Electronic money institutions vs banks: what’s the difference?
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The growing number of fintech products has given consumers more choice than ever when it comes to managing their money.
But while brands like Monzo, Starling and Revolut have become household names, not all of them are banks.
Instead, some are electronic money institutions (EMIs).
For consumers, the distinction isn’t always clear.
One key point of difference, though, is how your money is protected. And this may well determine whether it’s the right product for you.
What is an electronic money institution (EMI)?
An electronic money institution, or e-money institution, is a financial company that has been authorised by the Financial Conduct Authority (FCA) to issue and manage e-money.
Well known brands in this space include Revolut (which is transitioning into a bank), Alipay and Curve.
An EMI isn’t the same as a bank, although to the average consumer it often looks and feels like it.
For example, an EMI will allow you to open an account with them and can issue you with a debit card that you can use to withdraw cash.
You can use your account to make payments and transfers, including direct debits, and can hold balances in different currencies.
An EMI might also have a snazzy app that helps you budget or manage your finances.
But unlike a regular bank, many of these ancillary services will require the EMI to get additional authorisation from the FCA – and even then it’s limited as to what it’s allowed to do.
Loans and mortgages using deposits from its customers are completely out, for example.
What is a bank?
A bank can do all of the things that an EMI can do, including issuing e-money.
But it can also take deposits from its customers and use that money to provide loans and mortgages, and offer a broad range of other financial services such as overdrafts and credit cards.
Crucially, to be considered a bank in the UK, the financial company must have a banking licence issued by the Prudential Regulation Authority (PRA).
This changes the way it operates and the processes that must be in place to protect its customers’ money.
Its operations are also jointly regulated by the PRA and FCA.
And just to confuse things, a bank includes the likes of Lloyds Bank, but also building societies such as Nationwide, even though they operate in a slightly different way to traditional banks.
Neobanks – the digital-first variety that don’t have in-person branches – like Monzo are banks too, as long as they hold a banking licence.
Differences between an EMI and a bank
There are a few things that differentiate EMIs and banks.
To start with, EMIs are regulated by the FCA only, whereas banks are regulated by both the PRA and the FCA.
Banks are also allowed to lend their customers’ money through loans and mortgages but EMIs are not.
The biggest difference – and one that impacts you directly – is how your money is protected.
How banks keep your money safe
As most people will know, banks use the Financial Services Compensation Scheme (FSCS) to protect their customers’ money.
If a bank becomes insolvent, the FSCS will pay up to £85,000 compensation to each person or company that had an account with the failed bank.
This will happen within seven days of the bank’s failure.
If you have more than £85,000 deposited with a bank – and that can be across multiple accounts – then you will effectively lose everything over the threshold if the bank fails.
The only exception is for temporary high balances of up to £1,000,000, such as if you’ve just sold a home.
It’s also worth bearing in mind that the £85,000 protection applies to each authorised firm, but some banks share a single authorisation.
HSBC and First Direct share a single banking licence, for example.
So if you have more than £85,000 deposited between the two banks, any surplus will not be covered by FSCS.
How EMIs keep your money safe
EMIs use something called safeguarding to keep your money safe.
In general, this means an EMI will deposit your money with a safeguarding institution, such as a traditional bank or another institution authorised by the FCA for safeguarding.
The money must be kept in an account that’s separate from the EMI’s own bank accounts, and the account’s sole purpose must be to safeguard your money.
An alternative way to protect your money is for the EMI to take out an insurance policy on it.
Sometimes an EMI will use both segregation of funds and an insurance policy for extra peace of mind.
In theory, this money should be fully protected, including anything over £85,000.
In practice, you’ll need to apply to the EMI’s administrators if the firm fails.
You should get most of your money back but the administrator can deduct fees from the total.
Is an EMI or a bank better?
A lot of measures have been introduced since the 2008 financial crisis to protect the average bank user.
So while both EMIs and banks could fail – and they have done in the past – your money should be relatively safe regardless of which one you choose.
EMIs are invariably start ups, which means digital-first disruptors geared towards a younger audience.
Their aim is to offer something that traditional banks don’t, whether that’s user-friendly apps to help you manage your money or better-than-average exchange rates for regular travellers.
Legal restrictions necessitates a smaller producer range, but it also means it’s easier and faster to open an account with an EMI than with a traditional bank.
On the flipside, traditional banks will give you access to a wider range of financial products and a sense of stability that comes with years of experience.
The fees may not always be competitive but sometimes the trust in a brand is more important, especially when it comes to large sums of money.
Of course, there’s nothing to stop you from using both side by side.
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