In the 2000s, the European Commission (EC) adopted two general directives which eliminated obstacles in the European payments market.
Each of them has allowed the emergence of new players competing with traditional credit institutions: electronic money institutions (EME) and payment institutions (EP).
In a context of rapid growth of e-commerce and the digitization of financial services, these guidelines have paved the way for an increasingly competitive payments market. The emergence of new payment service providers has led to new rules enacted by the EC to protect consumers and the security of payments.
- The Second Payment Services Directive (PSD2) has issued a modernized legal framework that:
- takes into account technical innovations and associated risks,
- Strengthen payment security,
- It defines two new payment services related to Open Banking.
Let’s take a closer look at the regulatory landscape for EMI and EP.
Regulated entities in the payment and electronic money sector
Traditional lenders provide a wide variety of payment and banking services:
- Deposit protection up to € 100,000 per client via FGDR,
- Paid accounts,
- Loans and Credit Cards,
- Wealth management.
But as the sector welcomes new players, three new types of regulated operators have emerged:
- Electronic Money Institutions (EMIs), which issue electronic money and offer payment services,
- Payment Institutions (IPs), which exclusively provide payment services,
- Account Information Service Providers (PSIC) and Payment Order Service Providers (PSIP).
EMIs are subject to light regulation in an effort to encourage innovation in the payments industry.
- Accept customer funds and exchange them for e-money,
- Offer debit cards, standing orders, bank-to-bank transfers and direct debits,
- Provide other digital products such as currency exchange.
When issued by EMI, electronic money:
- It has a monetary value,
- is electronically archived,
- It is available upon request,
- It is used for direct payment,
- It is accepted by issuers, payment service providers and card networks,
- It is not subject to the same stringent requirements as banks that issue electronic money.
EMIs offer the same payment services as EPs. But entities wishing to become an EP or EMI must first define the payment services they will offer with the National Competent Authority (CNA), typically a country’s central bank.
Exclusions of the ANC rules
Some companies may issue e-money and offer payment services without obtaining a specific authorization. These license-exempt players provide payment services to purchase goods and services within a limited or defined network. Exempt entities must renew their status every year.
These exemptions aren’t just for small players. Some companies using this approach process larger payment volumes than a traditional payment institution.
Payment service provider agents
Payment service institutions controlled by the NCA may engage third parties to perform payment services on their behalf, through an agent license. Organizations must declare these agents to the ANC.
electronic money dispensers
The NCA controls an e-money dispenser depending on where it operates. It can distribute and circulate electronic money on behalf of an EMI, but it cannot issue it.
Services offered by new players
NCAs classify types of payment services into five categories:
- Payment acceptance: More than 33% of e-money and payment institutions have tailor-made solutions for accepting payments. With the rise of e-commerce, these solutions enable a wide range of payment methods that meet evolving customer preferences: Visa, Mastercard, WeChatPay, AliPay, and financing solutions such as Buy Now Pay Later.
- Online payment accounts: Several institutions have developed mobile applications with means of payment that allow for transactions and money transfers. They often offer more competitive offers than traditional banks.
- White Label Payment Solutions: Growing companies can develop their own payment offerings using products provided by licensed players. Young companies therefore do not need to obtain a license.
- Open Banking Solutions: Two new services have emerged following the Second Payment Services Directive:
- Account Information Service Providers (AISP), which allow companies to collect and use consumer payment data for the personalization of offers,
- Payment Initiation Service Providers (PSIPs), which allow markets to accept wire transfer payments.
- Specialized Payment Solutions: PSD1 and PSD2 have paved the way for specialized solutions such as third party payments.
New player business models
The business models of EMIs and SEs view consumer behavior, competitive factors, technological advances and regulatory changes differently. Payment institutions can opt for the business model and status that allows them to adapt and move in the desired direction.
EMI business models
- Neo-bank that provides payment cards, has BIN sponsorship, manages the related processing and issues a personalized IBAN code for SEPA payments,
- Banking-as-a-Service offers complete payment processes via API such as:
- Fintech and neo-banks.
- Embedded Finance for companies.
- International fund transfer service for the management of electronic money and sub-accounts / currencies.
EP business models
- Alternative Payment Method (APM),
- Payment as a Service (PaaS) provider with an orchestration platform and services such as issuance, acceptance and acquisition,
- Payment Service Provider (PSP) offering a payment, processing and acquisition gateway,
- Payment processor or acquirer that facilitates the routing of transactions between card networks and financial institutions,
- AISP or PISP that aggregates payment data and initiates wire transfers.
Advantages of a central bank platform
The payment services landscape continues to develop rapidly. Regulated institutions with a payment license or a banking license rely on a central bank platform to perform essential day-to-day functions, operate across multiple platforms, and pass mandatory information to the NCA (often the central bank of the country concerned).
Leading banking platform providers focus on developing and updating their SaaS platforms to streamline processes, stay at the forefront of industry innovation, and provide flexibility and customization.
With Skaleet’s Core Banking System, EMEs and EPs can focus and innovate on their core offerings. By connecting with many industry partners, they can become more competitive, create new offerings for customers, and deliver new payment revenue streams for merchants and end users.