What is a UK Payment Institution?
In the United Kingdom, a payment institution is a type of regulated financial institution that is authorized by the Financial Conduct Authority (FCA) to provide payment services. Payment institutions are subject to regulatory oversight and must comply with certain rules and regulations to ensure the safety and security of their customers’ funds. Payment institutions in the UK are defined under the Payment Services Regulations 2017 (PSR) and can provide a range of payment services such as money transfers, direct debits, and payment card issuance. Payment institutions are distinct from traditional banks and are not allowed to take deposits or offer banking services beyond the scope of payment services. To operate as a payment institution in the UK, a company must obtain authorization from the FCA and meet certain capital and operational requirements. Payment institutions must also comply with anti-money laundering regulations and have appropriate systems and controls in place to manage risk and ensure the security of customer funds.
A UK payment institution can engage in a variety of activities related to the provision of payment services, subject to the regulatory requirements set out by the Financial Conduct Authority (FCA). These activities include:
- Money remittance: A payment institution can provide money transfer services, allowing customers to send and receive funds domestically or internationally.
- Direct debit and direct credit: A payment institution can set up direct debit and direct credit arrangements, allowing businesses to collect payments from their customers or make payments to their suppliers.
- Payment card issuance: A payment institution can issue payment cards such as debit or credit cards, prepaid cards, or virtual cards.
- Mobile payments: A payment institution can provide mobile payment services, allowing customers to make payments using their mobile devices.
- Foreign exchange: A payment institution can offer foreign exchange services, allowing customers to convert one currency into another.
- Payment initiation: A payment institution can initiate payment transactions on behalf of its customers, allowing them to make payments from their bank accounts without having to provide their bank account details.
- E-commerce payments: A payment institution can provide payment services for e-commerce transactions, allowing customers to make online purchases using their preferred payment method.
Requirements for a UK Payment Institution License.
There are, of course, numerous requirements that must be met in order to obtain a Payment Institution license in the UK. These include, but are not limited to:
- Legal entity: The applicant must be a legal entity registered in the UK, such as a company or a partnership.
- Capital requirements: The applicant must have a minimum capital requirement of £100,000 or an amount equivalent to 2% of its annual payment volume, whichever is higher. The minimum is £100,000 for new applicants.
- Management and employees: The applicant must have an executive management team with relevant experience and expertise, as well as sufficient employees to manage its operations. This is a qualitative standard as determined by the FCA.
- Risk management systems: The applicant must have effective risk management systems in place to manage operational, financial, and legal risks. This includes such things as record keeping requirements, conflicts of interest handling and regulatory reporting procedures.
- Governance and internal controls: The applicant must have robust governance and internal control policies and procedures to ensure compliance with applicable laws, regulations, and standards.
- Anti-money laundering (AML) and counter-terrorist financing (CTF): The applicant must have effective AML and CTF policies and procedures in place to prevent money laundering and terrorist financing.
- Systems and controls: The applicant must have appropriate systems and controls in place to ensure the security of customer funds and protect against fraud. This includes, specifically, cybersecurity measures.
- Professional indemnity insurance: The applicant must have professional indemnity insurance in place to cover potential liability arising from its activities as a payment institution.
- Fit and proper test: The FCA will assess the suitability of the applicant’s directors, senior management, and significant shareholders based on their integrity, competence, and financial standing. This specifically relates to prior convictions, bankruptcies and lawsuit to which interested parties have been subject to in the past.
Timing for Obtaining a UK Payment Institution License.
The length of time it takes to obtain a UK payment institution license can vary depending on a number of factors, such as the complexity of the application, the completeness of the documentation provided, and the workload of the Financial Conduct Authority (FCA) at the time of the application. Generally, the FCA aims to process payment institution license applications within six months of receiving a complete application. However, this timeline may be longer or shorter depending on the individual circumstances of the application. The application process typically involves several stages, including initial screening, application review, due diligence checks, and assessment of the applicant’s compliance with regulatory requirements. The FCA may also request additional information or documentation during the application process, which can extend the timeline. Presently, a well founded application will take approximately 4-4.5 months to process and have the license issued.
Difference between UK Payment Institution & Electronic Money Institution
The main difference between a UK payment institution and electronic money institution lies in the nature of products and services each is able to offer. Generally speaking, a UK EMI is able to offer services that a Payment Institution is able to offer together with additional products.
That is, a payment institution is a type of regulated financial institution that is authorized by the Financial Conduct Authority (FCA) to provide payment services such as money transfers, direct debits, and payment card issuance. Payment institutions do not issue electronic money and are not allowed to take deposits or offer banking services beyond the scope of payment services. An electronic money institution (EMI), on the other hand, is a type of regulated financial institution that is authorized by the FCA to issue electronic money. Electronic money is a digital form of payment that is stored on an electronic device or remotely on a server, and can be used to make payments for goods and services. EMIs are not allowed to take deposits or offer banking services beyond the scope of issuing electronic money.
Both payment institutions and EMIs are subject to regulatory oversight and must comply with certain rules and regulations to ensure the safety and security of their customers’ funds. However, they have different regulatory requirements and are subject to different sets of regulations. For example, payment institutions are regulated under the Payment Services Regulations 2017, while EMIs are regulated under the Electronic Money Regulations 2011.
Payment Institutions and Cryptocurrency
A UK payment institution can provide payment services related to cryptocurrencies, subject to certain conditions and requirements set out by the Financial Conduct Authority (FCA). In the UK, cryptocurrencies are not considered legal tender, but are recognized as a form of property. The FCA has classified cryptocurrencies as “cryptoassets” and has set out specific rules and requirements for payment institutions that provide services related to cryptoassets.Payment institutions that provide services related to cryptocurrencies must comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, and must have appropriate systems and controls in place to manage risks related to cryptoasset transactions. Payment institutions that offer services related to cryptoassets must also be registered with the FCA and meet certain requirements related to capital adequacy and operational resilience.
Scope of Payment Institution License
A licensed UK Payment Institution can operate in other European Union (EU) and European Economic Area (EEA) countries under the passporting arrangements provided for under the Payment Services Directive (PSD2). Passporting allows payment institutions licensed in one EU or EEA country to provide their services across the entire EU/EEA without having to obtain separate licenses in each country. This means that a UK Payment Institution that is authorized by the Financial Conduct Authority (FCA) can provide payment services in any EU or EEA country, subject to certain conditions and requirements. However, it’s important to note that the ability to passport may be affected by the UK’s withdrawal from the EU. Additionally, a UK Payment Institution can provide payment services to customers located in other countries outside the EU/EEA, subject to the laws and regulations of those countries. However, the payment institution may need to obtain additional licenses or permissions in those countries to comply with local laws and regulations.
The UK Payment Institution license is often overlooked for the more pervasive EMI license. However, given the greater cost and complexity in obtaining an EMI license, the Payment Institution license is ideal for payment acquirers and remittance platforms.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, CoinDesk, and Bitcoin Magazine.
Find Adam: https://linktr.ee/adamtracy