If you are planning to expand your business internationally, or have any other interests, for sure you have already been interested in information about financial institutions, where it would be better to open an offshore corporate account. And for sure you have met recommendations on opening an account in one or another international payment system.
The emergence of international payment systems in European countries was facilitated by changes in EU financial legislation, introduced in the last five years. About the existence of such payment systems is already known to all. But those who are planning to use their services need more information about these financial institutions.
Electronic payment systems in the EU
Today there are two types of licensed payment systems: PSP (PaymentServiceProvider) and EMI (ElectronicMoneyInstitution).
The bulk of all payment systems appeared in London, the capital of most FinTech startups. And all of these systems act as an alternative to classic banks.
Both types of European payment systems have quite significant differences. Meanwhile, many people mistakenly perceive them as synonymous, and some are not even aware of the existence of different types of payment systems.
In this article we will tell about these differences, give recommendations on how to use both payment systems and try to understand if you should consider a payment system as an alternative to a “usual” foreign bank with a classical set of services.
EMI and PSP
Experts of offshore industry portal InternationalWealth.info note that since the beginning of 2020 the number of requests for consulting services on choosing the country in which a company should be registered as well as the services for opening an account in one of the banks of this country has significantly increased.
It is well known that it is quite difficult to open such an account on one’s own, without professional advice and guidance. And in the list of recommendations received more and more often is the advice to open an account with EMI.
Note that the EMI and PSP designations are used in European countries. In other countries, a different terminology is used. For example, you can meet the term MSB, MoneyServiceBusiness, “money services business”. It has more to do with the European PSP than with EMI.
It should also be noted that the European FinTech market is considerably ahead of other global financial markets. Therefore, the services of European banks and EMI services are more and more popular among foreign customers.
According to EU legislation, EMI and PSP refer to different types of licenses. They have something in common: both payment systems can open accounts for foreign citizens and both can provide an international bank account number (IBAN).
Now about the differences.
Payment Service Provider
PSP payment systems do not hold their clients’ money. PSP is a paymaster which provides a service of mass payments. The analogue of PSP in Russia can be called the QIWI system.
As an example of the use of PSP it is possible to give the payment of wages to employees in different parts of the world. You send in the corresponding sum, and order transfer of 100 payments on $XXX to employees in 10 or 15 countries. And the payment system will quickly make these transfers, saving your time and your money, which you would have lost on conversion fees and processing a large number of transfers.
Another example is a bank currency exchange office. You send them an amount in rubles, PSP instantly converts rubles to dollars according to your request, and sends it to your suppliers or partners in different countries.
The point of the PSP service is to process your money; these payment systems are not allowed to hold your money beyond the time it takes to complete the transactions. Usually it will not take more than 24-48 hours. It is not possible to have a classical PSP current account.
Electronic Money Institution
EMI clients can keep their funds in the payment system, as well as in a traditional bank account. In Russia similar services are offered by Yandex.Money system.
In comparison with PSP, systems like EMI not only provide payment services, but also allow you to conduct your business without any problems.
Most often the currency of the EMI account is euro. However, if desired and necessary, it is not forbidden to open either one multi-currency account or the required number of accounts for different currencies.
For security reasons, compliance services can sometimes prevent the opening of accounts of trusts, offshore companies, and other non-traditional organizations. In most cases, such problems can be solved with the help of expert advice.
Thus, EMI can be considered a successful alternative to a traditional bank account.
Foreign companies can open an EMI account, and use it to receive/send remittances to partners, suppliers and customers in different countries.
EMIs have access to all payment systems and payment zones. In most cases EMI accounts have access to SEPA (Single Euro Payments Area) and, less frequently, to S.W.I.F.T. (International Interbank Payments System).
Differences of EMI and PSP payment systems from classic European banks
The main difference between EMI and PSP and banks is the prohibition for payment systems to lend. While giving credits can be called the main business of banks, the licenses of payment systems do not provide such services. Moreover, the ban applies to all credit products: mortgages, overdrafts, business loans, etc.
Correspondingly, unlike banks which offer their clients credit cards with some limits, payment systems may issue only debit and prepaid cards.
Customers often express concerns about the security of payment systems, assuming more risks compared to traditional banks. However, experience shows that there are both good and bad examples of doing business in both sectors. The choice of a payment system should be approached as responsibly as the choice of a bank. Attention and vigilance are needed wherever money is involved. The relevance of the Latin motto Caveatemptor (Let the buyer be vigilant) has only increased in our time.
Doing business, or doing business from a country where banking risks are high, respectively, you should choose both banks and payment systems that are prone to risky approaches to doing business with foreign clients. And this will be the only option, as more conservative financial institutions will simply refuse to serve such a client.
Both banks and EMIs do a very thorough due diligence on a potential client. Likewise, you should take care to gather relevant information about the selected bank or payment system beforehand. Keeping your goals in mind, you need to build a certain margin of safety into your financial system.
The opinion that EMIs are not as safe as banks is wrong. Moreover, in many cases EMIs are much safer (for example, in comparison with investment banks). Payment systems do not play the stock and credit markets, which insures them from bankruptcy. Meanwhile, even solid banks can fall victim to risky games, as for example happened with the oldest bank LehmanBrothers which was operating since 1850 and went bankrupt in 2008. EMIs are also insured against fraud by traders.
In Britain, EMI keep their clients’ money in the most trustworthy banks. They say: “Too big to fail”. And in Lithuania, for example, EMI clients’ money is kept in the National Bank. Even if it goes bankrupt, the European Central Bank backs it up. All this reduces possible risks for EMI clients to a minimum.
Freezing an account without notice
EMIs operating in the mass retail business sector often open accounts to all applicants, conducting a minimum number of checks. The flip side of this openness is freezing or closing the account of a customer with large transactions.
This approach does a good job of protecting the retail market from fraud and money laundering. But it creates problems for honest merchants who make big deals.
Sudden blocking of accounts is possible in classic banks as well as in EMIs. These are the realities of today. So what can you do to insure yourself against problems associated with an unexpected freezing of an EMI account?
To prevent such situations, you should ensure that you can contact your account manager promptly. The manager should know you and understand the peculiarities of your business. By communicating with him or her prior to a transaction, you will eliminate the risk of having your account blocked.
This kind of communication is two-way. The manager, in turn, must also be sure that he will be able to contact you at the right time, and get answers to questions that EMI has about your account, or – from the correspondent bank about your transactions. If EMI representatives get the impression of you as a serious business person who is always ready to quickly provide supporting documents, compliance will most likely skip your ambiguous transactions in the future, requesting documents afterwards, rather than just freezing the account.
Let’s summarize
So, based on all of the above, we can offer our esteemed readers the following conclusions:
– For most foreign transactions, private individuals need the services of a PSP;
– Companies, on the other hand, need an EMI account, or a bank account. Better yet, have two accounts, for insurance in case of a sudden blockage;
– In the vast majority of cases, an EMI account will meet your financial transaction needs. Except in situations where there will be a need to use credit products;
– Generally, opening an EMI account takes much less time than opening an account at a foreign bank;
– When choosing an EMI or a foreign bank, it is highly advisable to consult a specialist;
– Remember about provisioning and diversification! No matter how reliable the EMI or bank you choose, always try to have some backup options;
– The choice of a particular EMI and country depends on your goals for using the account. For frequent payments and relatively small transaction amounts, it’s easier and more profitable to open an EMI account. But if you need to save funds and place them not on deposits, a traditional bank will be preferable.
We hope our article helped you to understand the differences between payment systems and banks.