Payment Services – Legal Setup for Payment Service Providers
A payment service provider is a profitable but responsible business that must be set up in accordance with multiple legal provisions. LegalBison assists entrepreneurs in understanding the PSP regulation and forming a complete authorized entity on their behalf.
- Company formation in a suitable jurisdiction
- Assistance with obtaining a payment service license
- AML compliance and reporting assistance
- Opening a corporate bank account
Speaks for itself: the feedback of our clients
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Common services for payment companies and their regulation
A PSP (Payment Service Provider) is a company designed to facilitate the transactions between the sending and receiving parties. In order to provide services pertaining to a PSP, whether onshore or offshore, any startup must obtain a PSP or a PI (Payment Institution) license first. Below, we will explain the main legal standpoints to take into consideration when licensing and launching a PSP.
- Banking
- AML-CFT
- Custody
- EMI and PSP
Banking access
As with many related institutions, a PSP has a lot to do with banking. For starters, potential customers use a payment company in order to transfer money in a faster and more convenient way compared to a standard bank transfer. Henceforth, the owner of a PSP must consider providing a stable and uninterrupted connection with a bank so that customers can transfer funds directly from their accounts. Both for PSP and EMI business models, it is necessary to prepare an agreement with a bank outlining the intention of the platform to conduct transactions (their technical side) on behalf of the customers.
AML-CFT Compliance
In preparation for obtaining the PSP license, businesses must follow a number of AML-CFT compliance guidelines. These include preparing the company’s own AML compliance policy, assigning a responsible AML Director (an obligatory requirement in some jurisdictions), and educating the key shareholders and directors on the importance of AML-CFT compliance.
Non-custodial payment service
Neither PSP nor EMI are allowed to hold custody of the client funds in any way. PSP platforms only streamline the transactions from customers’ bank accounts without holding any amount in custody, whilst EMIs exchange funds for the corresponding sum of electronic money, instantly allowing clients to use it for transactions. Then there are Payment Institutions that are based on PSP but have a larger scope of provided services, such as cash payments to payment accounts, withdrawal of cash from payment accounts, and remittance. All of these companies are required to hold an electronic ledger of customers’ accounts.
About Electronic Money Institutions and Payment Services Providers
EMIs are a business model resembling PSPs, although the scope of services it provides is different: while payment service providers simply conduct the transactions, EMIs exchange customer funds to electronic money before doing so. Similarly to PSP, EMI companies have their own EMI license, although the company formation and registration processes for EMIs are way more stringent in comparison.
Electronic Money Institutions licensed in Europe are subject to the regulations set forth in the Electronic Money Directive (EMD) of the EU while outside Europe, EMIs are governed by each jurisdiction independently. In order to safely obtain a license for an EMI, several preparatory steps are required:
- Completing AML-CFT procedures and drafting an AML policy;
- Meeting the prudential requirements that correspond to the operational and financial risks of your company;
- Managing the aforementioned risks (conducting a risk assessment procedure before applying for a license);
- Providing adequate payment gateways for customers to exchange funds with.
Considering launching a Payment Service Provider? Contact us!
Contact experts at LegalBison with your project plan and let us define future steps for the successful launch of your PSP, PI, or EMI.
Guiding questions for your PSP legality
The following guiding questions will help you determine whether your PSP is ready for launch. If the answers to some of them remain vague, consider reaching out to LegalBison for the assistance of a professional lawyer.
Legal implications of a PSP
Due Diligence Procedures
Almost every regulator licensing PSPs or EMIs requires the key directors, shareholders, and employees of the legal entity to pass a due diligence check. This process usually comes after the initial licensing application, during which you should already present a detailed business plan and the IT infrastructure, as well as the proper assessment of risks.
The primary due diligence requirements for a payment company will include:
- Identity, residence, and background checks of all beneficiary owners and shareholders;
- Proof of non-criminal record of all aforementioned individuals;
- AML certifications and proof of AML-CFT competence.
LegalBison provides qualified training materials to the beneficiaries, directors, and shareholders of PSP/EMI businesses. In addition, we undertake the legal documentation in its entirety, allowing the client to concentrate on other aspects of the business.
Establishment of Payment Gateways
Payment Service Providers assist clients in completing transactions from their bank accounts, whilst the electronic money stored in an EMI is backed by actual fiat currencies exchanged by customers using their bank accounts or any other accessible banking means. For the convenience and security of clients, it is important to establish an adequate number of payment gateways for PSP, EMI, and Payment Institution startups.
Consequently, an agreement with a bank is required to start operating as a PSP/EMI. In simple terms, this agreement allows you to integrate banking solutions into your platform and your customers – to complete transactions or exchange their funds for electronic money seamlessly and without obstacles.
The integration of payment gateways into a PSP/EMI is a responsible and meticulous process both from a technical and legal side. LegalBison actively assists clients with both.
Security of Clients Data & Funds
You must think in advance about the ways in which your payment company is going to secure the funds of clients, as well as their personal data. Apart from the legal requirements, such as the drafting of Terms & Conditions and a Privacy Policy, you will need a proper technical setup of the platform. At your request, LegalBison can assign a responsible individual to establish the IT infrastructure of your platform and even conduct an audit when required by the licenser.
- Due Diligence
- Payment gateways
- Security
Due Diligence Procedures
Almost every regulator licensing PSPs or EMIs requires the key directors, shareholders, and employees of the legal entity to pass a due diligence check. This process usually comes after the initial licensing application, during which you should already present a detailed business plan and the IT infrastructure, as well as the proper assessment of risks.
The primary due diligence requirements for a payment company will include:
- Identity, residence, and background checks of all beneficiary owners and shareholders;
- Proof of non-criminal record of all aforementioned individuals;
- AML certifications and proof of AML-CFT competence.
LegalBison provides qualified training materials to the beneficiaries, directors, and shareholders of PSP/EMI businesses. In addition, we undertake the legal documentation in its entirety, allowing the client to concentrate on other aspects of the business.
Establishment of Payment Gateways
Payment Service Providers assist clients in completing transactions from their bank accounts, whilst the electronic money stored in an EMI is backed by actual fiat currencies exchanged by customers using their bank accounts or any other accessible banking means. For the convenience and security of clients, it is important to establish an adequate number of payment gateways for PSP, EMI, and Payment Institution startups.
Consequently, an agreement with a bank is required to start operating as a PSP/EMI. In simple terms, this agreement allows you to integrate banking solutions into your platform and your customers – to complete transactions or exchange their funds for electronic money seamlessly and without obstacles.
The integration of payment gateways into a PSP/EMI is a responsible and meticulous process both from a technical and legal side. LegalBison actively assists clients with both.
Security of Clients Data & Funds
You must think in advance about the ways in which your payment company is going to secure the funds of clients, as well as their personal data. Apart from the legal requirements, such as the drafting of Terms & Conditions and a Privacy Policy, you will need a proper technical setup of the platform. At your request, LegalBison can assign a responsible individual to establish the IT infrastructure of your platform and even conduct an audit when required by the licenser.
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Examples of LegalBison's assistance with PSP/PI/EMI
Theory aside, it is time to implement the administrative and technical procedures of forming a payment company in reality. LegalBison undertakes the process in full while considering both the general law for PSPs and EMIs and the licensing requirements of particular regulators.
Building a PSP platform
Company formation is an obligatory step in the licensing application process. Most regulators require PSP platforms to establish local offices within the country. For this purpose, the requirements are as follows:
- Passport copies and proof of residence of all beneficiary owners;
- A detailed business plan;
- Renting a physical office space in the country;
- Depositing a certain amount of starting capital (as required by the jurisdiction) onto a corporate bank account.
LegalBison focuses extensively on company formation: our team is prepared to provide legal advice and practical help regardless of the jurisdiction in which you decide to incorporate a company. We undertake all the administrative and technical processes, including the paperwork, AML-CFT training, IT infrastructure set-up and assessment, and opening of a bank account for the payment company.
Securing a PSP license
Once the legal entity is formed in the jurisdiction of your choice (usually – the licensing jurisdiction), the licensing application process can be initiated. The general requirements for a PSP license include:
- Payment company formation with a legal address within the licensing jurisdiction;
- Articles of Association for an LLC (in some cases);
- Detailed business plan and financial forecasts for a defined period of time (usually – 3 years);
- An authorized share capital (the amount is specified by the regulator);
- Proof of client protection: safeguarding of funds, insurance, etc;
- AML/KYC and due diligence documents;
- Documents describing good business practices.
The set of preparatory documents and procedures is extensive but the assistance of a qualified lawyer can facilitate and foster the process. If you entrust LegalBison with the preparation of your licensing application, you can fully dedicate yourself to other aspects of your business in the meantime.
Securing a crypto license beside your PSP license
In separate cases, whenever your PSP or EMI intends to provide crypto-related solutions, such as on-ramping and off-ramping services, securing a crypto license is required in addition to the PSP/EMI license. It is possible to choose a crypto license in the same jurisdiction or in any other European or offshore country providing it. As for the requirements, they are usually as follows:
- Forming an LLC in the licensing country;
- Providing certified ID documents of all relevant parties;
- Drafting AML-CFT compliance documents;
- Assigning a responsible AML Officer;
- Preparing a business plan with a description of the company’s activities;
- Raising a corporate share capital and depositing a part of it in the corporate bank account.
Once your business obtains a PSP license, the crypto license application process will be greatly facilitated as the requirements are similar. With LegalBison’s assistance, your payment company can acquire both licenses in the shortest timeframe possible.
Providing access to banking gateways
When it comes to launching a PSP, a lot depends on the banking factor. Starting from forming an agreement with one or several banks to conduct transactions on clients’ behalf and ending with the opening of a corporate bank account for depositing the authorized share capital and other internal company expenses.
To rid you of the tediousness of the process, LegalBison can form banking connections for your startup on your behalf. All you have to do is contact us for a primary consultation and we will define the best course of action for your payment company.
Full legal package for a Payment Service Provider
Launch a PSP startup with a complete documentation package from LegalBison.
Our professional lawyers will handle your project and assist with a license obtainment.
FAQ about PSP setup
You will need to form a company in the country of your choice and license it according to the requirements of your chosen regulator.
The price of launching a PSP depends on the complexity of the project, its business model, and licensing requirements. We advise you to contact us directly for a detailed estimation of the cost.
You have to make sure that your company is fully compliant with the laws and licensing requirements of the licensing jurisdiction. This includes a detailed preparatory process with a lot of legal paperwork, and we are ready to assist you with both.
Yes, it is required for PSP startups to secure a PSP license since they are working with fiat currencies, even though they do not hold custody over clients’ funds, instantly converting them into electronic money instead.
No, only Electronic Money Institutions with proper licensing are eligible for this. It is a principal difference between EMIs and banks.
No, an EMI is not authorized to provide depositing or credit services to customers, while a bank can not and should not work with electronic money.
Yes, PayPal is a Payment Service Provider that allows customers to connect their bank cards directly to their wallets and complete transactions.
A payment institution (PI) is a business model that can provide such services as the execution of transactions, cash transfers to payment accounts, withdrawal of cash from payment accounts, and money remittance services.
Get in touch with our experts
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