To understand the difference between Electronic Money Institution (EMI) and a fully licensed Bank, it is necessary to scatter a widespread misconception regarding the nature of a current account.
This article should be illuminating for holders of deposit and e-money accounts, as well as to Electronic Money Institutions, both existing and newcomers to the e-money market.
The use of e-money has been rising exponentially since it was introduced in the late 1990s. In a survey conducted in 2020 in Austria, 68% of the 2,000 respondents believe that cash and bank deposits are backed by gold, while in the statistics provided by the Financial Conduct Authority (FCA), 74% of Britons believe they are the legal owners of the money in their current account.
Both beliefs are false. It is well-established that bank deposits are actually loans to banks. The word “deposit” can be misleading in this regard, for it connotes safe-keeping, custody, bailment, or trust. On the contrary, the deposit contract is commonly worded so that the bank does not hold deposited funds in custody for the depositor; the funds are not earmarked or segregated. Rather, the bank is allowed to commingle (mix) the funds with its own (which become its property) and to use them in whatever way they may think best on the condition that they will repay the equivalent amount of funds to the depositor.
The Electronic Money Institutions are quite similar in this regard, for e-money is a credit claim of the holder on the EMI and a debt liability of the Electronic Money Institution towards the e-money holder. The Electronic Money Institution promises to redeem/transfer the funds on-demand, as a bank does, and society considers e-money equivalent to bank deposits for practical purposes, and both are used to make payments and buy things.
What this means in practice is that whereas banks may hold €1 in funds for every €10 of deposit liabilities, Electronic Money Institutions must keep €10 of safeguarded funds for every €10 of e-money liabilities they have issued, they must maintain a one-to-one correspondence or parity at all times.
Electronic Money Institutions are not allowed to grant credit from the funds received in exchange for e-money, and if they do, it must be ancillary and granted exclusively in connection with the execution of a payment transaction.
Comparing Electronic Money Institution and Bank
One of the distinctions between the two financial institutions is the fact that EMIs operate almost exclusively online. Some of them happen to have physical open-door premises. Thanks to such business practice, EMIs cut their expenses by not renting or maintaining a physical location, which consequently means that they often can offer excellent banking conditions at lower fees.
Both EMIs and Banks are regulated by the government and obliged to perform Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. Clients should be happy about it. As long as the source of income/funds is legitimate from operating a legitimate business, there is nothing to worry about.
There are quite a few perks when it comes to having an account at a fully licensed bank. These offer a wide variety of services such as investment management, merchant banking, wealth planning, structuring, loans, etc.
Finding a reputable institution
You can run across a million different EMIs just browsing the web; services of those institutions vary wildly. The crucial thing is finding a reputable institution that you can trust your money with and which you can depend on in a time of an emergency. Too often, people open accounts without familiarizing themselves with the EMIs or their internal policies, and that leads to frozen accounts, rejected transactions, or terrible experiences with compliance teams. A word of advice: if you want to be smart in an unfamiliar situation, be sure to rely on the help of professionals.
If you, after all, decide to look for a bank or an EMI on your own, always do proper research on the chosen service provider. Check the company’s general business information, review its licenses on governmental websites, scan its social media, find out who works in the company, especially those who are the top executives. Just follow your common sense. By taking these simple steps, your chances of getting involved with the wrong crowd will reduce immeasurably.
Although this article is far from exhaustive, we have identified the main differences between two financial instruments that for the public appear virtually indistinguishable – and that difference is to be found on what is on the balance sheet of the entities that issue them. That is, the question boils down ultimately to the Electronic Money Institution vs Bank comparison.
Whereas e-money liabilities (a promise to repayment on demand) issued by Electronic Money Institutions are “backed” on the asset side of their balance sheets by an equal amount of funds held by the Electronic Money Institutions in accounts with credit institutions, deposit and e-money liabilities (also a promise to repayment on demand) issued by credit institutions are backed by loans and, to a lesser extent, vault cash and reserves with the central bank that credit institutions hold to meet customer withdrawals and transfers.
But loans are illiquid, and borrowers can default. As general creditors to banks, depositors stand to lose money if the bank goes under in the event of large-scale loan defaults. The same rules apply when these two financial instruments are issued by the same entity.
How can Szilaghi Consulting help you?
Electronic Money Institution vs Bank is quite a complicated topic, and, if you are an existing Electronic Money Institution or a newcomer to the business, you may want to contact Szilaghi Consulting, since we are a niche consultancy company that helps companies in getting e-money licenses in the EU and the UK. We can also help you better understand the operational and legal aspects of safeguarding, safeguarding accounts, and the e-money issuance business more generally. We’re here to help you not only navigate the complex Electronic Money Institution licensing landscape but also to help you understand how you can develop your e-money business.
Contact us for a consultation and we will identify and analyze your possibilities of obtaining the license in Europe as well as help you to understand the regulatory requirements related to the electronic money licensing process in the most suitable jurisdiction for you.
