clients use all available payment options. Gathering these funds together may accrue substantial commissions and typically require numerous transactions.
Conclusion
EMIs are a great option for small businesses dealing with everyday consumer needs. Because of ongoing innovations in this industry, the quality of products will continue to improve.
