A payment institution (PI) is a firm authorized in a member state of the European Union, or in the United Kingdom, to provide payment services such as money transfers, merchant acquiring, money remittance, payment account services and payment initiation. It is a non-bank license: a payment institution may not accept deposits, and unlike an electronic money institution (EMI), it may not issue electronic money.
Customer funds received by a payment institution may be held in a payment account, but only for the purpose of executing payment transactions. These balances are neither bank deposits nor e-money, are not covered by deposit guarantee schemes and must be protected through safeguarding.
Legal basis
The category was created by the first Payment Services Directive of 2007 and is now governed by the Second Payment Services Directive (PSD2), Directive (EU) 2015/2366, as transposed into each member state's law. In the United Kingdom the regime is set out in the Payment Services Regulations 2017 and supervised by the Financial Conduct Authority (FCA). In 2023 the European Commission proposed a third directive and a Payment Services Regulation that would, among other changes, fold the e-money regime into the payment institution framework.
Payment services covered
PSD2 lists the payment services that require authorization. They include:
- operating payment accounts and placing or withdrawing cash;
- executing payment transactions such as credit transfers, direct debits and card payments;
- issuing payment instruments and acquiring payment transactions for merchants;
- money remittance;
- payment initiation services and account information services, the two services associated with open banking.
A firm is authorized only for the services named in its permission. A payment institution may grant credit linked to a payment service under narrow conditions, for example short-term credit repaid within twelve months that is not funded from customer funds.
Authorization requirements
An applicant must show a sound business plan, adequate governance and internal controls, fit and proper managers and qualifying shareholders, an anti-money laundering framework and a safeguarding method. Minimum initial capital under PSD2 depends on the services: EUR 20,000 for money remittance only, EUR 50,000 for payment initiation only and EUR 125,000 for the other payment services. Ongoing regulatory capital is calculated using methods set out in the directive. Firms below certain volume thresholds may instead be registered as a small payment institution under national waivers, with lighter requirements but no passport.
Safeguarding customer funds
Funds received from payment service users, called relevant funds in UK rules, must be protected either by segregation in a designated safeguarding account at a credit institution or by insurance or a comparable guarantee. In the event of insolvency, safeguarded funds are intended to be returned to customers ahead of other creditors. Safeguarding differs from the client money regime applied to investment firms.
Passporting and agents
An authorized payment institution can serve customers across the European Economic Area through passporting, either cross-border or through a branch or appointed payment services agents. Since Brexit, UK payment institutions no longer hold EEA passport rights, and EEA firms need UK authorization to serve UK customers.
Comparison with other licenses
The closest US equivalent is the state money transmitter license, combined with federal registration as a money services business, though the US system requires a separate license in each state. Compared with an EMI, a payment institution has lower capital requirements but cannot hold stored value that customers can spend later; balances must relate to payment transactions.