What is the difference between an EMI and a Bank?
An Electronic Money Institution (EMI) and a bank are both regulated financial institutions, but they operate under different regulatory frameworks and use customer funds in different ways.
How an EMI works
An EMI provides payment services and electronic money accounts but cannot lend customer funds or use them for business activities.
All customer funds held by an EMI must be 100% safeguarded at all times. This means the funds are placed in segregated safeguarding accounts with regulated EU credit institutions. These funds are legally ring-fenced and cannot be used by the EMI or accessed by its creditors.
Because of this structure, customer funds held with an EMI are not exposed to lending or investment risk.
How a bank works
A bank operates under a deposit-taking model. When customers place money in a bank account, those funds legally become a deposit with the bank, which the bank can use to lend to borrowers or invest as part of its normal banking activities.
Customer deposits are protected by the Deposit Guarantee Scheme (DGS), which guarantees balances up to €100,000 per depositor per institution in the event of a bank failure.
Key difference in protection models
The key distinction lies in how customer funds are protected:
- EMI model: Customer funds must be fully safeguarded and segregated, meaning 100% of funds are held separately and cannot be used by the EMI. In other words, all funds are protected and would be returned to the customer should anything happen to the EMI or the safeguarding bank.
- Bank model: Customer funds are deposits that the bank may lend, with protection provided through the Deposit Guarantee Scheme up to €100,000.
In summary
An EMI cannot leverage or risk client funds and must keep them fully segregated, whereas banks use deposits as part of their lending activities and rely on the deposit guarantee framework to protect customers.