You should be aware that not all ‘bank’ accounts that are recommended by other websites are genuine bank accounts. Some of those accounts are e-money accounts offered by electronic money institutions that are not banks and quite often try to conceal this fact.

For example, the title “The Best Business Bank Accounts To Open From Anywhere” on NomadGate implies that you will find only information on bank accounts in the article. This however is not the case. In the article, you will find information on Wise (former TransferWise), Paysera and other financial institutions that are not banks. Wise and Paysera are electronic money institutions, i.e. they are not banks.

What is the difference between accounts opened with banks and electronic money institutions?

What Is A Bank?

A bank or a credit institution means an undertaking, the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account and/or provide other financial services (e.g., issue cards, make payments, etc.).

There are many different kinds of banks, including retail, commercial or corporate, and investment banks. Banks that provide only online services are called neobanks or digital banks. As a rule, neobanks don’t have physical offices, and their services are available only online through bank apps and websites.

Due to the importance of banks in financial stability and the economy of a country, countries have a high degree of regulation over them. Most nations use fractional reserve banking, under which banks hold only a portion of their current assets in liquid assets such as cash. Each country also has minimum capital requirements based on an international set of standards.

Most banks provide the following financial services:

1. Accounts;
2. Account top-up services;
3. Cash withdrawal from account services;
4. Payments to/from accounts;
5. Loans (mortgage loans, consumer loans, etc.);
6. Issuing and/or acquiring payment instruments (e.g., debit and credit cards);
7. Money transfers;
8. Deposits;
9. Investment services (i.e., activities related to investments in financial instruments such as bonds, stocks, etc.).

What Is An Electronic Money Institution?

An electronic money institution or EMI is a company that has received a license to issue electronic money.

Electronic money or e-money is a digital form of currency that can be accessed and used through online banking services or mobile apps. E-money has three fundamental properties: it is stored electronically, including magnetically; it can be used to make payment transactions; and other natural and legal persons accept it.

How Does An Electronic Money Institution Work?

To start using EMI’s services, you have:

• To open an e-money account. Sometimes such an account is called an e-wallet. As the name suggests, e-money accounts are used to store e-money issued by EMIs;
• To top-up money to your e-money account. You can do that by transferring money from your bank account to an EMI’s account opened with a bank. Money can be transferred by making wire transfers or using credit cards, Apple Pay, etc. After the money has been credited to the EMI’s bank account, the EMI issues e-money that value is equivalent to the value of money transferred to the EMI’s bank account. For instance, if you transferred $100, the EMI will issue the e-money that value is $100;
• Once you have topped up your e-money account, you can use it to pay for goods and services.

Payment cards (debit cards and credit cards) are among the most convenient instruments to pay for goods and services either on e-shops or in physical stores. Most EMIs offer their clients cards (Visa, Mastercard, American Express, etc).

Electronic money institutions cannot provide loans and investment services, take deposits or pay interest.

Which Account Should I Choose: An EMI Account Or A Bank Account?

Generally speaking, banks have 3 main advantages over EMIs:

• Deposit insurance. In the EU and the US, all deposits kept by consumers (i.e., people who use accounts for personal or family-related purposes) in banks (credit institutions) are insured. If a bank becomes insolvent, a special insurance fund compensates you the amount of up to $250,000 in the US or €100,000 in the EU kept in an account opened with a bank. Only in some countries, money kept in EMIs is insured.
• Requirements for banks are stricter. Banking and EMI services are licensed activities. Central banks or other state institutions and agencies issue licenses. There are fewer requirements for companies applying for EMI licenses than for bank ones. For instance, the minimum share capital of an EMI is lower than that of banks, an EMI management structure is less complex than that of banks, etc. Central banks supervise banks tougher that EMIs. For this reason, it’s less likely that a bank violates laws and harms its customers.
• The range of financial services. A bank can provide you with all financial services, including, to open an account, issue a card, grant you a loan, take a deposit and pay interests. Not all banks provide all financial service but most of them do that. EMIs cannot provide loans or take deposits.

EMIs have their advantages as well. You may want to open an account with EMI for these reasons:

• The main business of EMIs is payment services (i.e. wire transfers, card payments, etc.). For this reason, in terms of payment services EMIs’ apps and websites can be more functional and user-friendly than banks’ apps and websites.
• Many EMIs specialize in international transfer services. You can transfer money from one country to another for a fraction of the price offered by banks. However, it’s not always the case. Nowadays some banks compete with EMIs and offer better conditions than EMIs.
• Currency conversion rates offered by EMIs may be more favourable than those offered by banks.

In other aspects, the services of EMIs and banks have a lot in common and ordinary customers can hardly distinguish between services provided by EMIs and banks.

When I analyzed EMIs’ and banks’ websites, I noticed that some EMIs avoid mentioning that they are not banks. Such EMIs try to make the impression that they are a bank.

If your goal is to open a bank account but not an e-money account, you must be careful. On a company’s website, you should look for information proving that the company is a bank. If you don’t find such information, you can assume that the company is an EMI. It’s prohibited by law for any company to call itself a bank if such a person doesn’t have a banking license.

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^{Images from Pixabay.}