A license for payments, not banking
A payment institution is the license a fintech gets when it wants to move other people’s money without becoming a bank. The EU’s second Payment Services Directive, PSD2, lists eight payment services in its Annex I, from running payment accounts and executing card payments to money remittance, payment initiation and account information.
Point 5 of that annex covers “issuing of payment instruments and/or acquiring of payment transactions”. Acquiring is the service a company provides when it signs up merchants and settles their card payments, so a payment gateway that collects and pays out merchants’ funds is usually doing something that needs this license, or needs a licensed partner.
How much capital each service needs
The capital floor rises with the risk of the service. Article 7 of PSD2 sets three tiers, and the UK kept the same amounts in Schedule 3 of its Payment Services Regulations 2017, where the table is still headed “Initial capital requirement (euros)”.
| Services provided | EU, PSD2 Article 7 | UK, PSRs 2017 Schedule 3 |
|---|---|---|
| Money remittance only | €20,000 | €20,000 |
| Payment initiation | €50,000 | €50,000 |
| Payment accounts, transfers, card payments, issuing and acquiring (Annex I points 1 to 5) | €125,000 | €125,000 |
| Account information only | No amount in Article 7 | None |
A firm that offers services from more than one row needs the higher amount, the UK schedule says. Initial capital is a floor at authorization. Both regimes add an ongoing own-funds requirement on top, which the UK schedule calculates by one of three methods.
The UK’s small payment institution
Britain also registers a lighter version. Under regulation 14, a small payment institution may not have a monthly average of more than €3 million in payment transactions over the previous 12 months, and it may not provide account information or payment initiation services. A firm in that bracket is registered by the FCA rather than authorized.
Not a bank, and not every payments company
The common mistake is to treat a payment institution like a bank. Article 18(4) of PSD2 says payment institutions “shall not conduct the business of taking deposits or other repayable funds,” so a balance held with one is money waiting to be paid, not a deposit.
The license also isn’t needed by every company in a payment chain. PSD2 excludes technical service providers that support payments without “entering at any time into possession of the funds to be transferred”, which is why some gateways run under an acquirer’s license while others hold their own.
Before you sign with a payments company in Europe or the UK, look up its legal name on the national register, check whether it is authorized as a payment institution or an electronic money institution, and ask which entity actually holds your funds between the sale and the payout.