Payment institution

What it means

A payment institution is a non-bank company licensed to provide payment services, such as transfers, payment gateways, issuing payment cards, acquiring card payments or money remittance. Its activities are governed by the PSD2 directive and the Slovak Payment Services Act.

Unlike a bank, it may not take deposits or grant ordinary loans. It must keep client money segregated from its own funds, for example in a dedicated bank account, so that the money stays protected even if the institution fails. Such funds are not, however, covered by deposit protection the way bank deposits are.

In Slovakia the licence is issued by the National Bank of Slovakia, which also supervises the institution. A licence from one member state can be used throughout the EU via the so-called European passport, which is why many fintech services operate in Slovakia under another country's licence.

How it works in practice

An online shop or store usually meets a payment institution as the provider of its payment gateway or card terminal. Customer money reaches the merchant with a delay and net of fees, so gateway statements must be matched against invoices and against the amounts credited to the bank account.

Many payment institutions also offer payment initiation and account information services within open banking. Accounting software can then pull transactions straight from the bank, of course only with the client's consent and strong authentication.

A company holding operating cash in an account with a payment institution should weigh risk and liquidity. For larger balances it is safer to keep the main account at a bank and hold with the payment institution only what is needed for day-to-day payments.

What to watch out for

Before signing with a payment service provider, check its licence in the supervisor's register. Unlicensed payment services are not unusual, and a client of such a provider lacks the protection the law grants when dealing with licensed firms.

Payment institutions are subject to anti-money-laundering rules and may freeze an account over suspicious transactions or incomplete identification. A company should therefore keep documents on the source of funds and its beneficial owner ready.