How did it all start?
Before moving to the history of the occurrence of Electronic money institutions (EMI) and the evolution of their development, we would like to remind our readers about the definition of EMI and their main difference from banks.
An EMI is a type of financial institution with the right to issue and manage electronic money on behalf of its users. Electronic money is a digital alternative to cash stored in EMI e-wallets for electronic transfers.
The main difference between EMI and banks lies in the types of licenses, as well as the fact that EMI does not offer traditional banking services, such as lending and savings accounts. Instead, EMI focuses exclusively on providing electronic payment services.
In the 1990s, several electronic wallets and payment products were developed by the then-existing payment service providers – banks. They were intended to replace physical coins and banknotes.
As a result of the rapid development of the internet and the necessity of an effective method of online payment, the question of expanding the list of institutions that can issue electronic money has arisen.
This led to the idea of a "narrow bank" regime. It resulted in the creation of a new type of financial institution, which would have lower capital requirements and whose activities would be aimed at issuing electronic money.
The first Electronic Money Directive (EMD) was adopted in September 2000, which established EMI as a separate financial institution whose activities were entirely focused on the issuance of electronic money and online transactions.
The directive regulated the aspects of their licensing, initial and ongoing minimum capital requirements, clients’ capital protection, appropriate management obligations, etc. Since EMIs were determined not to accept deposits and not to grant credit, the regulatory and supervisory rules provided for in the Directive were less strict than those applied to banks.
Establishing of EMI
From 2000 to 2004, the Directive was implemented in EU member states. However, this process took place at different speeds in different countries. One of the first was Great Britain, where a year later the Electronic Money Association created a detailed local document that solved many operational problems for potential issuers. This has resulted in a disproportionate number of applications for authorization in the UK compared to other EU Member States where the process has been much slower. Therefore, one of the first EMIs that received a license, although it was founded by German entrepreneurs, was a company in Great Britain, now known as Skrill (until 2011 - Moneybookers). This was followed by several other EMIs, including PayPal Europe.
Thus, the homeland of the first EMIs can rightly be considered Great Britain, which was at the origin of the foundation of a new type of financial institution, which later gained considerable popularity.
One of the important events that influenced the further development of EMI was the adoption of the Third Money Laundering Directive in 2005. The Directive contributed to the acceleration of EMI development, as the procedure for applying Due Diligence for EMI clients was separately regulated, based on their riskiness, transactions, etc.
Thus, attempts were made to facilitate the functioning of EMIs, to define a single common approach for them on the territory of the EU, and to increase their number in general.
It is demonstratively that according to data from the Central European Bank as of January 2007, there were only 13 fully operational EMIs in the United Kingdom. This was the highest among European countries, as there were only three in neighboring France, one in Cyprus, one in Denmark, three in Italy, one in Germany, and two in Slovenia. At the same time, not all these EMIs provided cross-border services in other EU countries.
Therefore, the next step was the adoption of the Payment Services Directive (PSD). It was supposed to be implemented in the member states by the end of 2009. The Directive regulated payment services throughout the European Union and the European Economic Area. It also aimed to create a more integrated payment market and improve payment security and consumer protection.
In 2009, the Second Electronic Money Directive (2EMD) was adopted to correct outdated regulations and create favorable conditions for increased EMI competition. For example, among other things, the initial capital required to create an EMI was reduced from EUR 1 million to EUR 350,000.
However, the market of payment services did not stand still, and in practice, both EMI providers and clients continued to face one or another shortcoming of legislative regulation.
EMI today
The Second Payment Services Directive (PSD2) was adopted in 2015 to make payments within the EU as simple and efficient as within the same country and to open payment markets to new entrants. It improved the existing rules regarding electronic payments and took into account innovative services such as mobile payments.
Improvements in regulatory acts, globalization, and increased demand for digital payments have led to the expansion of EMI localization. For example, in the already mentioned 2007, only Great Britain had more than 10 EMIs, and in other jurisdictions there were significantly fewer or none at all.
In addition, the above circumstances led to a rapid increase in the number of EMIs. As of 2023, according to the same Thebanks.eu, the number of registered EMIs in the EU is 584.
EMI is a symbol of the evolution of financial services. They significantly affect the increase in the total cost of digital payments. According to statista.com, the total value of transactions in the digital payments market is expected to reach $9 trillion in 2023. For comparison, in 2021 this figure reached 6.7 trillion US dollars. At the same time, total transaction value is projected to grow by 11.80% annually, leading to a projected total of $15 trillion by 2027.
Conclusions
Consequently, the formation of EMI was long and thorny, although the institution of electronic money itself is still quite young because it arose in the 1990s. The invention of EMI took place only in the early 2000s. Their implementation was gradual, disproportionate, and the improvement of legislative regulation did not always keep up with the dynamic development of digital financial services.
However, EMI managed to find its niche in the market of financial services, competing with their classic representatives - banks. Currently, many EMIs operate not only within individual countries but also within entire regions.
As we know them, EMIs have become very recently, and now we are witnessing their truly unprecedented flourishing, as evidenced by the number of registered institutions in Europe alone.
Today, EMI means convenience, security, and time-saving for private users and companies.
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