Electronic money institution

What it means

An electronic money institution is a company licensed to issue electronic money, meaning monetary value held on an account, card or app that can be used for payments. Typical examples are payment apps, prepaid cards and digital wallets.

Unlike a bank, it may not take deposits or pay interest on balances as deposits, nor lend out clients' money. It must redeem electronic money for ordinary money at full value at any time on request.

Besides issuing e-money, it may provide payment services like a payment institution. In Slovakia the licence is granted by the National Bank of Slovakia, but many institutions operate under a licence from another EU state through the single European passport.

How it works in practice

Many neobanks and fintech apps are not banks but electronic money institutions. This matters to clients because money held with them is not covered by deposit protection as bank deposits are.

The institution must safeguard clients' money by keeping it separate from its own assets, for example in a segregated bank account or by insurance. If it fails, this money should be returned to clients, but the process may take longer and not go smoothly.

For businesses, an account with an e-money institution can be cheaper and faster, especially for cross-border or foreign currency payments. As the main business account, though, it is sensible to consider a bank as well and keep a backup account in case of a freeze.

What to watch out for

E-money institutions are subject to strict AML rules and may temporarily freeze an account over suspicious transactions. This happens more often to businesses with unusual payment patterns, and resolving it through customer support can take a long time.

Before opening an account, check in the regulator's register that the provider is licensed, in which country and for which services. Unregulated services that merely resemble e-money may offer no protection of clients' funds at all.