In the current evolving financial industry landscape, businesses are continually presented with opportunities to enhance their offerings and expand their reach, mainly if they plan to build internet acquiring around Europe or other countries. Offering Internet Acquiring services became a very sustainable business. Sometimes, companies have such a significant turnover with online payments, where 80%-90% or even the whole incoming is coming from online payments, and the numbers are getting huge, that it is not more feasible to rent financial services from a third party provider, but is cheaper to build your own acquiring infrastructure. Such companies (brands), like Uber, Take Away, or any other from these niches, make or have plans to build their processing by creating separate entities that will take care of the internet-acquiring part of their business.
The first step after the decision is taken and the entity is created is to get the license for such business activity based on the needs business request. In the EU, two types (group types) of licenses establish the kind of such company(ies).
Small Payment Institutions (SPIs) and National Payment Institutions (NPIs) are two such entities that offer businesses an exciting avenue to delve into the realm of financial services. Understanding the compliance and regulatory frameworks that govern these institutions is paramount. Let's seek to elucidate these definitions, the activities they cover, their differences, the process of obtaining their licenses, and some intriguing statistical facts about them.
Small Payment Institutions and National Payment Institutions: Definitions and Areas of Activity
Small Payment Institutions (SPIs) are entities authorized under the EU's Payment Services Directive (PSD2) to provide specific payment services. They are designed for smaller, emerging companies that may still need the volume to justify the compliance costs and capital requirements of a full Payment Institution (PI) license but still want to offer payment services.
SPIs can provide payment services such as executing payment transactions, issuing and/or acquiring payment instruments, remittance, and money transfers. However, they are restricted by a payment transaction volume threshold. This limit is between €1.5 and €3 million per month, depending on each EU country's specific legal regulations. If an SPI's transaction volume exceeds this limit, it must upgrade its license to a full PI.
On the other hand, National Payment Institutions (NPIs) operate on a larger scale than SPIs. An NPI is a fully licensed payment institution under PSD2 and does not have a transaction volume limitation. They can provide all payment services that SPIs can, in addition to services such as issuing electronic money and operating payment systems.
Differences between Small Payment Institutions and National Payment Institutions
Several differences between SPIs and NPIs extend beyond the scale of operations and types of services offered.
Compliance and Regulatory Requirements: NPIs are subject to more stringent regulatory requirements. They must adhere to strict governance, operational, and risk management regulations and comply with the full range of PSD2 requirements. On the contrary, SPIs have reduced regulatory obligations, making them a more accessible entry point for smaller businesses.
Capital Requirements: SPIs enjoy lower initial capital requirements, which can be a boon for start-ups and smaller entities that may need more financial resources to meet the substantial capital requirements for NPIs.
Passporting Rights: NPIs have the advantage of being able to 'passport' their license to other EU member states, allowing them to provide services across the EU. However, SPIs prefer to avoid these "passporting" rights and can only offer services in the country where they are licensed. Basically, SPIs can provide services only in the country they gained the license, without the possibility of organizing services such as cross-border money transfers, etc.
The Licensing Process
The process to become licensed as an SPI or an NPI is overseen by each EU member state's relevant national regulatory authority, such as the Financial Conduct Authority (FCA) in the UK. The process typically involves the following steps:
1. Preparation and Submission of Application: This involves compiling the necessary documentation, including a business plan, evidence of initial capital, details of management personnel, and information on the company's ownership.
2. Review and Assessment: The regulatory authority will assess the application. The applicant may need to demonstrate that its systems and controls are suitable for the business's nature, scale, and complexity.
3. Decision: Following the assessment, the regulatory authority will decide on the application. If successful, the entity will be granted an SPI or NPI license.
The time it takes to become licensed can vary, but it can take between 3-12 months on average.
In Addition - Electronic Money Institutions:
An Electronic Money Institution (EMI) is a financial entity licensed to issue electronic money (e-money) and provide payment services under the Electronic Money Directive (EMD) and the Payment Services Directive (PSD2) within the European Union. E-money is digitally stored monetary value, often issued on receipt of funds to make payment transactions. It is accepted by entities other than the issuer and is not a deposit account, a current account, or derived from a credit provided by the issuer.
The business areas covered by an EMI are pretty extensive, including, but not limited to:
- Issuance and redemption of electronic money
- Execution of payment transactions
- Issuing and/or acquiring payment instruments
- Money remittance
- Operating payment systems
- Payment initiation services
- Account information services
One crucial advantage of having an EMI license is the "passporting" right it offers. Once a company is granted an EMI license by the competent authority of an EU member state, it can provide services across the EU without the need for additional licenses in other EU countries. The "passporting" enables businesses to extend their reach and customer base significantly.
Regarding who can obtain an EMI license, it is typically unavailable to Small Payment Institutions due to the additional regulatory and capital requirements associated with issuing electronic money. SPIs are limited to a smaller range of payment services and cannot issue e-money. In contrast, due to their more extensive scale and resources, National Payment Institutions can apply for and obtain an EMI license, expanding their product and service offerings.
Integrating e-money services into a business's product portfolio can offer several advantages. For example, it enables businesses to provide innovative digital payment solutions like e-wallets, prepaid cards, and mobile payment applications. Additionally, it allows companies to process real-time payments and offer a seamless user experience, enhancing customer satisfaction and driving revenue growth. Finally, electronic money services can provide businesses with additional data about customer behavior, which can be invaluable for tailoring products, services, and marketing initiatives.
However, it's important to remember that operating as an EMI involves increased responsibilities. These include compliance with Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations, robust IT system requirements, and managing risks associated with electronic money issuance and payment services. Therefore, considering the increased regulatory scrutiny and operational demands, the decision to become an EMI should be considered carefully.
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