Payment (PI) and electronic money institution (EMI): here’s what you should know

Exposing the truth behind fast EMI or PI License Transaction

Typically, time constraints drive someone to purchase a micro-payment institution, an authorised financial institution, or an e-money institution. Generally, it is thought that purchasing an authorised institution enables activities to launch more quickly than requesting authorisation from scratch.

Potential purchasers frequently believe that buying an existing authorised EMI or PI will speed up the process of entering the market compared to applying for a fresh license. Such presumptions are demonstrably untrue, as any personally liable purchaser should first undertake thorough research on the acquisition target, gather all relevant paperwork, file a request to the regulatory agencies for the transition of ownership, and then interact and respond to any inquiries may arise regarding the buyer’s intended financial model.

Many experts stated that the transfer of ownership process, from undergoing proper research to the end of receiving approval, takes about the same amount of time same with applying for a new license, both usually taking around 6 to 8 months. In addition to this, one should consider how long it will take you to identify a business that can grant the kinds of licenses required.

Another significant fallacy is the idea that buying an authorised, already-existing EMI or PI will result in a faster launch of the purchaser’s goods and services. If the purchaser launches his goods and services prior to the regulator’s approval of the transition of a control application, it would be dangerous for the purchaser and suspicious to the regulator.

One major factor in this is the existing legislation governing the country. For example, in the UK, A business with an EMI or PI license is required by the Electronic Money Regulations 2011 (EMRs 2011) and the Payment Services Regulations 2017 (PSRs) to notify the FCA of any shifts in circumstances. Additionally, we should remember that EMIs and PIs are now subject to PRIN as of 2019. The FCA must be properly informed of any significant issue related to an EMI or PI that the FCA would probably foresee or expect to be made aware of, according to Principle 11 “Relations with regulators,” which requires EMIs and PIs to report to the FCA. The SUP 15 form must typically be submitted to receive this kind of communication.

The regulatory compliance guidelines and practices of the acquisition target must be updated before the launch of any product or service to guarantee that they thoroughly address all the characteristics of the purchaser’s goods and services. In some instances, it would be difficult and most likely improbable since the EMI or PI architecture is insufficient for such items, or the customer contract has to be updated to reflect this.

But according to legislation, such a modification necessitates giving the customer 60 days’ notification. In other cases, the EMI or PI lacks the necessary permits, making launching such services impossible. For instance, the acquisition target cannot provide such a provision if it does not have authorisation for purchasing/issuing forms of payment.

This same concept also applies to the function and systems of the EMI or PI, which the authority officially approved. The purchaser who registered into the accord with the seller cannot force the seller to push out goods or services that were not included in the initial approval from the authority.

For instance, if the EMI initially received an authorisation on the premise that it will only offer digital financial services, it cannot introduce new payment cards, even if the license that was granted states that it can acquire or issue payment instruments. Before beginning card issuance operations, the firm would need to notify the authority of its plan to do so and get clearance to be entitled to this under the license terms.

What to consider before EMI/PI acquisition?

I. Regulations and Compliance Process

Prospective buyers seeking an EMI or PI license must recognise the importance of the below fundamental aspects of the authority’s strategy for the transition of ownership:

• Until the transition of ownership is permitted, the purchaser is not allowed to take over ownership of the EMI/PI unless the executive management that represents the purchaser has received regulatory approval as being associated with the target. Typically, when the transition of control ownership application is registered, the purchaser often asks for the permission of the new executive management at the same time.

• A redesigned strategic plan, operating policies, and financial structure must always be presented to the regulatory authorities, along with the transition of ownership submission. Resubmitting the pre-existing EMI/PI’s corporate strategy, financial structure, and operational strategy as they were when it was first authorised would not be enough.

• A fresh or revised risk management structure needs to be created since the transfer of control typically results in changes to the products and services offered. It is improbable that the authorities will be satisfied with a re-submission of the current EMI/PI’s risk management rules and processes under which the EMI/PI was initially authorised.

• Avoid falling under the misconception that because the EMI/PI has already been approved, the ownership transition will be simple because it most likely will not be. In general, authorities view the transition of ownership as a separate permission.

• Anticipate increased regulatory inspection of the durability and profitability of the company model and financial projections.

II. Proper Research and Due Diligence

In addition to the aforementioned items, a purchaser should keep in mind that establishing a sales contract and concluding it without conducting adequate due diligence could harm their brand and investments. Prospective purchasers should look into performing extensive due diligence on the acquisition target, paying close attention to the following points:

• In most countries, especially in Europe, authorities require all licensed EMI or PI to begin offering operations within a year after receiving their permission. The government can revoke clearance if your acquisition target has not started offering services within 12 months. Hence, if you are purchasing a business that is more than a year old and they have not documented any consumer engagement throughout that time, you are at risk. One way to solve the issue is to mention it to the authority when submitting the transition of ownership application and ask for confirmation that you can complete a such activity and that the permission won’t be revoked.

• Thoroughly verify all market authorisation supplied by the company and examine the operating documents to confirm the authenticity of the data provided and confirm client cash balances as well as balances on protecting bank accounts and the firm’s own funds.

• Verify the accuracy of the safeguarding records, examine numerous examples of the daily safeguarding reconciliations, and check with the bank the outstanding balances on the safeguarding checking accounts. Any compliance issue can result in significant risk in the future.

• Inspect all correspondence between the business and the authorities and other concerned parties, including the tax agency, the banking and finance ombudsman, the monetary criminal investigative agencies, etc. There are frequently unresolved open-ended inquiries or concerns that could be detrimental to the business and the incoming stakeholders.

• Look for that are off-balance sheet assets, such as any guarantees given, any client finances that are not recorded in the business’s accounts, any debt securities created and not reported, etc.

• Ask the firm’s management and stockholders for guarantees that no brokerage or distributorship agreements have been made and haven’t been declared to the authorities and customers, as these could involve obligations and reputational risk.

• Inspect all contracts with 3rd parties cautiously since these frequently include high minimum fees and charge for early termination that often equals the total value of the agreement for the remaining years. These third parties include software providers and property owners. Closely examine which of these contracts you will have to cancel and the resulting financial harm. If possible, try to negotiate a concession on the purchase cost equal to that amount.

• Make sure that no other party has permission to utilise the intellectual property (IP) generated by the EMI/PI for its own digital software system and solutions if those technologies’ IP rights are included in the acquisition price. Ask the sellers for guarantees that the IP was not given to a private entity and that the operator, staff, and administration will not keep backups of the codebase, technical information, or development files.

• Revisit the company’s anti-money laundering processes, counter-terrorism financial support, anti-bribery and fraud, and budgetary crime prevention practices and policies. You should also analyse a sample of customers from various products and services to see if these practices and policies were implemented and if there is any possible hazard in the client portfolio. One of the main dangers that the buyer of the EMI/PI is exposed to is non-compliance with AML/CTF/KYC standards. You need reassurance that any misbehaviour by the clients won’t come back to haunt you in the future, including claims, guarantees, and insurance.

• Examine any service contracts with employees, executives, and administration because they may contain clauses that provide for further incentives and payouts in the event of termination. Verify that the senior executives do not have any pending non-financial incentives.

• Create a thorough purchase/sale contract that outlines the procedures, restrictions, and timelines of the acquisition in detail. All of these should be subject to legal permissions. Do not include firm deadlines for governmental permits and due diligence because these processes are uncertain, heavily reliant on the seller, and frequently take much longer than planned. Simply obtaining all required due diligence papers from the sellers can take months, so avoid making commitments that are out of your disposal.

• As conventional bookkeeping firms do not generally have an in-depth understanding of the company and nuances linked to the regulatory duties, think about hiring experienced payments or e-money compliance requirements experts to undertake the due diligence on the acquisition target.

• Use a trustworthy third-party custody operator to close the purchase/sale contract; all transactions, including the deposit, must be conditioned on the delivery of the commitments and go through the authorised agent.

III. Business and Corporation Concerns

Many parties and stakeholders should be to be taken into consideration when the purchase is being planned. If this factor is not accounted for, the company’s operations may subsequently become immobilised. In this matter, the following are some factors that must be looked into:

• Analyse the customer portfolio, price, contract terms, and others. if the acquisition target has already begun to provide services. Upon completion of the transfer of ownership, keep in mind that you might need to stop offering some services, raise prices, and end some client relations and that most of these adjustments will need 60 days’ notice to the clients, which could result in new concerns to the banking and finance ombudsman and authorities. Remember that the current source of revenue could decline dramatically or stop altogether; if necessary, try to cut purchasing prices in line with this.

• Be mindful to thoroughly analyse the risks associated with the contracts the EMI/PI has signed with its stakeholders, particularly those with the financial institutions, suppliers, and purchasers. In several cases, the shift of ownership entails asking a third party for approval before implementing the adjustment. These partners will frequently need to establish separate investigations into the purchaser, new supervisory board, new directors, and fresh business models, as well as brand-new services and products. The enrollment procedure with these stakeholders when you purchase a firm may have to be restarted from the beginning, even though you may have relied on these ties when making a purchase.

• If the purchaser does not adhere to the guidelines outlined in the contracts, there is a serious risk that such stakeholders may temporarily halt the delivery of services to the EMI/PI. This could have a detrimental effect on the firm’s revenue stream and result in concerns from end customers that could eventually reach the budgetary ombudsman office and/or the authority.

• The dangers associated with changing authorised signatures for associate agreements during a managerial transfer for a firm are particularly high when it comes to financial institutions. Changing the authorised signatories on an account can take several months. In one case, a business waited for 10 months to update the user’s account authorised signatories, during which time the consumer’s finances were frozen on the account’s safeguarding bank because there was no legal way to sign the money transfer orders. Bear in mind the Covid-19 travel restrictions as well, as some traditional banks need in-person verification.

• Think thoroughly about the acquisition target’s workforce because you could need to replace some staff members, undertake additional training, set up new qualifying programs, etc. Additionally, keep in mind the legislative employment security and dismissal processes you must adhere to. Do not undervalue the significance of a coherent and experienced team or the corresponding expenditure necessary for that area. After all, any EMI/PI is just a collection of people and IT systems.

Opinion: buy an EMI/PI license or a new one?

The time required to obtain a new license or a transition of ownership permission is not a factor when comparing an EMI or PI license for sale to an EMI or PI license that has already been issued because both are similar in that sense. In our viewpoint, it is not worthwhile to acquire an empty-shell EMI or PI license, or an EMI or PI that has not evolved much and lacks beneficial Intellectual Property in technology, goods or services, 3rd agreements, and client portfolios because the premiums demanded on the industry are frequently unjustified by any inherent assets aside from the license on its own.

A comparative assessment between a new EMI license and the available EMI license is provided below:

As shown in the tables above, the new EMI license option will take the same period as acquiring an existing one and can be up to 3.5 times less costly than buying an expensive EMI or PI license. Additionally, with the new authorisation, there is no need to be concerned about undisclosed duties, historical problems, accrued liabilities, customer complaints, or any other significant concerns that might prevent your setup from becoming a unicorn.

The acquisition option only stands to reason if you’re purchasing an already successful company, the acquisition target’s exclusive properties, and/or a client base to launch your own items. Therefore, before buying licenses, you should consider whether it is worthwhile. Finding an EMI license for sale may not be difficult, but the actual issue is making the deal succeed.

How can COREDO help you?

If you need professional advice as an existing EMI client or a new individual in the field, we have the appropriate consultants for you who can help. You may view the services that we can offer through this link: https://coredo.eu.