The Regulatory Landscape of Payment Players! 💳

At the end of the 2000s, the European Commission (EC) decided to adopt two overarching directives across the European Union to remove barriers in the European payments market. The first concerns Electronic money (Directive 2009/110/EC) and the second Payment Services (Directive 2007/64/EC). These two directives have facilitated the emergence of new players on the market besides credit institutions – Electronic Money Institutions (EMIs) and Payment Institutions (PIs). 

They have also paved the way for an increasingly competitive payments market accompanied by the rapid growth of e-commerce and the digitization of financial services. The appearance of new payment service providers meant new rules were required to protect consumers and payment security. To resolve these issues, the second payment services directive (PSD2) endorsed a new legal framework to better accommodate the new technical innovations (APIs) and the associated risks, strengthen payment security (introduction of SCA), and define two new payment services  (AISP and PISP) related to Open Banking. 

Focus on regulated entities operating in the payment and electronic money industry 🔍

Among the regulated bodies, there are firstly credit institutions that can supply a range of banking and payment services including: 

• Offering payment services;
• Managing customers' deposits with protection of up to €100.000 per customer via the Fonds de Garantie des Dépots et de Résolution (FGDR) deposit guarantee scheme; 
• Offering interest-bearing accounts; 
• Issuing credit cards, loans, and other loan products;
• Other financial services products like insurance and wealth management;
• Use of the term ‘bank’.

As described in the introduction, European legislators have introduced a regulatory framework that allows new operators to supply payment services. Three types of regulated operators have appeared: 

• Electronic Money Institutions (EMIs) that can issue and manage e-money and provide payment services;  
• Payment Institutions (PIs) that only provide payment services; 
• And finally, Account Information (AISP) and Payment Initiation (PISP) Service Providers.

Electronic Money Institutions (EMIs) versus Payment Institutions (PIs)

To understand the difference between these two types of payment service providers, an exact description of the services they can provide is necessary. 

An electronic money institution can issue electronic money. This means: 

• It can be stored electronically;
• It represents a monetary value;
• It is issued on receipt, which means any asset is prepaid;
• It is issued for payment transactions; 
• It is accepted by the issuer and payment service providers/card networks 

Contrary to banks which can also issue electronic money, EMIs are not subject to the same strict prudential requirements. The regime exists to stimulate innovation in the payments sector. Generally speaking, electronic money institutions can: 

• Accept funds from customers and change them into electronic money. Customers use electronic money accounts as payment wallets, but they do not earn interest and cannot be overdrawn.
• Offer debit cards, bank-to-bank transfers, standing orders, and direct debits but not stand-alone loan products.  
• Offer certain digital financial service products, like currency exchange.

As well as issuing electronic money, EMIs can also offer all the same payment services as payment institutions. However, it is important for entities looking to become a PI or EMI to define the types of payment services they want to their NCA (National Competent Authority) and to determine which of these relate to the issuing of electronic money. The account itself is where the point of differentiation between the two statuses lies. The user of a payment wallet is free to use their account as they see fit, which means that they can withdraw money from it, transfer funds to bank accounts, make purchases, pay public service bills and lots of other things besides. It is worth pointing out that electronic money is not about depositing money as it is geared towards transfers and electronic payment methods. However, payment accounts offered by payment institutions are more limited. The reason for this is that to use your account, there must be an identifiable transaction for which funds are sent to the entity processing the payment. This means that the payment account needs a payment order based on which the funds will arrive into and leave the account. 

Please note: Customer funds received by electronic money and payment institutions must be subject to specific protection, either in the form of a segregated account (or third-party payment) with a credit institution, insurance cover or a comparable guarantee.

Electronic money and payment entities excluded from regulation by NCAs 👀

License-exempt players 

Some companies can offer payment services and issue electronic money without having to obtain specific authorization. These exempt legal entities can, for example, provide payment services to buy goods and services, on the condition that the payment methods used are only accepted within the premises of the issuer or within a limited and defined network. A car-share business can benefit from this status to facilitate collections for drivers. 

A mobile telephone operator can also provide this kind of service to pay for gift collections or to buy electronic tickets. It is excluded from authorization. It should be noted that agreed exemptions are not limited to small players on the market. Some of them, particularly telecom operators, can process large volumes of payments – greater than those of a payment institution. Please note that these exempt entities remain subject to a declarative obligation to their relevant NCA, and their exemption is renewed annually. 

Payment services provider agents

The different payment service institutions supervised by the NCA of the country in which they operate can mandate agents to distribute payment services on their behalf via an agent license. These agents must declare the agents distributing their services to the NCA. The status allows agents to offer only payment services within the limits imposed by the license granted to the mandator. For example, an agent may not distribute savings products, if their authorized representative, namely a payment institution, is not itself authorized for this type of product. 

Electronic money distributors

Any electronic money institution is controlled by the NCA where they operate. These players can also mandate physical and moral persons to distribute electronic money on their behalf. They can put electronic money into circulation but they cannot issue it. These operators form part of a sub-contractual framework of the electronic money institution.

Services offered by new players 📱

The various NCAs in Europe classify the types of payment services that can be offered into five broad categories, whether licensed or not:

Accepting payments: Today, more than a third of electronic money and payment institutions have developed solutions to accept payments to help merchants pay-in their payments. Stimulated by the rise of e-commerce, these payment solutions allow marketplaces to have a unique payment page with a large array of payment methods adapted to the habits of end-users (Visa, Mastercard, WeChatPay, AliPay, etc.). Increasingly, these solutions integrate financing solutions like consumer credit and Buy Now Pay Later. 

Online payment accounts: Various institutions have developed mobile applications giving access to payment instruments to carry out transactions and transfer money. These new players propose more competitive offers and solutions than traditional banks, whether in terms of charges or innovative functionalities. Licensed entities also give unlicensed businesses the chance to offer payment solutions too. 

White-label payment solutions: By using products supplied by licensed players, other businesses can develop their own offers. This concept leads to ‘platformization’ and increasing ‘orchestration’ in the payments industry. Several licensed players distribute their products to startups, thus freeing them from the need to get involved in obtaining a license leaving them free to concentrate on the viability of their business model. Lydia is an excellent example. The French fintech and unicorn uses various licensed institutions to offer a payment application with lots of features.

Open Banking solutions: Two new services have appeared following the second payment services directive: 

• Account Information Service Providers (AISPs) allow the collection and use of consumer payment data of consenting consumers for offers and financial services tailored to customer habits. 
• Payment Initiation Service Providers (PISPs) allow marketplaces to accept payment by bank transfer.

Specialized payment solutions: The payment services directives have paved the way for the development of new specialist payment solutions like third-party payment systems.

Business model types offered by new players 💡 

The EBA observes that EMI and PI business models are divided according to: 

• customer expectations and behavior;  
• competitive pressure;
• technological advances; 
• and modifications related to regulation.  

These considerations play a central role in the choice of services offered by regulated organizations. 

Wise (formerly TransferWise) is a clear example of the difference in terms of business models and services offered by an electronic money institution and a payment institution. 

Wise started as a payment institution. The fintech was not able to issue its own cards to its customers or to hold its customers’ money in payment accounts without an identifiable payment order. So Wise decided to change its status as an institution to an electronic money institution. Now Wise can issue payment cards and operate multi-currency accounts. 

As you can see, payment institutions can legally choose business models where they do not need to keep their customer’s money in payment accounts without an identifiable payment order. Payment institutions generally provide payments processing and money transfers. There are also PISPs that only supply payment initiation services. More complex business models do exist. This allows certain payment institutions to participate in co-branding card issuance programs or indirectly offer electronic money accounts to merchants. In these situations, please contact us or a specialist advisor on these issues to give you an overview of all the options open to you when it comes to choosing between electronic money institution and payment institution. 

Here is a non-exhaustive list of possible business models:

For electronic money institutions:

• A neobank with the capacity to issue its own payment cards, has its own BIN sponsorship, manages related processing and issues a personalized IBAN code for SEPA payments.   
• A Banking-as-a-Service provider offering full payment processes (electronic money accounts, payment cards, etc.) via modern API-operated drivers.
  • For fintechs and neobanks. 
  • For corporates by embedding payment services into customers’ non-financial experiences (Embedded Finance). 
• An International Money Transfer player with the ability to manage electronic money and the sub-accounts/sub-currencies for your customers.
• Other... 

For payment institutions***:

• A new Alternative Payment Method (APM) to respond to omnichannel needs.  
• A Payment-as-a-Service (PaaS) provider with an orchestrating platform and lots of payment services (issuance, acceptance, and acquisition). 
• A Payment Services Provider (PSP) that combines the functions of a payment, processing, and acquisition gateway.
• A Payment Processor or Acquirer (or both) to facilitate transaction routing between card networks and financial institutions.
• An AISP or PISP to aggregate payment data and initiate bank transfers.
• Other...

***Don’t forget, electronic money institutions can also offer payment institution services.   

Core Banking Platform: vital to ensure payment organization operations 👨‍💻

The payment services market continues to expand rapidly. Everyone wants to be a payment institution or an electronic money institution. Regulated institutions holding a payment or banking license need to use a Core Banking Platform to process payment transactions and update payment accounts each day. These platforms also interface with a subsidiary accounting system, a general ledger and reporting tools that enable accounting and regulatory information to be transmitted to the NCA. 

Core Banking suppliers specialize in the development and regular updating of their technological SaaS platform. Payment institutions and electronic money institutions can thus carry out their operations and align their own financial offers with the back-end. Next-generation solutions are supplied via a platform model (Platform-as-a-Service), i.e.hosted in the cloud, built on open architectures, based on microservices, API-driven and using a Pay-as-you-Go revenue model. 

Keep in mind that using a Core Banking Platform gives great flexibility plus a high degree of personalization and that the implementation of the platform requires its own license. With Skaleet and its Core Banking Platform, payment and electronic money institutions are in a position to focus and innovate on their core expertise. By interconnecting with lots of payment and technological partners, they can become more competitive, create new offers and create new payment revenue streams for merchants and end-users.