Alternatives to traditional banking are becoming more and more popular, especially since we have moved into the digital age. There are two main kinds of online banking: E-money Institutions (also known as EMIs) or Payment Services Provers (also known as PSPs). Both options often convenient and easy alternatives to banking, and the best of the best are controlled with very simple mobile apps.
Because these forms of alternative banking are continually growing in popularity, there is a lot of potential for new and old business owners to enter the field. However, because of the extensive and often expensive licensing requirements that you have to meet when entering this field, you have to have a plan. You need to know what value you are bringing and what your client base is. It is also important to know what your competition is. Today, some of the biggest companies in online banker are Revolut, Wise, N26.
Electronic money is essentially cash that is stored in a digital format (in the EMIs servers or electronic chip) rather than in a physical wallet. The person with the electronic money can then use it to pay other people when they make purchases. There are three main conditions when it comes to e-money, and all have to be met: e-money must be issued at an equal value to the money received as payment, it is used as an instrument to execute transactions and must be accepted as a form of payment by at least one party who does not issue the same e-money.
Specificity of the registering
One of the things you will need to consider is where you want to base your business, as that will affect where you should get your license. The nice thing about building your business in an EU jurisdiction is that once you get a license in one of the Member States, you have the legal right to offer your services in all of them. Once you decide where you want to base your business, you can move on to obtaining your license. The two kinds of licenses, EMI and PSP, have almost identical requirements. In this article, we are going to take a look at EMI licensing specifically, but if you prefer PSP, you can expect to have to meet essentially the same standards. EMI are generally the more sought-after license because you can offer a greater range of services with it than you can with the PSP. Having an EMI license gives the ability to offer all the services you could as a PSP with the addition of being able to issue electronic money.
There are a number of different requirements that the license holders have to meet, we are going to take a look at the major requirements that you need to be aware. Once the Electronic Money Institution has been granted their activity license, they need to have local operations in Estonia. Local operations include having a board that resides in Estonia. The management board located in Estonia has to have at least two members. All of the members appointed to be on the management board for the Electronic Money Institution have to have proper education, experience, and other professional qualifications that make them a qualified person for the job of managing an EMI. Further, managers can only be people who have a stellar reputation in buisness. In order to open an Electronic Money Institution, you must have at least 350,000 euros in share or initial capital.
Benefits of license
Execute payment transactions, including transactions to another payment service provider and through cards/other similar devices;
Execute direct debits, including one-off direct debits;
Execute credit transfers, including for standard orders;
Execute payment transactions where funds are covered by a credit line;
Offer services that allow cash to be put into a payment account;
Both issue and acquire payment instruments;
Perform money transfers;
Execute payment transactions where the consent of the payer was received over telecommunications or digital device;
Offer Payment Initiation Services;
Offer Account Information Services.
Term of registering
The duration of the license registration depends on how quickly you are able to get all the documents drafted and submitted. Most people take a few months to prepare all the documents, and the regulator will likely ask questions and for more documents for several months after that about how the business will be managed, how assets will be protected, etc. Based on our practical experience 9 out of 10 projects, require at least 5-6 months for preparations and 5-6 month for application review, which totally makes around a year to get a proper authorization.
There is an EU directive called the Payment Service Directive 2 that is responsible for regulating payment service businesses in the European Union. This directive does not only apply to EMIs, but rather other businesses like banks, building societies, payment institutions, and the customers of said different businesses. In addition to the EU Directive, Estonia has regulations put in place called the Payment Institutions and E-Money Institutions Act or PIEIA. In Estonia, Financial Inspection supervises the different financial services businesses and markets to ensure they are meeting Estonian and EU regulations. FI is also responsible for awarding or revoking EMI licenses which are required for issuing e-money services in Estonia.
Providing Electronic Money Services in Foreign States
When a company is authorized to offer financial services within any country in the European Economic Area or the EEA, they have the right to provide regulated financial services anywhere else in the European Economic area without having to spend time and money requiring any additional licenses. This is because an EMI license is what is known as a passportable financial service all around the European Union. Once you decide to expand, you will need to notify the FI that you are planning to do so. When an EMI tells the FI that they plan to provide cross-border services to other foreign states, the FI maintains the legal right to require the submission of information, documents, and/or explanation of any information that is relevant to the FI ability to maintain regulated supervision of the EMI.
All of the policy and procedural documents that are submitted to the FI have to be unique to the individual EMI. If an applicant simply submits a template document, it will likely lead to delays or the total rejection of the application.
In order to open an EMI, you are going to need to acquire a license which means you are going to need to submit a written application to FI. Including in your application, the founders or management board of the company are going to need to submit the following documents.
First of all, these are documents related to the company: a copy of the articles of association (If the company is an operating company, you will need documentation of the decision on the amendment of the articles in addition to the amended articles of associations), a detailed business plan, documentation that offers proof of the paid and/or payable share capital in amount of EUR 350 000, an action plan that describes exactly what the business is going to offer its customer base, and the internal rules, procedures, policies and a complete list of all of the applicant’s shareholders. You should also provide documents on the financial condition of the company, such as: for a new company, an opening balance sheet and predicted revenue and expenditures. For an operating company, an income statement and balance sheet for last month’s activity and prior three annual reports if possible. A complete outline of the legal, technical, and financial principles used to run the payment system. These principles must be approved by Estonian Central Bank.
Further, if the applicant wants to operate payment systems, they will need to provide a draft of the rules they will use to guide how their system will function.
A document outlining how the applicant will meet the requirements outlined in PIEIA regarding the protection of the customer’s assets. In more detail, this includes: a) An explanation of what control systems the company is going to put in place and what measures the company is going to take to ensure that there is no money laundering, financing of terrorists, or leaking of the payers’ personal information; b) A full description of all IT, technological systems, security systems, and control mechanism systems that will be used by the business for the services they plan to offer; c) A document outlining how the company will be organized, including an explanation of any agents and branches and any planned participation in national or international payment systems.
In addition, you will need documents providing all information required by PIEIA on those who hold qualified holdings in the company: information on all of the managers of the company, including a complete list of prior employment, a description of what they will be responsible for in the company, and evidence that each manager is trustworthy and meets all of the legal requirements outlined in PIEIA. Information on companies that either the applicant or member of management holds over 20%. This information needs to include the amount of share capital, the list of activities, and the extent of the holding. Information of the applicant’s auditor which includes name, place of residence, and personal identification code. If the auditor does not have a personal identification code, you can also provide a registry code or date of birth.
The Financial Inspection of Estonia may require you to submit additional documents and information if they are not able to reach a decision based on the above information alone. Generally, if they ask for more information, it will because they are not convinced that the applicant has the needed resources or facilities to offer the payment services they play to offer, or they are unsure that it meets all the regulations outlined in the PIEIA, but there are some other reasons why they may ask for more information, so there is no need to worry.
Before you start the licensing process, you need to have some form of a business plan established. We have a team of people that will help you edit your business plan to ensure that it matches up with what the FI is looking for, but you need to have some idea of what you are wanting to go in. This business plan needs to include an understanding of the competition, a marketing plan, and a client segment. It does not need to be formal, but at least 2-3 written pages will give us a jumping-off point to help figure out exactly what you need. You bring the ideas, and we will offer all the guidance and frameworks that you need to be successful. You will also need to compare prepared with an explanation of all of the IT systems that your EMI will be doing. IT systems including things like asset and data protection along with money flow. Your team needs to include someone with technical knowledge. Even if you plan to use third-party systems, you still need to have documentation that outlines the systems.
We understand that this processing can be quite intimidating as it is rather demanding. That is why we want to help you through the entire process. We will take care of all matters: analysis of your business model and country selection, formation of the legal entity, assistance with banks, preparation of all internal policies and procedures, assistance with business plan and program of operations, compliance, assistance with third party providers, application, and documents preparation to apply for EMI license, communication with central banks. If you are interested in getting licensed in Estonia, please contact us today so we can get started.