Electronic money, or e-money, and the institutions that manage it are playing an increasingly important role in the financial world. What are e-money institutions, and how do they differ from traditional banks?

In this article, we will explain the legal foundations of e-money, how e-money institutions operate, and the characteristics of these institutions. We will also discuss why these institutions are an attractive alternative for businesses for digital payments and international transactions and describe the steps required to set up an electronic money institution.

What’s in this article?

• What are e-money institutions, and how do they differ from traditional banks?
  
• Why are e-money institutions important for businesses?
  
• Which regulations apply to e-money institutions in Germany?
  
• How to set up an e-money institution in Germany
  

What are e-money institutions, and how do they differ from traditional banks?

The term “e-money institution” is defined in Paragraph 1, Clause 2, Sentence 1, Number 1 of the Payment Services Supervision Act (ZAG). E-money institutions (EMIs) are businesses that issue and administer electronic payment instruments. They provide services that let customers make payments electronically without relying on cash or traditional bank accounts. “E-money” stands for “electronic money” and refers to digital alternatives to physical means of payment such as coins and banknotes. People access e-money through smartphones, computers, or special cards. Examples of e-money include credit on prepaid cards, digital wallets, or online payment services.

Differences from traditional banking

In contrast to traditional banks, which are regulated in Germany under the Banking Act, e-money institutions are not allowed to conduct traditional banking business. This includes lending and taking deposits. Because of the narrower scope of their activities, electronic money institutions are subject to special legal regulations that are less comprehensive than those applicable to banks.

An e-money institution’s main task is to issue e-money and ensure users can complete transactions, including payments to online stores, transfers to other users, or payments at digital and physical points of sale. These institutions often offer better rates than banks, especially for international payments, because they have lower exchange rates and fees.

The role of technology and licenses

Technology is important for electronic money institutions because they use digital platforms and advanced security mechanisms to ensure fast and secure payments. As a result, e-money institutions are often more flexible and innovative regarding introducing new payment methods. The lower regulatory requirements bring further benefits for e-money institutions, which can often offer their services more cheaply and quickly than traditional banks.

However, reduced regulation has limitations. For example, an EMI is not allowed to use its customers’ funds for investments, but traditional banks make profits that way. Instead, e-money institutions are financed by the fees they charge for their services.

EMIs and payment institutions need a licence to operate. This licence is issued by the relevant national financial supervisory authority in the EU. The Federal Financial Supervisory Authority, or BaFin, lists all payment and e-money institutions in Germany in a registry.

Why are e-money institutions important for businesses?

E-money institutions let businesses receive payments digitally without having to rely on banking processes. Because e-money institutions usually focus on one or a few business transactions, they can make them optimal. As a result, their cost structure and processing speed are often significantly better than those of full-service banks. Businesses benefit from the services of e-money institutions, especially regarding online business. Customers can use online payments easily and securely, which speeds up the purchasing process and increases customer satisfaction.

Fast and secure payment transactions

Global payment services from electronic money institutions make it easier for businesses to operate internationally. They offer low-cost currency conversions and fast cross-border transactions. This is particularly attractive for businesses that operate in different countries or work with international partners. E-money institutions also offer solutions for paying freelance employees, suppliers, or other business partners. These payments can be quickly and inexpensively transferred to digital wallets.

In addition, many e-money institutions work with technologies such as mobile applications and application programming interfaces (APIs). Businesses can integrate these with their systems to develop customised payment solutions. This increases efficiency and improves the customer experience. E-money institutions are particularly attractive for startups and small businesses because they offer a flexible alternative to traditional bank accounts. Businesses can quickly open an account and start making payments without having to do extensive paperwork.

As an e-money institution, Stripe empowers businesses around the world with Stripe Payments, online and in person. Over 100 payment methods and a fast, localised payment process create a smooth customer experience and accelerate expansion into new markets.

Which regulations apply to e-money institutions in Germany?

E-money institutions in Germany are subject to strict legal regulations designed to ensure the security of customer funds and the stability of the financial system. These regulations are based on the ZAG, which transposes the EU directives on electronic money and payment services into national law.

Licence

Every e-money institution must have a licence from BaFin to work in Germany. To obtain this licence, the institution must meet strict requirements, including a solid business model, transparent structures, and appropriate measures to combat money laundering. The e-money institution must also ensure management is reliable and professionally qualified.

Protection of customer funds

E-money institutions must keep the funds they receive from their customers separate from their assets. This is done by depositing the money in separate accounts at banks or by taking out insurance. This protects customer funds even if the e-money institution has to file for bankruptcy.

Continuous oversight

E-money institutions are subject to ongoing supervision by BaFin. They must submit regular reports that demonstrate their financial condition and compliance with legal requirements. In addition, BaFin can audit institutions to ensure all requirements are met.

No lending or deposit business

E-money institutions are prohibited from conducting traditional banking activities. Their business is limited to the issuance of electronic money and the provision of payment services. They are also allowed to spend e-money only up to the amount of funds received; this prevents the institutions from taking excessive risks.

Data protection

E-money institutions must protect their customers’ personal data and comply with the requirements of the General Data Protection Regulation (GDPR). They must ensure data is not used or disclosed without authorisation.

Anti-money laundering

E-money institutions are required to implement strict measures to prevent money laundering and terrorist financing. This includes identifying their customers, monitoring transactions, and reporting suspicious activity to the relevant authorities.

The regulations do not apply only to businesses domiciled in Germany. Foreign e-money institutions that want to offer their services in Germany are also subject to regulation. They must register with BaFin or work with a licensed partner such as Stripe. For example, Stripe Connect offers businesses in Germany an e-money licence and covers all compliance requirements. This means businesses no longer have to meet the criteria for an e-money licence on their own.

Tasks assumed by Deutsche Bundesbank for the regulation of e-money institutions

In addition to BaFin, the Deutsche Bundesbank assumes several important tasks and responsibilities in line with legal requirements relating to e-money institutions.

Monitoring and regulation

The Bundesbank is involved in granting licences to e-money institutions and supports BaFin in evaluating applications. In addition, the Bundesbank monitors the institutions’ compliance with regulatory requirements, such as capital requirements and liquidity.
Ensuring stability
By monitoring the risks that e-money institutions might pose, the Bundesbank helps ensure the financial stability of the e-money sector. This includes the analysis of data and reports submitted by these institutions.

Audits and reporting

E-money institutions are obliged to submit regular reports to the Bundesbank on their business activities, financial situation, and risk positions. The Bundesbank collects and analyses this data and compiles relevant statistics.

Through its oversight and supervisory functions, the Bundesbank also contributes indirectly to the protection of users of e-money services by ensuring the institutions operate in a sound and legally compliant manner. The Bundesbank also works closely with BaFin and other national and international supervisory authorities and continuously analyses the development of e-money and its importance for the economy.

How to set up an e-money institution in Germany

Setting up an e-money institution requires careful planning, sufficient financial resources, and compliance with strict legal requirements. If you want to set up an e-money institution in Germany, the process is complex and requires several steps that are designed to help you meet the legal, organisational, and financial requirements. The establishment of an e-money institution is regulated by the ZAG and requires a licence from BaFin.

These steps can be simplified by using Stripe Connect, which provides a payment platform that lets businesses route payments to third parties. It supports various business models, enabling users to automate payment flows, make payouts worldwide, and meet legal requirements such as tax reporting. The platform offers flexible APIs that integrate with existing systems and supports a variety of currencies and payment methods.

Developing a business model

The first step is to create a business model. In this step, you describe the planned services, the target group, and how the e-money system will work. It must be clear how you intend to issue e-money and process payments. A solid business plan is the foundation for the profitability of your business.

Identifying qualified company management

Managers must be reliable and professionally qualified: they should have experience in the financial sector and be able to demonstrate their knowledge of the legal requirements and their technical ability to comply with them. The licensing process also includes verification of the business’s shareholders.

Establishing a legal entity

The next step is to create a legal entity, such as a limited liability company (GmbH) or public limited company (AG). You will need to register this business in Germany. The share capital for an e-money institution is €350,000, which must be paid in full and proven.

Establishing measures to protect customer funds

You must show how you separate client funds from your assets. This can be done through trust accounts at banks or insurance companies. Detailed anti-money laundering and anti-terrorist financing procedures are also required.

Apply for an e-banking licence

This application must contain detailed information, including the business model, internal organisation, planned security measures, and risk management. Documents such as articles of incorporation and proof of paid-up capital must also be submitted.

Review by BaFin

Once the application is submitted, BaFin will review your documents. This process can take several months. During the review, questions might arise that you, as the applicant, must answer. If the review is successful, BaFin will grant you a licence to operate as an e-money institution.

Continuous reporting and ongoing requirements

Once licensed, your e-money institution must submit regular reports to BaFin to document compliance. Internal controls and audits must also be in place to ensure the security and stability of your e-money institution.