Payment Institution Licences: Key Requirements and Best Practices

In the evolving landscape of digital payments, understanding the nuances of various financial licences is critical for businesses looking to operate in this domain. A key category is the Payment Institution (PI) Licence in the United Kingdom, which is designed for entities that intend to provide payment services without issuing electronic money (e-money). This article explores the intricacies of the PI Licence, focusing on its two main categories: the Authorised Payment Institution (API) and the Small Payment Institution (SPI). In a separate article, I am looking at the difference between Payment Institutions and Electronic Money Institutions.

What is a Payment Institution (PI) Licence?

A Payment Institution Licence allows businesses to offer payment services such as executing payment transactions, money remittance, and payment initiation services. This type of firm is regulated by the Financial Conduct Authority (FCA) in the UK and is essential for companies that handle client funds and facilitate payments between parties.

The Two Categories of PI Licence

The PI Licence is bifurcated into two distinct categories, each catering to different scales of operation:

1. Authorised Payment Institution (API)

2. Small Payment Institution (SPI)

In more details:

1. Authorised Payment Institution (API)

• Targeted at Larger Providers: APIs are suited for businesses that handle a significant volume of payment transactions. They are ideal for companies with a large customer base and extensive payment processing needs.

• Capital Requirements: Authorised Payment Institutions are subject to specific capital requirements. The amount of capital required depends on the volume and type of payment services provided.

• Regulatory Compliance: APIs must adhere to rigorous regulatory standards. This includes robust internal controls, risk management processes, and compliance with Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations.

• Operational Infrastructure: Given their scale, Authorised Payment Institutions need to establish a strong operational framework, including secure payment processing systems, customer support mechanisms, and efficient dispute resolution procedures.

• FCA Authorisation: To become an API, businesses must undergo a comprehensive authorisation process with the FCA, demonstrating their adherence to all regulatory requirements.

• Ability to Hold Client Funds: APIs can hold client money, which allows them to manage funds for payment services over a longer period.

• Higher Transaction Limits: APIs do not have the same restrictive transaction volume limits that apply to SPIs.
  

2. Small Payment Institution (SPI)

 

• Designed for Smaller Operations: SPIs cater to businesses with lower transactional volumes. They are a suitable choice for start-ups and smaller enterprises entering the payment services market.

• Service Scope: SPIs can offer a range of payment services, including money remittance, payment initiation services, and execution of payment transactions, but their scope is more limited compared to APIs and EMIs.

• Transaction Limits: SPIs often have a cap on the total transaction volume they can process annually. For example, in the EU, SPIs can process up to €3 million in payment transactions per month.

• Reduced Capital Requirements: Small Payment Institutions have lower initial capital requirements compared to APIs, making it more accessible for smaller businesses.

• Registration Process: While SPIs still need to register with the FCA, the process is generally less stringent than the full authorisation required for APIs. However, they must still demonstrate compliance with relevant regulations.

• Operational Restrictions: Small Payment Institutions might face certain limitations in their operations, such as caps on transaction volumes and restrictions on cross-border activities.

• Simplified Regulatory Requirements: The regulatory requirements for SPIs are less stringent compared to APIs and EMIs. This includes lower initial capital requirements and lighter ongoing compliance obligations.

• No Holding Client Funds: SPIs generally cannot hold client money for extended periods. They can facilitate payments and transfers, but the funds must be moved quickly from the payer to the payee.

How to choose between an Authorised Payment Institution and a Small Payment Institution?

1. Determine Business Requirements: Assess whether your platform needs to hold client funds and the expected transaction volumes.

2. Regulatory Consultation: Engage with legal and regulatory experts to understand the implications of an SPI versus an API license in your jurisdiction.

3. Future Growth: Consider your platform's growth trajectory and whether starting with an SPI might suffice in the short term, with a plan to upgrade to an API as your transaction volumes and business needs grow.

Key Considerations for Obtaining a PI Licence

• Business Plan and Model: A clear and comprehensive business plan outlining the nature of payment services, target market, and operational strategy is crucial.

• Financial Stability and Resources: Demonstrating financial stability, including adequate capital and financial projections, is essential.

• Governance and Management: Robust governance structures and competent management are necessary to ensure compliance and effective operations.

• Compliance and Risk Management: Establishing strong compliance and risk management frameworks is vital to adhere to regulatory standards.

• Technology and Security Infrastructure: Secure and efficient technology systems are critical for payment processing and data protection.

• Customer Protection Measures: Policies and procedures for protecting customer funds and ensuring transparent services must be in place.

Is a licensing agreement a possible substitute to a PI license?

A licensing agreement with an already licensed payment institution or electronic money institution is indeed a viable option for facilitating donations on your platform without obtaining your own SPI, API, or EMI license. This approach can provide several advantages, especially for startups or smaller companies looking to avoid the complexities and costs associated with obtaining a license directly from the FCA.

Key Points of a Licensing Agreement:

1. Partnering with Licensed Entities:

• You can partner with an existing licensed payment institution (API) or electronic money institution (EMI) that already complies with FCA regulations.

• These partners can handle the payment processing, holding of funds, and compliance requirements on your behalf.

1. Reduced Regulatory Burden:

• By leveraging the infrastructure and regulatory compliance of a licensed partner, your platform can focus on its core activities without needing to manage the regulatory requirements directly.

• This can significantly reduce the administrative burden and associated costs.

1. Speed to Market:

• Partnering with a licensed entity can enable a quicker launch since you avoid the lengthy and complex process of applying for your own license.

• This is particularly beneficial if you need to scale operations rapidly.

1. Revenue Sharing and Fees:

• Typically, such partnerships involve revenue-sharing agreements or fee structures where your platform pays the licensed entity for their services.

• These fees can be negotiated and should be weighed against the costs of obtaining and maintaining your own license.

1. Compliance and Risk Management:

• While the licensed partner will manage regulatory compliance, your platform will still need to ensure that it operates within the terms of the agreement and adheres to any applicable regulations.

• This includes ensuring data security, protecting user information, and managing risks associated with payment processing.

Steps to Implement a Licensing Agreement:

1. Identify Potential Partners:

• Look for reputable licensed payment institutions or electronic money institutions that offer white-label services or are open to partnership agreements.

• Ensure they have a good track record and can support your anticipated transaction volume and business model.

1. Negotiate Terms:

• Engage in negotiations to define the terms of the licensing agreement, including fee structures, revenue sharing, compliance responsibilities, and service levels.

• Clearly outline the roles and responsibilities of both parties to avoid any ambiguities.

1. Legal and Regulatory Review:

• Conduct a thorough legal review of the licensing agreement to ensure it meets all regulatory requirements and protects your interests.

• Ensure that the agreement includes clauses related to compliance, data protection, and risk management.

1. Integration and Testing:

• Work with the partner to integrate their payment processing systems with your platform.

• Conduct extensive testing to ensure that transactions are processed smoothly and securely.

1. Ongoing Management and Compliance:

• Continuously monitor the partnership to ensure that all transactions and operations remain compliant with regulatory requirements.

• Maintain open communication with the partner to address any issues or changes in the regulatory environment.

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The Payment Institution Licence, whether as an API or SPI, opens avenues for businesses to partake in the dynamic field of payment services. Understanding the differences between these licences and the associated regulatory requirements is key for businesses to choose the appropriate category that aligns with their scale and scope of operations.

For any business aspiring to venture into payment services, navigating the application process and maintaining compliance can be challenging but rewarding. It is advisable to seek professional advice and thoroughly prepare to meet the FCA's standards. With the right preparation and strategy, obtaining a Payment Institution Licence can be a significant step towards success in the financial services sector.

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Need Expert Guidance? We Can Help!

Are you considering applying for a Payment Institution Licence and feeling overwhelmed by the complexity? Our consultancy specialises in guiding businesses through the intricacies of obtaining a PI Licence. With our expertise in regulatory compliance, financial planning, and strategic consultation, we can streamline your application process, ensuring that you meet all the necessary requirements with ease.

Don't navigate this journey alone. Contact us today for a consultation, and let us help you to unlock the potential of your business in the financial services sector. With Aevitium LTD's support, your path to obtaining a Payment Institution Licence can be clear and achievable.