When looking at new payment methods, we often hear terms such as challenger banks, neobanks, or digital banks - you may be surprised to understand that a number of these providers don't have banking licenses. Instead, they operate as E-Money institutions, following the lead of the old prepaid card companies.
In the EU, Electronic Money Institutions or (EMIs) were brought into regulation by the Electronic Money Directive (EMD), aimed at allowing non-bank entities to compete with traditional banks.
The main difference for customers is the protection of funds.
Banks are covered by The Financial Services Compensations Scheme (FSCS), which can pay back customers if the bank fails or is unable to pay back funds. This protection for UK deposits covers:
EMIs, unlike banks, are NOT part of the Financial Services Compensations Scheme. Instead, they are subject to the safeguarding requirements under Regulation 20 of the EMRs 2011 - which are very different. This means that to protect your money, they can either hold all their deposits in a segregated account with an authorised institution or alternatively take out insurance that covers the risk of failing.
On July 9th the UK Financial Conduct Authority (FCA) published a letter addressed to authorised Payment Institutions and E-money Institutions highlighting 6 key areas where it believes firms are not adequately complying with their regulatory obligations. Three of the 6 Key areas of concern that may impact you include:
The FCA has directed firms to improve key aspects of safeguarding arrangements:
- The appropriate creation and maintenance of safeguarding accounts - this includes firms carrying out regular (at least annual) audits of their safeguarding arrangements
- The mixing of customer funds in a safeguarding account with its own funds. The FCA wants regular reconciliation to prevent this from occurring more than necessary and ensuring the rapid return of funds in the event of insolvency
- Proper records of safeguarded amounts and evidence that reconciliations have been implemented when required
- Firms clearly recognising the time when safeguarding obligation starts, particularly for EMIs that issue e-money and allow the customer to spend before customer funding of its purchase has been received by the EMI
- Dealing with unallocated funds
The FCA expressed concern about the transparency of firms when promoting their claims about services and pricing that cannot be sustained. For example the inappropriate use of the term free when describing the costs involved in currency conversions and inaccurate statements around the protection of funds - like suggestions that deposit protection covers e-money balances or that EMIs are forms of bank.
If you’re a customer of a challenger bank or use other payment tools such as prepaid cards then you’re likely to be affected. You may notice updated comms from your provider which should give you some clarity about their processes, but if not it may be worth digging around to ensure you’re comfortable with the protection offered and the charges stated. In some cases, the brand you’re dealing with, won’t actually be the firm with responsibility for safeguarding your funds.
Providers have emailed their customers in response to the FCA asking all EMIs to remind their customers how they protect their money.
Curve emailed their customers on the 29th June 2021 stating:
“EMIs, however, are required to keep all customer funds in a special type of bank account, protected by law and separated from their operating funds. This is known as safeguarding, and this is how EMIs protect your funds, if we hold them. So if Curve went bust, you should get your money back, uncapped. The only loss you would possibly incur is the cost of administrators appointed to return your money, which will be distributed fairly across all customers. Unfortunately, having administrators involved may mean this would take longer than 7 days.”
Revolut emailed their customers on the 29th June 2021 where they stated:
"So, provided that it is compliant with the safeguarding laws, if an e-money institution goes out of business, customers should get most, if not all, of their money back. (Although, as explained, in some instances certain costs may be taken by the receiver of the firm.) The payout could also take longer than it would with a bank."
Caxton emailed customers on Monday 28th June 2021 stating:
“The requirement for segregation only applies to payment services and card activities conducted by Caxton, and for which a requirement to safeguard exists under applicable rules. As a result, Caxton’s obligations to segregate will relate to its International Payment activities (where the funds are within the definition of relevant funds). Card activities are subject to the safeguarding arrangements of Valitor Limited who are an authorised Electronic Money Institution regulated by the Financial Conduct Authority (FRN 900688), and, therefore, are also required to comply with the same safeguarding requirements.”
Currensea is the UK’s first Card-Based Payment Instrument Issuer (CBPII) and is authorised by the Financial Conduct Authority as a Payments Institution.
As the UK’s first Direct Debit Travel Card, Currensea acts as a layer in front of your existing current bank account, saving you money, giving you extra security, and making your bank work that bit harder for you whenever you spend in a foreign currency. In other words, you spend as seamlessly abroad as you do at home.
What this means is that your money stays in your high-street bank account and is only taken after you’ve spent. Because Currensea never holds any funds, you don’t have to worry about safeguarding, since your money is held safely in your bank account and protected by the Financial Services Compensation Scheme.
The world of FinTech has brought an amazing selection of providers to the market, giving us more choice and empowering us to take control of our finances. But with so much choice on the market, it’s important to choose providers that are being completely transparent with you. For example, who is the underlying company keeping your money safe and how are they doing that?
FairFX and AsdaMoney cardholders probably didn’t expect to be affected by the Wirecard scandal last summer. However, because Wirecard provided the safeguarding and infrastructure for these travel cards, when Wirecard’s accounts were frozen by the FCA users were left unable to use their cards or access their funds.
It’s quite common for prepaid cards to use another firm to either issue cards and/or safeguard customer funds. Be sure to check with your provider and make sure you’re comfortable with the end solution.
Do your own research, it’s your money and you should know how others are protecting it. Look beyond the marketing communications that providers place on their website. You’re within your rights to dig deeper, ask questions and make sure you are comfortable with what’s happening when you place your money with them, and if there is doubt, find an alternative. It's always better to be safe than sorry.
If you have any questions about Currensea’s Direct Debit Travel Card or if you’d like to find out more information about how your money is protected when using Currensea, please reach out to the team at firstname.lastname@example.org.
Currensea Limited is registered in England and Wales (No. 11413946), authorised by the Financial Conduct Authority (Reference No. 843507) and is a Principal Member of Mastercard. We are registered with the Information Commissioner's Office (Registration No. ZA524676).
© Currensea Limited 2022