Apr 21, 2020

Offshore Banking 101: What is the difference between an EMI, a PSP and a Bank?

If you’ve been looking into the best places to open an offshore corporate bank account, you have probably come across PSPs (Payment Service Provider) and EMIs (Electronic Money Institution) as alternatives to traditional Offshore Banks. You might also have noticed that many EMIs and PSPs are based in Lithuania and London – more on that later.

Some people use these terms interchangeably, but that is a mistake. There are some important differences: this article explains the key differences in simple terms, and advises you on the best options. What can you expect from EMIs and PSPs? And are they good alternatives to an old-school offshore bank account?

These days, here at Offshore Pro we receive a lot of requests for offshore company formation with bank account included. Most people know that opening a bank account without a specialist has become extremely complicated. Unless your case is extremely simple, it usually makes sense to pay a little extra for a turnkey package from a professional offshore company formation service such as ourselves. Often, we recommend EMI accounts as part of these packages.

First of all, you should understand that PSPs and EMIs are both European terms. In other countries they are referred to by other terminology: for example MSB (Money Service Business). MSBs are more equivalent to PSPs than EMIs. Europe leads the world in financial technology and that is why clients from all continents are attracted to European banking and EMI services. 

The terms EMI and PSP refer to different kinds of licenses granted under European law. Both can set you up with “accounts” and they can both give you a direct IBAN number for example, but there are important differences.

The main difference between the two types of offshore payment processors is that PSPs are not allowed to hold money for you. A good example of a PSP is a currency exchanger. You might send them your Euros, and they will send your US dollars to your provider in China. 

A mass payment provider, sometimes called a “paymaster”, could be another example of a PSP. You could send them 100,000 dollars and have them send out 100 transfers of 1000 dollars each, for example to make salary payments.

In both cases, the PSP is licensed and regulated to handle your money, but they are not allowed to sit on your money for longer than is necessary to carry out the transactions in question, typically 24-48 hours. Therefore you cannot have a regular bank current account with a PSP.

An EMI, on the other hand, is fully authorized to operate a current account. You can keep a balance with an EMI, just the same as in a normal bank account. You will get your own IBAN number and internet banking login, and with that you can carry on your business. 

Although EMI accounts function most commonly in Euros, there are no currency restrictions in Europe, so there is no restriction on EMIs opening multi currency accounts or multiple currency accounts. There is also no legal restriction on them accepting clients from anywhere in the world (except a few countries that are subject to EU sanctions). Sometimes compliance restrictions might get in the way of opening accounts for offshore companies, trusts etc, but a good professional adviser can help you solve these difficulties.

EMIs are therefore a really good, straightforward alternative bank account for companies that simply need a bank account to send and receive wire transfers. EMIs these days have direct access to payment systems (almost always SEPA, less commonly SWIFT) 

A traditional bank is something different again. The main difference between a bank and an EMI is that the traditional business of a bank is lending money, whereas EMIs are totally prohibited from lending money. By this we mean all types of credit products: mortgages, overdrafts, business loans, factoring, letters of credit, bank guarantees etc. These products can only be offered by banks and are totally outside the remit of EMIs and PSPs. Banks can also offer credit cards with a real monthly credit limit, while EMIs and PSPs can only issue prepaid cards or debit cards.

Some people worry about the safety and risks of EMIs versus banks. The answer to this is there are good and bad actors in every sector. Caveat emptor ultimately applies: if you are in what is classified as a high risk business, or from a high risk country, it makes sense you might find you have to deal with banks that have higher risk appetite because the more conservative banks won’t touch your business. 

The important thing is to remember that just as a Bank or EMI is required to do due diligence on you, you should do your due diligence on the bank. Know your risks at all times and build plenty of redundancy into your system.

It would be a mistake to say that EMIs are inherently less safe than banks. In many cases EMIs are actually safer than banks. Why? Precisely because they do not get involved in loaning out money or in playing the stock markets which can be a risky business. Huge banks have been brought to their knees by single rogue traders, but that could never happen with an EMI.

For example, in Lithuania, which has specifically decided to become a fintech hub, EMIs typically keep all their clients’ money at the national bank, which is part of the Eurosystem. If the national bank went bankrupt, it would have to be bailed out by the European Central Bank. In the UK, EMIs often keep their funds in commercial banks that are generally considered “too big to fail” such as Barclays and HSBC.

Are EMIs more likely to freeze your account without notice? Not really. Some EMIs in the bulk retail business (Transferwise is a good example) have a policy of onboarding just about everybody with few checks, and then freezing or closing the account as soon as larger transactions go through. This policy works for the retail market but… imagine you just closed a huge deal, you have a time sensitive wire transfer, your account suddenly gets blocked and nobody wants to take responsibility. This is every entrepreneur’s worst nightmare! Yet it happens every day, both in EMIs and in banks.

So what about accounts for offshore companies, that are typically doing relatively complex and sophisticated international transactions, that don’t fit into cookie-cutter compliance models? One thing we at Offshore Pro Group recommend to our clients is really important: you must be able to pick up the phone and talk to an account manager who knows who you are and understands your business. We only deal with banks and EMIs where this kind of direct relationship is possible. It is basically like old style private banking and in our view it is crucial. Unfortunately, however, it comes at a cost in terms of transaction fees, onboarding fees etc.

So, dialogue is the key to avoiding problems such as frozen accounts. It’s a two way process and the account manager also needs to know that he or she can contact you if there is any question from internal compliance or from a correspondent bank about your transactions. If they are confident that you are a serious businessperson who will provide supporting documents promptly on request in the future, Compliance are much more likely to let a transaction pass through and then request documents afterwards, rather than blocking it on the spot.

In summary then, while PSPs can be useful for specific tasks, here’s what you can take away from this article:

  • Most companies need either an EMI account or a Bank Account. 
  • An EMI account will probably work if you don’t need credit products.
  • EMI accounts are usually much faster to open
  • You should take advice from experienced professionals about which EMI or Bank is right for your business
  • Redundancy and diversification are paramount: never make the mistake of trusting just one bank or EMI, however good they seem, with all your business.

Offshore Pro Group has nearly a decade of experience helping people like you set up offshore bank and company structures. We can help you with both made to measure solutions, and turnkey packages that are ready to go immediately! Contact us today to discuss your needs!