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An Overview of Electronic Money Institutions

By Jamie Johnson

What is an Electronic Money Institution (EMI)?

EMIs allow their users to make payments. Unlike payment institutions, EMIs can issue electronic money. Electronic money represents a financial value that the user has electronically or magnetically. The electronic money is stored under a central accounting system or on a carrier such as a chip. This financial value can then be used to purchase goods and services. A simple example of electronic money is a gift voucher for a shop.

It should be noted that EMIs often do not offer all of the same services as existing banks. For example, they typically do not provide deposit guarantees. This means that the government does not protect a customer’s deposits.

What are the advantages of EMIs?

There are three primary benefits of EMIs: the speed with which they execute transactions, the security involved in electronic money and lower cost of making international transfers.

EMIs make transactions quicker because electronic transactions are executed instantly. This contrasts with traditional banking, where transfers between different banks can take anything between a few hours and a few days. This makes EMIs more convenient for consumers.

EMIs also use authentication and tokenisation to ensure that they protect the private information of consumers. This means that EMIs might be more secure than traditional banking services.

EMIs also tend to cost the consumer less when they are making an international transfer because they remove the need for currency exchange. This is because the value of the transaction is stored on a central system for the firm. Given this, users avoid the international transfer fees that banks have historically had.

What are the disadvantages of EMIs?

There are three disadvantages of EMIs: there are regulatory limits on how many transactions they can process, the technology used might be vulnerable, and there is a risk of fraud.

Given that EMIs are smaller institutions, there tend to be regulatory limits on how many transactions they can process per day. Thus, they may not be reliable for persistent users. Nonetheless, it should be noted that at the current rate of use, most EMIs process considerably fewer transactions per day than their regulatory limit. Plus, these regulations could change if people become more reliant on EMIs for everyday transactions.

The technology used for EMIs may also be vulnerable to any technical issues. The payment gateway of EMIs might fail, meaning that the user cannot process any transactions. If the user is a business, this could mean that they miss out on a large amount of revenue.

Despite the security of EMIs, there is still a risk of fraud. Cybercriminals could exploit users through phishing. Given the speed of transactions, the cybercriminal might execute a large number of transactions before the owner notices.

How are EMIs regulated?

There are two primary sources of regulation to be aware of: the Electronic Money Regulations (EMRs) 2011 and the Payment Services Directive (PSD2).

What is the result of the EMRs 2011?

The EMRs 2011 set out the requirements for an institution to become an EMI. Under these regulations, an EMI needs to apply with a statement of what the EMI intends to do so that it can be determined whether the institution counts as an EMI. This statement would also include a business plan to demonstrate that the applicant can reasonably continue operating for the next three years. Finally, the total business activities of the applicant cannot create electronic money that is worth more than €5 million at the time of their application.

What is the result of PSD2?

PSD2 requires EMIs to handle customers data in a more secure way. The primary way this is achieved is through strong customer authentication (SCA). As a background to SCA, there are three ways that a customer can provide proof that they are the rightful owner of an account when they use a service: knowledge, possession and inherence. Knowledge authentication involves a user authenticating that they are the rightful user by referring to something only they would know, such as a password. Possession involves them using something only they would own, for example, they could verify their login by getting the service to send them a text with a verification code. Inherence is something that the user has by nature of being the user; for instance, they could use their fingerprints to login. SCA requires an EMI to authenticate users by using at least two forms of proof. So, an EMI might be needed to force users to use a passcode and their fingerprints to access the service. Firms were initially required to introduce SCA before the end of 2020, but due to COVID-19, this deadline has been postponed to the 14th of September 2021 in the UK.

Case studies

Revolut – Revolut is a London-headquartered EMI. The main appeal of Revolut is its currency exchange that does not entail any transaction fees. It also provides stock trading, cryptocurrency exchange and direct payment transfers to others. Its app accommodates for 120 currencies, and it allows for sending money in 29 different currencies. Users are also able to access cryptocurrencies, such as Bitcoin, Ethereum and Litecoin.

LeoPay – LeoPay is a Bulgaria-based EMI that allows users to transfer money for goods and services. It provides users with IBAN accounts, which enables them to make and receive international transfers. LeoPay does not charge for opening and maintaining an account. Nor does it charge users when they transfer money to another account. However, it does provide a charge for those putting money into their account by any means other than a bank transfer.

Hello bank! – Hello bank! is a France-based EMI that is wholly owned by BNP Paribas. In addition to banking services, it also provides brokerage and insurance services. The EMI offers a basic service and a premium service. The basic service involves no monthly charge, whereas the premium one involves a monthly charge of €5.

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