In this article, we’re guiding you through the intricacies of the e-money licence: what it means, who needs one and of course, how it affects you, the consumer. This new wave of regulation has been put into place to not only safeguard the consumer but also to put measures in place to identify and stop fraudulent activity.
What Is Electronic Money (E-money)?
Before we dive into the licencing requirements, let us first take a look at what electronic money is defined as. Essentially, e-money is a digital version of cash. It maintains a monetary value that can be used to make payments and various transactions, typically over the internet, or through a phone or card.
E-money products are either software-based or hardware-based and are responsible for electronically storing the monetary value. Software-based products are used on computers and tablets and require an internet connection (like PayPal for example) while hardware-based products encompass cards that have a chip card and do not require an online connection (for example, Square).
What Is An E-money Licence?
The e-money licence is a regulatory licence that authorises an electronic money institution (EMI) to conduct business. EMIs represent the digitisation of financial services and are authorized to issue money as well as provide payment cards, e-wallets, and IBAN accounts. While banks may provide a similar service, they require an alternative licence as they are able to provide a greater range of services.
In a nutshell, an EMI is considered as such if it engages in the issuing and redeeming of electronic money (e-money), cash withdrawal, deposit and payment services, remittance services, debit or credit transfers, payment initiation and execution services, and account information services. They may conduct these services only if they have the proper licensing.
How Does It Protect The Consumer?
While regulation and consumer protection are the driving force behind e-money licences, there are also several other reasons as to why the regulatory framework has been put into place. The licence is designed to provide businesses with the opportunity to gain access to the e-money market, to facilitate innovation in secure e-money services, and to build healthy competition in a secure market.
E-money licences are obtained to safeguard a consumer’s funds should the EMI become insolvent. This operates in an entirely different manner to a banking licence. Under the proper regulation, EMI’s can choose to do either of the following options to safeguard consumer funds (funds provided by customers in exchange for the issuance of e-money):
- deposit the funds into a segregated client’s funds account with an authorised credit institution, or
- acquire insurance that will cover the risks associated with the client’s funds.
This ensures that the consumer is always protected against loss of funds, and will be compensated accordingly should the situation present itself. It is imperative that consumers only choose EMIs with the correct e-money licences.
How Much Money Is Protected With The E-Money Licence?
According to the FCA regulations, the EMI is responsible for establishing the appropriate organisational arrangements to ensure that the safeguarded funds are at all times protected.
As mentioned above, this can be done by either storing the deposited customer funds in a separate account (different from the institution’s working capital and other funds) or by ensuring that they are covered by an appropriate insurance policy or comparable guarantee.
While licenced banks work in conjunction with the Financial Services Compensation Scheme (FSCS) and only insure users up to ￡85,000, EMIs are required to protect 100% of the consumers’ funds.
According to the licence, EMIs are required to safeguard all funds deposited on the platform and not just a portion as per the licence required by the banks.
While EMIs take several other precautions to protect consumer funds, the e-money licence ensures that the most fundamental legal requirements are met, granting the company the right to legally operate.