Core payment software vendor SDK.finance prepared a detailed how-to guide on how to get a Payment Institution or Electronic Money Institution license in the UK.
Please note that SDK.finance does not provide a financial license service. This article is for informational purposes only.
If you are planning to provide payment services or issue electronic money, you will need to apply with the FCA for registration or authorization, either as a Payment Institution (PI) or Electronic Money Institution (EMI).
We’ve put together a quick-fire guide that will help you navigate your way through the various documentation and get you to the relevant sections that’s the most applicable for the type of service your business will provide.
In this guide we’ll look at:
1. The Second Payment Services Directive (PSD2) and why is it important, specifically from a PI and EMI licensing perspective.
2. Payment Institutions (PI) including:
– Authorized Payment Institutions (API)
– Registered Small Payment Institutions (SPI)
– Account Information Services (AIS) and Payment Initiation Services (PIS)
3. Electronic Money Institution (EMI) including:
– Authorized EMI
– Registered Small EMI
4. What is passporting and why would you want to take advantage of it?
5. Where do you need to apply and where can you get more information?
1. Why is PSD2 important from a PI and EMI licensing perspective?
PSD2 is a regulatory framework released by the European Parliament to enact significant improvements to the European payments market through a number of core objectives, including:
– Contributing to a more integrated and efficient European payments market.
– Leveling the playing field for payment service providers (PSPs).
– Promoting the development and use of innovative online and mobile payments.
– Making payments safer and more secure.
– Protecting consumers.
– Encouraging lower prices for payments.
It replaces the existing payment regulation framework under PSD1 and introduces new regulatory requirements through the Payment Services Regulation 2017 (PSRs 2017).
For PI’s it means that firms that were previously registered or authorised under the Payment Services Regulations 2009 (PSRs 2009), should have already applied for re-authorisation under PSR 2017.
And EMI’s that were registered under the Electronic Money Regulations 2011 (EMRs 2011) will also already have had to re-register under PSR 2017 (amending EMR 2011).
PSD2 is basically an overhaul of the regulation in the payment services sector and therefore does have a significant impact on companies in the PSP sector.
The main differences from PSD1, that PI’s and EMI’s in particular should be aware of, relate to business conduct, handling complaints, and reporting and notifications. More detailed information on each of these sections can be found in chapters 8, 11 and 13 respectively of the FCA’s guidelines on Payment Services and Electronic Money.
2. Payment institutions (PI’s)
Any UK company that provides payment services needs to apply to the FCA to become either a registered small payment institution (SPI) or an authorised payment institution (API), whereas if your business only provides account information services, you can apply to become a registered account information service provider (RAISP).
According to the FCA, the definition of a payment service provider is anyone who provides one of the following services:
– an authorised payment institution;
– a small payment institution;
– a registered account information service provider;
– EEA authorised payment institution;
– an EEA registered account information service provider,
– a credit institution;
– an electronic money issuer;
– the Post Office Limited;
– the Bank of England, the European Central Bank and the national central banks of EEA States other than the United Kingdom (other than when acting in their capacity as a monetary authority or carrying out other functions of a public nature);
– government departments and local authorities (other than when carrying out functions of a public nature);
– any person with access to a regulated payment system who provides services to consumers or businesses who are not participants in a regulated payment system;
– any person with access to an IFR card payment system who acts as an acquirer or card issuer for the purposes of enabling the transfer of funds.
If you or your business falls under any of these categories, you will need to apply to become a PI.
Apply to become an authorised payment institution (API)
Before applying to become an API, there is a list of 12 conditions your company must meet for it to be considered, including that the application must be in respect of a body corporate, such as a limited company or partnership, your head office, and registered office must be in the UK, you have taken adequate measures to safeguard payment service user funds, etc.
There’s also a list of details you need to provide as part of your application which includes items such as the type of payment services business you want to provide and your plans for obtaining a ‘safeguarding’ account with the UK or EEA bank.
If you are planning to apply as an API (or SPI below), it is a good idea to do it well in advance of your planned service provision start date as approval times can take anything between 3 to 12 months.
Apply to become a registered small payment institution (SPI)
Businesses also have the option to apply as a registered SPI if:
– they do not plan to provide payment services on a cross-border basis or in another EEA state;
– they processed less than an average of €3 million over the previous 12-month period, or, if trading for less than 12 months, the projected amount of payments over the next 12-month period will be less than an average of €3 million.
– they do not intend to conduct account information or payment initiation services (PIS).
Registering as a small payment institution is much simpler and less costly. There are still certain conditions the company has to comply with but the application requires far less accompanying pieces of information and SPI’s are also exempt from the authorisation and prudential requirements of PSR 2017.
Account information services (AIS) and payment initiation services (PIS)
AIS and PIS were not previously regulated by the FCA but now fall under the scope of PSR 2017 and PSD2.
Companies that want to provide AIS only, can apply to become registered account information service providers (RAISPs) while companies that want to provide PIS only, will need to apply to become authorised, similar to API’s.
Typical examples of account information (AIS) type businesses include:
– businesses that use account data to provide users with personalized comparison services;
– businesses that provide information from the user’s various payment accounts to third parties (such as credit reference agencies);
– businesses that provide users with a dashboard where they can view information from various payment accounts in a single place.
Payment initiation services (PIS) are businesses that enable customers to pay via online banking facilities on merchant websites, instead of using credit/debit cards.
SDK.finance is a top-notch digital banking technology provider, for Payment Institutions and Electronic Money Institutions.
3. Electronic money institutions (EMI’s)
Any company in the UK that intends to create and distribute electronic money (e-money) will also need to either apply to become a registered small EMI or apply to become an authorised EMI.
The FCA defines e-money as any electronically stored monetary value represented by a claim on the electronic money issuer, which is issued on receipt of funds for the purpose of making payment transactions or accepted by a person other than the electronic money issuer.
Therefore, the electronic money issuer has to apply for registration or authorisation and has a similar definition as a payment service provider (PSP) above, with a few minor technical differences.
EMI’s will also have to comply with additional money laundering, terrorist financing, and transfer of funds regulations.
Apply to become an authorised EMI
If you apply as an authorised EMI, your company may issue e-money in other EEA states in addition to being able to provide other unrelated payment services, such as discussed under PI’s.
Therefore, as an authorised EMI, you can offer all the services as an API, on top of the e-money services.
You have to provide relevant information about your e-money platform, including your e-money business in the form of a business plan, the payment services you may provide in the business plan, and the measures you have taken to safeguard e-money holders’ funds.
Similar to PI’s, the approval process after application can take anything between 3 to 12 months (it’s the same timeframe for small EMI’s below).
Apply to become a registered small EMI
The option is also there for businesses to apply to become a registered small EMI under the following conditions:
– they do not plan to provide payment services on a cross-border basis or in another EEA state;
– their business activities are expected to generate average outstanding e-money of €5 million or less;
– they processed less than an average of €3 million over the previous 12-month period, or, if trading for less than 12 months, the projected amount of payments over the next 12-month period will be less than an average of €3 million;
– they do not intend to conduct account information or payment initiation services (PIS).
Other than providing evidence that the business is not expected to generate outstanding e-money of more than €5 million and will process less than €3 million in a 12-month period, the required information to be provided with the application is similar to that for authorized EMI’s.
4. What is passporting and why would you want to take advantage of it?
Passporting is where a PI, EMI, or AIS operates their business activities in another EEA state based on its authorization or registration status in the UK.
They can either do this through an establishment passport, where they physically establish themselves in the host EEA state or a service passport, through cross-border service bases without the need for a physical establishment.
The reason why qualifying businesses might want to take advantage of this law is that it saves the company a lot of money, time, and fighting through red tape by not having to apply for authorization as a service provider in each individual EEA jurisdiction they want to operate in.
There are some significant changes to passporting under PSD2, including the application process. Although existing passports under PSD1 will still be valid under the new regulations, businesses should decide if they need to make changes to their passport, especially considering the changes in definitions and scope of activities.
It is worth noting that passporting is not available to small payment institutions (SPI’s) or small electronic money institutions (small EMI’s).
5. Where do you need to apply and where can you get more information?
The application process for all of the above-mentioned authorizations and registrations is available in one place through the FCA’s Connect portal.
There is a wealth of information on the FCA’s website and you are likely to find a straightforward answer to any of your queries there. The below resources are particularly helpful in guiding you through what licensing you have to apply for, why you need to apply for it, and how to get started with the application process.
- Find out how PSD2 affects your business
- The FCA’s guidance notes on their approach to Payment Services and Electronic Money
- Apply to become electronic money or a payment Institution
- Apply to become an authorised payment institution (API) or an authorised electronic money institution (EMI)
- Apply to become a small payment institution (SPI) or a small EMI
