All Electronic Money Institutions (EMIs) and Payment Institutions (PIs) must open a safeguarding account to do business and accept payments from their customers. There are no exceptions. The safeguarding requirements, according to Payment Service Providers Directive 2 (PSD2), mandates that all EMIs and PIs must open a safeguarding account to receive a payment license.
Opening a safeguarding account can be done only through a bank. Yet, it can be challenging to open a safeguarding account because many traditional banks are reluctant to work with fintech companies. However, banks like EMBank are accustomed to fulfilling fintech’s needs. Opening a safeguarding account at such a bank with proven experience is crucial for a fintech’s operations.
What is a safeguarding account?
A safeguarding account is an account that an EMI or PI establishes with a bank for the purpose of segregating their customers’ funds. Funds are e-money or payments that an EMI or PI receives and keeps for its customers. These funds can be used for investing or buying products and services from merchants.
This account serves three purposes:
- EMIs and PIs need this account to conduct their business
- It prevents commingling customers’ funds with the operational funds of an EMI or PI
- It protects customers’ funds from fraudulent activities or the bankruptcy of an EMI or PI
Safeguarding Requirements According to PSD2
The second Payment Services Directive (PSD2) establishes rules and procedures that E-Money Institutions and Payment Institutions must follow.
Safeguarding account requirements fall under the guidelines of PSD2. Article 10 of the PSD2 mandates all payment institutions that hold customer funds for payment transactions to safeguard their customers’ funds. The primary way for PIs and EMIs to protect these funds, according to the PSD2, is to keep customer funds in a separate account with an authorized bank or credit union.
Opening A Safeguarding Account
Obtaining a safeguarding account can be challenging for many payments and electronic money institutions. Many banks still do not offer this type of account despite the obligation in PSD2 for banks to provide customer payment accounts to EMIs and PIs. Plus, many other banks that provide this account require the institutions to meet stringent criteria before opening a safeguarding account.
Some banks, like EMBank, are accustomed to safeguarding requirements and welcome EMIs and PIs to open a safeguarding account with them. Opening a safeguarding account at EMBank is a well-defined, streamlined process: After an EMI or PI fills out a simple form, a relationship manager will contact them on the next business day to guide them through the application process. After everything is verified and approved, the safeguarding account will be ready for use.
Statement Letter for A Safeguarding Account
After opening a safeguarding account, an EMI or PI will receive an acknowledgment letter stating that they have officially opened an account. The EMI or PI must then provide this statement letter to a relevant financial supervisory authority.
The acknowledgment letter is a part of the licensing documentation process. It states that the banking institution where the PI or EMI has a safeguarding account has no interest or rights to access the funds or assets in the account. So, for instance, if the institutions have an unpaid debt with their bank, they cannot access the safeguarding account funds to pay off the debt.
Relevant financial supervisory authorities, such as the Financial Conduct Authority (FCA) in the UK mandate companies that handle funds from payment services or e-money transactions to have annual safeguarding audits. The reason for this is that the FCA wants to see if EMIs and PIs are adequately protecting customer funds. In addition, the institutions may be vulnerable to insolvency, so these audits are a necessary supervisory tool for the FCA to protect the funds held in safeguarding accounts.
EMIs and PIs should document all business activities and customer transactions for a successful audit. This documentation should include:
- Safeguarding account information, acknowledgment letters, and other banking arrangements
- Records and accounts for client funds
- Reconciliation controls
- Safeguarding arrangements and governance
- Breach controls and reporting procedures
Before an audit, all PIs and EMIs should independently review safeguarding documents, policies, and procedures.
How Can EMBank Help?
European Merchant Bank (EMBank) offers accessible financial products for fintech companies and local/regional SMEs across a variety of industries. Established in Lithuania and licensed by the European Central Bank, EMBank offers a total package consisting of a European banking license, a single API-based software, and the know-how to provide a truly embedded finance offering.
European Merchant Bank (EMBank) offers accessible financial products for fintech companies and local/regional SMEs across various industries. Established in Lithuania and licensed by the European Central Bank, EMBank provides a Banking as a Service offering, combined with Safeguarding Account, Business Account, and Accumulative Account types as well as payment options through SEPA, Swift, and Target2.
Please keep in mind that the above information has been prepared or assembled by the EMBank and is intended for informational purposes only. Some of the information may be dated and may not reflect the most current legal developments.
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