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Payment service provider

In today’s dynamic business landscape, seamless and secure payment processing stands at the forefront of customer expectations. The emergence of Payment Service Providers (PSPs) has revolutionized how transactions are conducted, presenting businesses with new opportunities and responsibilities. Stepping into the shoes of a Payment Service Provider can be a game-changing venture for entrepreneurs.

This article is tailored for the entrepreneurial spirits looking to carve their niche in this lucrative landscape. It will help you familiarize yourself with the principles of PSP activities and the main requirements for obtaining a license to conduct such business. Whether you’re an ambitious startup or an established business eyeing a new venture, let’s unravel the essentials of venturing into the world of PSPs.

Before we dive into the intricacies of becoming a PSP, let’s take a moment to understand what exactly a PSP is.

What is a Payment Service Provider?

In simple terms, a PSP is a financial entity that facilitates electronic transactions between merchants and customers. Acting as the intermediary, a PSP enables businesses to accept a variety of payment methods, from credit cards to digital wallets, providing a seamless and secure payment experience. In other words, PSPs are third-party providers that enable companies to accept payments from their clients in a convenient way.

PSPs offer a range of services, including transaction processing, payment gateway solutions, fraud prevention, and compliance management. Their role is not only to streamline payments, but also to enhance the overall customer experience, instilling trust and reliability in the digital transaction ecosystem.

What advantages make customers use PSPs?

  • Diverse Payment Options: PSPs enable customers to choose from various payment methods, including credit cards, debit cards, digital wallets, and more.
  • Secure Transactions: PSPs prioritize security measures, employing encryption and advanced fraud detection tools to safeguard sensitive financial information.
  • Cross-Border Transactions: Many PSPs facilitate international transactions, allowing customers to make purchases from and sell to businesses worldwide. This global accessibility opens up new opportunities for both consumers and businesses.
  • Recurring Payments: PSPs often facilitate recurring payments, making it convenient for customers engaged in subscription-based services. This can include utility bills, subscription boxes, streaming services, and more.
  • Competitive Rates: As intermediaries, PSPs often negotiate competitive transaction rates with financial institutions.

How to become a Payment Service Provider?

Becoming a PSP involves several key steps, from understanding the regulatory landscape to obtaining the necessary licenses. Here is a comprehensive guide to becoming a PSP:

At the legislative level, the EU has Directive (EU) 2015/2366 (PSD2), which came into force on January 13, 2018, which addressed barriers to new types of payment services and improved the level of consumer protection and security.

In accordance with the PSD2 regulations, the legal entity authorized to provide and execute payment services throughout the Union is a payment institution (PI).

We can classify two types of Payment Institutions: Authorized Payment Institutions (API) and Small Payment Institutions (SPI). Let’s get acquainted with each of them.

Authorized Payment Institutions

An API is a specific category of PI that has successfully obtained authorization from the National Competent Authority and may offer a wide range of payment services within the European Economic Area.

In order to obtain an API license in the EU, the license application must be completed and submitted to the relevant financial regulatory body, along with the required documents.

An API license is an ideal choice for a legal entity that has succeeded in the financial market so far and wishes to expand its operations.

The main requirements for obtaining API license:

1. The registration of a legal entity in the European Union country in which the license is to be obtained.

2. Authorized capital. The capital requirements depend on the scope of services planned to be provided under the license, and there are 3 levels:

  • If a PI plans to provide only money remittance services, its capital must be at least EUR 20,000;
  • If the PI plans to provide only payment initiation services, its capital must be at least EUR 50,000;
  • If the PI plans to provide all other services, its capital must be at least EUR 125,000. Such services include:
  • Services enabling cash to be placed on a payment account, as well as all the operations required for operating a payment account.
  • Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account.
  • Execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider.
  • Execution of payment transactions where the funds are covered by a credit line for a payment service user.
  • Issuing of payment instruments and/or acquiring of payment transactions.

3. Business Plan. You need to outline the nature of the payment services you intend to provide, your target market, and the operational and financial aspects of your business. Include a robust risk management strategy that addresses potential risks and demonstrates a commitment to consumer protection and financial stability.

4. Operational and Security Standards. Develop and implement robust security measures to protect customer data, prevent fraud, and ensure the integrity and confidentiality of payment transactions. Details about your institution’s procedures for incident reporting, management of sensitive data, business continuity arrangements and principles and definitions used during collection of statistical data should be provided in the application.

5. Ownership structure. The ownership of the company, including the shares held by key individuals or entities, should be transparently disclosed. This encompasses the identification of directors and those overseeing payment services activities within the payment institution. Moreover, evidence validating their good reputation, along with the requisite knowledge and experience for conducting payment services, is essential. These disclosures are crucial for regulatory compliance.

Small Payment Institutions

A Small Payment Institution (SPI) is an institution that has obtained an SPI License in the EU. Through this license, the institution can provide various payment and financial services, but under one main limitation: the average monthly turnover in payment transactions must not exceed a limit set by the Member State but that, in any event, amounts to no more than EUR 3 million. Applying for an SPI License is easier and cheaper than applying for an API License.

In addition, SPIs cannot provide payment initiation and account information services, whereas an Authorized Payment Institution can provide both.

Additional requirements for obtaining an SPI license:

1. The registration of a legal entity in the European Union country in which the license is to be obtained. In this regard, the registration location is significant because, unlike APIs, SPI licenses allow you to provide services exclusively within the country of registration.

2. Authorized capital. There are no initial capital requirements for SPIs unless they go above the limit presented above. If a Small Payment Institution wants to go above the limits, it must pass a procedure of authorisation and become an Authorised Payment Institution. In such a case, the initial capital requirements for APIs will apply.

3. Reputable Management. Managers or persons responsible for managing the business must have a good reputation. They must have no criminal record for money laundering, terrorist financing offenses or any other offenses in the financial sector.

4. AML policy. Compliance with Anti-Money Laundering, Anti-Terrorist Financing and Anti-Money Laundering Regulations.

5. Skills and Integrity Verification. The presence of evidence of qualified skills and knowledge for the effective operation of the business and integrity of each director. In other words, directors must have economic, financial education (or in a similar field).

6. Diverse Management Composition. The composition of the top management should be represented not only by foreign citizens, but also, by necessity, residents of the jurisdiction in which the license is issued.

Please note that depending on the country where you plan to obtain a license, the requirements may differ.

After reviewing the primary (emphasizing that this list is not exhaustive) requirements imposed on applicants seeking licenses to obtainPayment Service Provider status, and once you’ve determined that you meet these criteria, it is prudent to explore the question: “Which EU countries offer the most favorable conditions for obtaining a license?”

Based on the latest information available from the EUCLID database and FCA Register, the United Kingdom, the Netherlands, France, Germany, and Sweden are the top five countries with the highest number of Payment Institution licenses. In light of this, we suggest a closer examination of the details related to the cost and terms of licensing in the aforementioned countries.

  1. The United Kingdom.

To obtain a UK API or SPI License, one needs to submit a direct application to the Financial Conduct Authority (FCA), the regulatory body overseeing financial activities in the United Kingdom.

For details on eligibility requirements and the application process, we recommend visiting the official website of the FCA.

The FCA application fee for an API License will range from £2,500 to £5,000depending on what activities you plan to engage in. The FCA application fee for an SPI License is £500.

The processing time with the FCA is notably variable for both types of licenses, spanning a duration of 3 to 12 months.

2. The Netherlands.

The regulatory authority overseeing the financial market in the Netherlands is De Nederlandsche Bank (DNB). DNB is dedicated to maintaining a stable financial system, encompassing stable prices, robust financial institutions, and the smooth functioning of payment transfers. To provide payment services, one must initiate an application process with DNB and secure authorization to offer such services.

DNB imposes a fee for the evaluation of authorization applications. This fee remains applicable irrespective of the outcome — whether the application is approved, rejected, withdrawn by the applicant, or if DNB halts the consideration during the procedure. The amount of this one-off fee is EUR 6,800. The DNB also charges payment institutions an annual fee to cover the costs of its regular supervision.

In comparison to other European countries, the processing time for a Payment Institution (PI) license application is notably expedited. The statutory consideration period for a license application for payment service providers is set at 3 months. However, the ultimate review period is contingent on the comprehensiveness of the information furnished during the application process, along with any additional queries from the regulator. Consequently, the timeline has the potential to extend to 6 to 9 months (it may vary from case to case).

Detailed information on obtaining a PI license can be found here.

3. France

In France, payment institutions are licensed and supervised by the French Prudential Supervision and Resolution Authority (ACPR). The authority offers two types of PI licenses — a Payment Institution License and a Small Payment Institution License.

For comprehensive details on obtaining PI licenses, we recommend visiting the official website of the ACPR.

The application fee associated to a French Payment Institution (PI) license application ranges from 3,000 to 5,000 EUR.

The standard review period for an PI license application by the ACPR spans3 months from the date of receiving a complete application. In cases where the application is deemed incomplete, an extension of the review period may occur to accommodate the request for additional information.

4. Germany

A license for a PSP in Germany is granted by the Federal Financial Supervisory Authority, commonly known as BaFIN, the financial services regulator of Germany. To apply for a Germany Payment Service Provider license, one must submit an application directly to BaFIN. The application should include all necessary documents and fulfill the requirements outlined by BaFIN.

The current fee for obtaining authorization to offer a single payment service or registering account information services is EUR 6,150. For authorization encompassing multiple or all payment services, the fee is EUR 8,515.

Additionally, payment institutions undergo continuous supervision by the Deutsche Bundesbank and BaFin. They are also obligated to pay an annual fee calculated based on their total assets.

BaFin must make a decision within 3 months of receiving a complete application. In reality, it takes around 4–5 months to obtain the license.

5. Sweden

The Finansinspektionen, Sweden’s financial supervisory authority, is responsible for authorizing, supervising, and monitoring all companies operating in the country’s financial markets. Accountable to the Ministry of Finance, Finansinspektionen (FI) plays a crucial role in overseeing financial activities.

To offer payment services in Sweden, companies must obtain authorization from FI. It is possible to apply for either authorization or an exemption from the authorization obligation. According to legal standards, a company anticipating a turnover for payment services exceeding EUR 3 million per month is obliged to apply for authorization and is officially classified as a payment institution. Alternatively, a company with a turnover below this threshold has the option to apply for an exemption from the authorization obligation and is termed a ‘registered payment service provider.’

Applicants are required to pay a fee in conjunction with their application. The fee for an authorization application is SEK 378,000. In the case of an application for exemption from the authorization obligation, the fee is SEK 217,000 for legal persons and SEK 98,000 for natural persons.

Additionally, Finansinspektionen (FI) imposes an annual supervision fee. Payment institutions are subject to an annual fee of SEK 100,000. Legal entities granted exemption from the authorization obligation face an annual fee of SEK 25,000, while for natural persons, the annual fee is SEK 15,000.

FI commits to reaching a decision within 3 months, assuming the application is complete and the required fee is paid. However, overall, the comprehensive process of obtaining a license typically spans a duration of 9 to 12 months.

Conclusions. In today’s dynamic financial landscape, obtaining a PI license is a pivotal step for entities venturing into the realm of payment services. The licensing process, albeit nuanced, is a gateway to unlocking opportunities for businesses to offer diverse payment services. From single payment services to comprehensive financial operations, the flexibility granted by a PI license fosters innovation and facilitates market participation.

Navigating the application process can be complex, requiring a thorough understanding of the specific requirements in each jurisdiction. Our legal firm stands ready to provide expert guidance and support throughout the licensing journey.

The information provided in this article is intended for general informational purposes only and does not constitute legal advice, counsel, or professional services. This article does not create an attorney-client or consultant-client relationship between the reader and the author. Always consult with appropriate professionals for advice tailored to your specific circumstances and jurisdiction.