Payment Institution vs E-Money Institution: Where Funds Really Differ

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Payment Institution vs E-Money Institution: Where Funds Really Differ

A Payment Account from a Payment Institution is a short-term tool for executing payments under PSD2. Funds don't count as deposits or e-money. But recent case law and EBA guidance allow PIs to hold funds pending future payments, blurring the line with e-money. Here's how to tell them apart.

Ever wondered why some fintechs can hold your money indefinitely while others can't? It often comes down to a single legal distinction: whether the firm is a Payment Institution (PI) or an Electronic Money Institution (EMI). And that difference isn't just bureaucratic—it affects how your funds are protected and how you can use them. Let's break it down. ### The Payment Institution: A Short-Term Stopover A Payment Account offered by a PI is a short-term, transactional tool. Under Article 4(12) of the Second Payment Services Directive (PSD2), it's an account used for executing payment transactions. Article 18(2) and (3) confines it to payment services and says funds received by a PI don't constitute a deposit, other repayable funds, or electronic money. Typical examples? An acquirer's settlement balance owed to a merchant, or remittance funds held between receipt from the payer and delivery to the payee. In both cases, the PI merely processes the payment—it doesn't offer a place to store money. But case law has widened the scope slightly. In Case C-661/22, ABC Projektai v Lietuvos bankas, the Court of Justice of the European Union (CJEU) held at paragraph 53 that: > "a Payment Institution may receive funds not immediately accompanied by a payment order, and leave them available on a payment account, as a payment service rather than the issuance of e-money." The European Banking Authority (EBA) reached the same conclusion in Q&A 2018_4221, subject to safeguarding under Article 10 PSD2. The key condition? An intention to use the funds for future payments. So the account remains one of transit, not storage. ### E-Money: The Long-Term Hold By contrast, e-money is "electronically stored monetary value" under the Second Electronic Money Directive (EMD2). It can be held indefinitely—think of the wallets offered by Wise and PayPal. An EMI must safeguard the funds it receives (Article 7) and must issue and redeem e-money at par (Article 11). It may not pay interest or any other time-based benefit (Article 12). ### Three Questions to Tell Them Apart In practice, the distinction turns on three questions: - **Is there an intention to use the funds for a specific or identifiable future payment?** If so, a payment account is the more suitable characterisation. - **Does the user hold a claim on the issuer that is redeemable at par and may be spent with third parties?** If so, the balance is e-money. - **What is the intended timeframe?** A short period pending a payment order points to a payment account, whereas an indefinite period points to e-money. ### The Bottom Line The CJEU and the EBA permit a PI to hold funds pending future payment orders, but this does not allow it to offer long-term storage of value. That remains the territory of EMIs and credit institutions, although the boundary can still be difficult to draw in practice. So next time you see a fintech offering to hold your money, ask: is it a pit stop or a parking spot? The answer matters more than you might think.