When E-Money Stops Being E-Money: What's Next for EMIs?

In the coming months, part of the activities currently carried out by electronic money institutions (EMIs) will need to be reclassified from e-money issuance to payment services. This change will have very practical implications for capital requirements, client agreements, relationships with e-money distributors, and internal processes.

In Case C-661/22, the Court of Justice of the European Union significantly narrowed the concept of "electronic money". As a result, the holding of client funds in accounts by EMIs providing traditional payment services can no longer be regarded as the issuance of electronic money.

While the payments industry, and EMIs in particular, are eagerly awaiting the position of the Bank of Lithuania on on the reclassification of e-money activities into payment services, Violeta Čirkova points out that this change may significantly affect institutions' capital requirements, as the D method would need to be replaced by the B method.

Interestingly, our analysis showed that the impact could move in either direction: capital requirements would increase for some institutions, while decreasing for others. The impact depends on the relationship between client fund balances held in accounts and the turnover of those funds.

Under the D method, capital is calculated based on the average amount of outstanding electronic money (at least 2%). The more client funds are held in accounts, the higher the capital requirement. The relationship is direct.

Under the B method, capital is calculated based on the monthly volume of payment transactions, applying a progressive scale. As a result, higher transaction volumes do not necessarily translate into higher capital requirements.

Our analysis revealed several key takeaways:

• Where clients maintain relatively low account balances but funds move quickly (transaction volume exceeds balances), the D method generally results in lower capital requirements.

• Where client fund balances are high and transaction volumes are low, the B method becomes more favourable, resulting in lower capital requirements.

• For larger institutions holding substantial client fund balances and generating significant transaction volumes, the B method often becomes advantageous again. At higher transaction volumes, the applicable rates decrease to the lowest tiers (0.5% to 0.25%), which keeps capital requirements relatively low.

What should EMIs do now? EMIs should already be assessing their metrics and analysing how the change in methodology may impact their capital requirements.

Sigita Zavišienė notes that, in addition to recalculating capital requirements, EMIs will need to update their client agreements as well as internal policies and procedures. Importantly, the reclassification of e-money issuance into payment services should not be confused with "re-licensing". Electronic money institutions will remain electronic money institutions. However, once PSD3 is transposed into national law, they will have the option to convert their existing licence into a payment institution licence.