What is a payment institution, a commercial agent and an e-money institution?

A company that operates in fintech or intermediates payments must at some point answer a question – does it need a license from the Financial Supervision Authority.

For that, one must judge, if the company operates as a commercial agent, payment institution, or an e-money (called electronic money in other jurisdictions) institutions pursuant to the Payment Institutions and E-money Institutions Act of Estonia (PIEIA).

PIAIA is an application of PSD2 and as such similar rules apply in the other member states of the European Union.

Payment Institution

Payment institutions are entities, the permanent activity of which is the provision of payment services. The definition of payment services contains the execution of payment transactions, cash payments to payment accounts, withdrawal of cash from payment accounts, money remittance, and others.

A payment institution can set up a branch office in another member state using a simplified procedure. If a company has a license in one EU member state, it can expand its operation into other member states. One example of payment institutions in Estonia is Make Commerce (Maksekeskus).

To operate as a payment institution in Estonia, a company must have a share capital of at least EUR 20 000 (if a company intends to provide only payment initiation services). To provide all the services a company must have a share capital of at least EUR 125 000. In addition to that it is necessary to  submit a business plan, AML rules of procedure, internal rules, risk assessment and other documents.

Commercial Agent

PIEIA provides for some exceptions, which allow for simpler financial transactions, e.g. payment transactions from the payer to the payee through a commercial agent with a contractual right to negotiate the sale or purchase of goods or services or to enter into contracts for the sale or purchase of goods or services on behalf of only the payer or only the payee.

Those are usually cases of monetary transactions made on the basis of a contract from the buyer to the service provider, without the commercial agent being a party to the contract.

According to the explanatory letter of PIEIA, this exception can be applied only in cases of representatives, which act only on behalf of one of the parties. So, in the EU those e-commerce platforms, which intermediate payments between both the buyer and the seller should operate under a payment institution license.

The majority of marketplace type services act as representatives of one of the parties, e.g. Bolt and Wolt act as the representative of the service provider. As such they do not need a license to intermediate payments.

E-money institution

An e-money license is similar to that of the payment institution. The main difference stands in the fact that an e-money institution can issue e-money, which expresses a monetary claim against the issuer and can be used as a payment instrument to execute payment transactions.

For example, PayPal is an e-money institution, and transactions with PayPal are made with e-money. Also, Transferwise, Monese, and Stripe operate on a UK based e-money institution license.

Acting as an e-money institution makes it possible to use an electronic unit of value that allows faster monetary transactions compared to payment institutions that deal, for example, with SEPA payments.

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