Electronic Money Institutions (EMIs) are financial entities authorized to issue electronic money (e-money) and provide related payment services. E-money is a digital alternative to cash, stored electronically and used for transactions. EMIs play a crucial role in the digital payments ecosystem by facilitating secure, efficient, and convenient electronic transactions.
There are different kinds of EMIs. There can be issuance, distribution and redemption of electronic money. You can also find services that provide payment services that facilitate e-money transactions. Some can find distribution of payment cards enabling conversion of e-money into physical cash or cash deposits onto electronic cards.
What is e-money?
E-money exists in two forms: hardware-based products that use physical devices such as prepaid cards, and software-based solutions accessed via mobile phones or computers. By adopting e-money, you’re essentially swapping cash for an alternative payment method. Unlike debit or credit cards, e-money transactions don’t require third party authorisation.
How are e-money institutions regulated?
Authorisation and Registration – EMIs must be authorised by the FCA to issue electronic money. This involves a rigorous application process where the EMI must demonstrate that it meets the necessary requirements. Smaller EMIs with lower transaction volumes can opt for registration rather than full authorisation. Registered EMIs face fewer regulatory requirements but are subject to strict limitations on the amount of e-money they can issue.
Safeguarding Customer Funds – EMIs are required to safeguard customers’ funds by keeping them in separate accounts with authorised credit institutions or by investing them in secure, low-risk assets. This ensures that in the event of insolvency, customers funds are protected and can be returned to them.
Prudential Regulation – EMIs must maintain adequate systems and controls to manage operational risks, including IT security, fraud prevention, and business continuity planning. They must also have effective governance arrangements, including clear organisational structures ad lines of responsibility.
Consumer Protection – The FCAs regulatory framework for EMIs includes various measures to protect consumers, such as rules on how e-money must be redeemed, requirements for handling customer complaints, and participation in the Financial Ombudsman Service for dispute resolution. EMIs must ensure that customers can redeem their e-money at any time at par value, less any applicable fees.
The role of insurance in EMIs
Customer Fund Protection – While EMIs are required by law to safeguard customer funds (usually by holding them in segregated accounts or investing them in low-risk assets), insurance can provide an additional layer of protection. Insurance can play a role in protecting customer funds in the event of the EMIs insolvency. While safeguarding mechanisms are primarily designed for this purpose, insurance can offer further assistance.
Business Continuity and Resilience – Insurance can support an EMI business’ continuity and disaster recovery plan by providing financial resources to recover from major disruptions. This can include coverage for physical damage to premises, loss of income and additional expenses incurred during the recovery period. Giving the increased prevalence of cyber threats, cyber insurance has become a critical component of risk management for EMIs. It covers various costs associated with cyber incidents, including forensic investigations, notification of affected customers, legal fees, and public relations efforts to manage reputational damage.
Innovation and New Products – Insurance can enable EMIs to innovate and offer new products and services with greater confidence. For instance, if an EMI wants to introduce a new type of payment service, insurance can mitigate the the associated risks, allowing the EMI to proceed with innovation while managing potential exposures. EMIs may collaborate with insurance companies to offer bundled products, such as travel insurance linked to e-money accounts or mobile wallets. This can enhance the value proposition for customers and create additional revenue streams for the EMI.
What kinds of insurance do EMIs use?
Cyber Insurance - Cyber insurance provides protection against compensation claims arising from a network, information, or privacy breach. In addition to first party covers, such as cyber extortion, business interruption, incident response, and forensic investigations. This can be particularly prevalent for e-money institutions due to the increased risk associated with data breaches.
Employment Practices Liability Insurance - Employment practices liability insurance provides the company protection from allegations arising from a range of employment disputes (i.e. wrongful dismissal, harassment, and discrimination). This will help to manage the risks associated with employment practices and the litigation that can come alongside it.
About the author
Ryan Nevin is an Account Broker at Get Indemnity™ - he is an ambitious professional who is currently studying towards being a Chartered Insurance Broker.