Video: What are the Risks of Electronic Money Institutions (EMIs)?

INSIGHTS

13 Oct 2022

In today's WH Insights episode, Gaby Zammit, Managing Associate at WH Partners discusses the risks and protection associated with Electronic Money Institutions (EMIs). WH Insights is a video series discussing key legal concepts, trending legal topics, news and legal updates.

The iGaming and the e-Commerce industries have significantly increased the need for innovative payment solutions. The appetite of both merchants and consumers for alternatives to traditional banking solutions is more evident than ever. Fintech companies and other non-bank entrants are driving market disruption by offering customers

  • better products and
  • better user experience at lower prices

Almost anything a consumer wears, be it a watch or wristband, can now become a contactless payment device.

Understanding how electronic money institutions are regulated and the attendant risks and protection are key.

An EMI is authorised to issue and redeem electronic money which can also be used to make payments. E-money is a type of currency which is only available and stored digitally.

Just like a traditional bank, EMIs open unique IBAN multi-currency accounts for their customers which can be used for payments. Some can also issue debit cards. Unlike traditional banks, EMIs are not ‘deposit takers’ and therefore cannot lend money. If they do, it must be ancillary and granted exclusively in connection with the execution of a payment.

There’s a critical difference between banks and EMIs. While banks can mix the funds deposited by customers with their own and use both for their own purposes, EMIs must ring-fence all funds received from customers. While EMIs do have access to customer funds, they are forbidden from using them other than for purposes involving the issuance and redemption of e-money. In addition, EMIs require ‘safeguarding accounts’, opened with a licensed credit institution, to hold their customers’ money. A safeguarding account is a segregated account which keeps clients’ funds separate from the company’s operational ones.

In contrast to EMIs, the funds that the bank owes its depositors - who are essentially its creditors - are mostly backed by illiquid loans and, to a lesser extent, liquid assets. If everyone decided to ask their bank to return their money, banks would not be able to deliver on their promise. As general creditors to banks, depositors stand to lose money if the bank goes under in the event of large-scale loan defaults. On the other hand, EMIs do have all the funds even if all of their customers withdrew their money at the same time.

There are no clear rules as to how to assess the protections afforded by an EMI, but the following questions may provide a useful indication.

  • Is the eMoney firm licensed, and, if so, by which regulator? Not all licenses are of equal value in terms of consumer protection.
  • Is the eMoney firm audited and if so, does its auditor look into the firm’s compliance with safeguarding obligations?
  • Are there previous examples of how the relevant regulator had previously dealt with a failed institution? If yes, how long did it take for clients of the failed EMI to receive their funds?

Clearly then the risks and protection associated with EMIs must be seen on a case-by-case basis and there is no hard and fast rule

A careful assessment is definitely a must.

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This video is not and is not intended to constitute legal advice and should not be relied on as such. It is intended for general information purposes only.