It is obligatory for Payment Institutions (PIs) and Electronic Money Institutions (EMIs) to have their clients’ accounts safeguarded.
A safeguarding account mainly aims to secure clients’ funds through segregation by blocking any third-party access. Along with the client’s perspective, obtaining a safeguarding account is mandatory to acquire an Electronic Money Institution or a Payment Institution license.
The Financial Services Compensation Scheme (FSCS) does not protect funds held by Payment Institutions (PIs) and Electronic Money Institutions (EMIs). As competition increases for financial products and services, some institutions may become insolvent. In the event of such circumstances, securing the clients’ funds has paramount importance. A safeguarding account becomes the sole alternative with an effective solution.
Every payment service client has their long-term financial health in mind, and it is necessary to safeguard their funds obtained for or from payment service users.
Imposed in Payment Services Regulations (PSRs) and Electronic Money Regulations (EMRs), Payment Institutions and Electronic Money Institutions are obliged to safeguard their clients’ funds by ensuring:
Payment Institutions and Electronic Money Institutions are required to immediately segregate relevant funds from payment service users from all other funds it holds upon receipt. If funds are still on hand at the end of the business day following the day when the funds were deposited, then requirements state that they are placed in a separate safeguarding account.
The priority is to ensure the return of consumer funds as soon as it is practical. Therefore, Payment Institutions and Electronic Money Institutions should already segregate customer funds from the remainder of company assets.
Obtaining a safeguarding account can be a complicated and time-consuming process. The majority of banks do not provide safeguarding accounts because they perceive safeguarding as a service with high-risk potentials. Thus, a Payment Institution or an Electronic Money Institution should look for fintech-friendly banks that have experience with successful operations on safeguarding accounts.
Additionally, PI and EMI licenses have specific deadlines determined by regulators. Therefore, a consistent plan with realistic deadlines should be received by the bank providing safeguarding account services.
For PIs and EMIs, it is apparent that the choice of bank for a safeguarding account has the utmost importance in terms of operation and licensing. One successful example may be European Merchant Bank (EMBank) as a fintech-friendly bank providing a safeguarding account to Payment Institutions and Electronic Money Institutions.
