EMI vs Bank and Payment Institution

Electronic money institutions, banks, and payment institutions help money move, but they are not the same. The label determines what they can do, how they hold client funds, and what capital and compliance rules apply. These choices affect price, speed, and risk. Let’s compare these three models to gain clarity on their roles and where they excel.

Key Takeaways:

• An EMI issues electronic money and can offer related payment services.
• A bank is a credit institution that takes deposits from the public and grants credit for its own account.
• A Payment Institution (PI) provides payment services but does not issue e-money.
• EMIs, banks, and payment institutions are regulated by different organizations based on their jurisdiction.
• EMIs, banks, and PIs, have similar services but their scope is widely different.

Here’s a quick table comparing EMIs to banks and payment institutions:

Electronic Money Institution vs Bank

EMIs focus on issuing e-money and providing payment services, while banks take deposits and lend. The split matters because only banks offer deposit accounts covered by a statutory deposit guarantee, while EMIs must safeguard client funds in other ways.

Services

Banks can accept deposits, offer current and savings accounts, make loans, issue cards, and more. EMIs can issue e-money, hold it in wallets or cards, and provide payment services such as transfers and acquiring. EMIs do not operate insured deposit accounts and cannot use safeguarded client funds to lend.

Business Model

Banks earn net interest on deposits and loans and pay into deposit guarantee schemes. They also earn fees on cards, accounts, and treasury services. EMIs earn fees from issuing e-money, foreign exchange, cards, and payment processing. They must keep client funds separate and cannot fund lending from those safeguarded balances.

Regulation

The EU authorizes banks under the Capital Requirements Directive, while the Prudential Regulation Authority authorizes banks in the UK. Banks meet high initial capital, risk, liquidity, and disclosure standards and pay into a deposit guarantee scheme that protects retail deposits up to €100,000. EMIs, on the other hand, are authorized under e-money rules and payment rules. They must safeguard client funds in segregated accounts or with insurance, but clients do not get deposit-guarantee protection.

Cost of Licensing

The EMI license vs banking license cost profile is not the same. In the UK, an EMI application falls into FCA pricing categories, resulting in a low-thousands application fee. Fees depend on the EMI type: £1,120 for a Small EMI and £5,580 for an Authorized EMI.. Banks pay a dual application fee split between the FCA and the PRA during authorisation, which adds to upfront cost and governance effort. This dual application also makes a bank license materially dearer to obtain and maintain than an EMI license for most business plans.

Electronic Money Institution vs Payment Institutions

It is important to know the difference between Payment Institution and Electronic Money Institution to give you better grasp on how they are used. Here’s a closer look at these non-bank payment firms and what makes them distinct:

Services Offered

EMIs can hold customer value as e-money and let users spend, transfer, or withdraw that value. Payment Institutions execute payment services, including remittance and acquiring, but they do not hold customer value as e-money. Payment institutions can also grant short-term credit linked to a payment service under strict conditions.

Initial Capital Requirements

In the EU, EMIs must hold at least €350,000 as initial capital. Payment Institutions have lower initial capital that depends on the services offered, most commonly €20,000, €50,000, or €125,000 under Article 7 PSD2.

Regulations

Both EMIs and PIs must safeguard customer funds that they hold while executing payments. They separate those funds from the firm’s own money or cover them with insurance or a guarantee. By separating funds, the firm can return customers’ assets if the business fails.

Pros and Cons of EMIs

EMIs fit digital wallets, multicurrency accounts, and card programs. They suit firms that want to hold customer balances without becoming a bank. They can suit consumers who value app-based onboarding and competitive foreign exchange platforms.

Pros of Using EMIs

• Some providers like Stripe Technology Europe and Revolut Payments UAB develop fast product rollout and API-friendly stacks.
• Allows passporting across the EEA once authorized in one member state.
• There are safeguarding regulations that protect client funds.

Cons of EMIs

• No deposit-guarantee cover on customer balances.
• Firms cannot fund lending with safeguarded client money.
• Needs heightened supervisory focus on AML and safeguarding compliance.

Pros and Cons of Banks

Banks offer universal services with deposit protection. They fit savings, credit, and large-scale treasury needs.

Pros of Using Banks

• Have deposit insurance, which protects depositors’ savings.
• Offers full lending and credit products, including overdrafts and term loans.
• Broad payment and cash-management rails under one roof.

Cons of Banks

• Typically, heavier onboarding due to prudential and AML requirements.
• Product change can be slower due to prudential and legacy constraints.
• The pricing for foreign exchange and cross-border payments can be higher than specialist EMIs/PIs in retail contexts.

Pros and Cons of Payment Institutions

Payment Institutions specialize in executing payments without holding e-money value. They fit the acquiring, remittance, and pay-in/pay-out flow.

Pros of Using Payment Institutions

• Requires lower initial capital than EMIs and banks for many business models.
• Flexibility to provide acquiring, remittance, and payment initiation across the EEA.
• Have access rights to bank accounts on objective and non-discriminatory terms under PSD2.

Cons of Institutions

• No e-money issuance, so they cannot store customer value as wallet balances.
• Firms safeguard funds but do not provide deposit insurance.
• Any credit must be short-term and tied to a payment service, with funding and duration limits.

When to Use an EMI, Bank, or Payment Institution

Use an EMI when you need stored value and a wallet experience. A good example is public transportation cards, where you need to pay fiat money in exchange for a balance on the card. Users can then make payments using the balance when needed.

Payment Institutions are great when you only need to move money without holding their value. It’s commonly used in remittances, settling bills, and recurring payments like gym memberships, subscriptions, and the like.

Banks, on the other hand, are meant for deposits, savings, and credit. Banks are suitable for deposits because they offer interest and provide insurance to protect users’ funds. Banks also provide loans for mortgages, vehicles, and working capital for businesses, after assessing their creditworthiness.

FAQ

How are banks keeping my money safe?

Banks must meet capital and liquidity rules and join a deposit guarantee scheme. In the EU, deposit guarantee schemes protect eligible deposits up to €100,000 per depositor per bank, with fast payout timelines.

How do EMIs protect my money?

EMIs must safeguard client funds by holding them in segregated accounts at credit institutions or by using insurance or a comparable guarantee. These are ring-fenced from the firm’s own money, but deposit insurance does not cover them.

How do payment institutions keep my money safe?

Payment Institutions must safeguard funds received for executing payment transactions until those funds reach the payee or the institution returns them.