Introduction to the protection of funds : What You Need to Know

The protection of funds is a fundamental pillar of the financial sector, particularly for payment and electronic money institutions. It is a regulatory requirement and a critical factor in maintaining customer confidence and trust.

This article examines the key principles of the protection of funds and outlines financial institutions' obligations to ensure compliance.

The protection of funds : A mandatory regulatory obligation

The protection of funds is a legal requirement enforced by regulators on payment and e-money institutions, ensuring customer funds remain secure and accessible.

What Differentiates a Payment Institution from an E-Money Institution?

A payment institution offers payment services without issuing electronic money, such as credit transfers, direct debits, or card transactions. It acts solely as a financial intermediary.

In contrast, an electronic money institution (EMI) can issue electronic money, which possesses the following characteristics:

• Stored electronically.
• Issued upon receipt of funds.
• Intended for payment transactions.
• Accepted by the issuer, partner card networks, or payment service providers.

Read also: The regulatory landscape for payment players

Both payment and e-money institutions must segregate customer funds from their assets to mitigate risks such as bankruptcy or financial inability to meet obligations. In practice, this is achieved through one of two primary methods:

• The Segregation Method: Customer funds are placed in a segregated account held by an authorized credit institution, ensuring they remain separate from the company's assets. Funds held in these accounts are covered by national deposit guarantee schemes, typically up to €100,000 per customer in the event of insolvency.

• The Insurance Method: Less commonly used, this method involves taking out an insurance policy with an authorized insurer to cover customer funds in case of the institution's financial failure.

In some cases, both methods can be combined to provide more excellent protection, depending on the institution's structure and regulatory requirements.

What Are the Risks?

Failure to comply with the protection of funds obligations can expose financial institutions to serious risks, including:

• Financial Penalties: Regulatory authorities may impose heavy fines for non-compliance.
• License Suspension: Institutions may face suspension or revocation of their license for repeated or severe breaches.
• Operational Risks: Poor funds management, reconciliation errors, or delays in execution can cause severe operational disruptions.
• Reputational Damage: Losing customer trust and credibility can be highly detrimental, particularly in the financial sector, where security and reliability are paramount.

The main challenges for PI and EMI in terms of protecting funds

Legally, PIs/EMIs must ensure that their customers' funds are segregated at least once a day; this is what most PIs/EMIs do, given the cumbersome nature of carrying out this task manually.

However, an emerging trend among these institutions is to carry out several segregations on the same day to meet tighter control requirements and optimize their cash flow. Indeed, segregation accounts often benefit from better remuneration conditions from banks than the traditional operational accounts of PIs and EMIs.

A new practice, which seems to be appreciated by regulators, is gradually developing: the segregation of funds at several banks. This approach involves distributing customer funds between at least two banks. This diversification significantly reduces risks, notably the counterparty risk associated with dependence on a single bank and the operational risks associated with the possible failure or unavailability of a single institution.

In this context, Skaleet provides a concrete response. Skaleet delivers the ability to calculate precisely the funds to be hived off and instruct the bank to order the transfer and segregate the funds on the hived-off account. It provides detailed visibility on the breakdown of hived-off funds so that in the event of bankruptcy, it is possible to determine the amount to be reimbursed to each customer.

Thanks to its advanced automation, Skaleet enables funds to be segregated as frequently as necessary across multiple banks, providing greater compliance and flexibility while maximizing financial benefits for institutions.

In the second phase, another process can be used to provide an additional guarantee: reconciliation.

Reconciliation: what's it all about?

Reconciliation is an additional security feature: it verifies that the bank has automatically carried out the segregation operations ordered by the PI/EMI via Skaleet.

To be effective, reconciliation must be supported by technological tools capable of providing transparency and reducing the risk of errors. In practice, discrepancies can occur (reporting errors, transfer delays, pending transactions). PIs and EMIs are expected to identify these discrepancies as quickly as possible and resolve them as soon as possible.

Compliance audits

Audits are carried out by regulators to ensure institutions comply with their legal obligations. During an audit, they must demonstrate the robustness of their processes, including the effectiveness of the mechanisms and arrangements in place to ensure the protection of funds. Audits assess whether PIs and EMIs comply with requirements and have implemented robust measures to safeguard the security and transparency of operations. Although the requirements define a strict framework, they imply organizational and technical challenges that EPs and EMIs must face daily.

For these companies, it is imperative to equip themselves with a stable, reliable solution that combines enhanced security with compliance with the most demanding standards. By relying on a network of trusted partners, financial institutions can comply with legal requirements and focus on innovation to develop offers adapted to market trends and customer expectations.

Skaleet: your technological ally for compliance

Skaleet is positioned as a partner of choice for payment and e-money institutions, offering an advanced solution to protect customer funds. The platform has been specially designed for this purpose, ensuring fully automated end-to-end segregation and guaranteeing compliance with regulatory requirements without any manual intervention.

With Skaleet, financial institutions can rely on an innovative system to automate time-consuming tasks. This approach frees up time for teams. So, they can focus on what matters: offering innovative, differentiating services.

Why choose Skaleet ?

• A platform-native firewall module for 100% regulatory compliance
• A "focus on what matters approach, taking care of complex, low-value-added tasks
• Reliability and safety to the highest standards
• Rapid deployment of the solution (just 4 months)

Would you like to learn more about fund protection? Look at our guide and discover practical tips for better compliance and Skaleet's 7 steps to fund protection.

The funds customers receive (and send) via SEPA transfers are recorded in the settlement account held by the PI/EMI at its partner bank.

Skaleet regularly calculates the amount of customer funds to be segregated and instructs the partner bank to transfer these funds from the settlement account to the segregation account held by the PI/EMI.