Companies that handle electronic payments need to keep their clients’ funds separate from their operational funds to prevent the comingling of funds. Client funds also need protection if a company goes bankrupt and liquidates assets or uses funds for fraudulent activities. The best way for companies to protect their clients is to set up a safeguarding account.
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What is a safeguarding account?
The primary purpose of this type of account is to protect customer funds if a company experiences financial failure or is involved in fraudulent activities. This account keeps client funds separate from the business operations of a company. In addition, it protects customers against third-party creditors by ensuring that a company does not misuse customer funds.
Most regulatory authorities require all Electronic Money Institutions (EMI) and Payment Institutions (PI) have a safeguarding deposit account. These companies must open a safeguarding account with a licensed central bank or credit institution. Companies must open a safeguarding account before applying for an authorized EMI or PI license from a financial regulator.
How does this type of account work?
Safeguarding requires EMI and PI companies to protect customer funds. This protection only applies to relevant funds. Relevant funds refer to all customer financial transactions and e-money exchanges. Applicable fees and operating capital are not considered relevant funds and do not meet the safeguarding account requirements.
When the EMI or PI receives customer payments, they are obligated to put this money in a safeguarding account. For example, when a customer makes a clothing purchase online, they make an e-payment. The money in this transaction goes to a safeguarding account of an EMI or PI. Once the transaction is verified, the money goes to the online merchant.
What are the benefits?
The primary benefit of a safeguarding account is that it protects customer funds if an EMI or PI goes out of business, declares bankruptcy, or is involved in fraudulent activity. There is a clear separation between relevant customer funds and non-relevant funds once the customer funds arrive at an EMI or PI.
Another benefit of having a safeguarding account is that it meets the requirements of financial regulators. An EMI or PI cannot establish its business and conduct transactions with this type of account. Once an EMI or PI sets up a safeguarding account, they will receive a letter with all the account details to submit to the financial regulatory authorities. Once the financial regulatory authorities accept the letter, the EMI or PI can start its business operations.
EMBank provides safeguarding accounts to businesses to enhance their financial capabilities and keep them in compliance with financial regulations. EMBank understands what it takes to operate an EMI or PI, so they take a fintech-friendly approach to provide customized banking solutions. They also provide a dedicated Relationship Manager to help guide an EMI or PI through the safeguarding account process.
Once an EMI or PI provides EMBank with its information and completes all the required documents, the review process will start. When this process is complete, the EMI and PI can start their business. Contact EMBank for more information on opening a safeguarding account.