Using payment service providers

There are many ways to make payments. Some are made through your bank, while others happen through non-bank payment providers. It is important to be aware that the protections you have differ depending on the type of firm you are using. 

There are a range of non-bank payments providers including:

Electronic money institutions (EMIs)

Electronic money, also known as 'e-money', is stored electronically, usually in an online wallet or on a prepaid card. You can use it to make payments for goods and services. Issuing e-money is a regulated activity in the UK.

Authorised payment institutions (APIs)

APIs provide a range of regulated payment services. A type of API you could use may be a money remitter, which sends money around the world.

Small payment institutions (SPIs)

SPIs can provide the same services as APIs, but handle much smaller amounts of money. As a result, there are fewer rules that SPIs need to follow.

How do I know if a firm is a non-bank payment provider?

All non-bank payment providers (APIs, SPIs and EMIs) must be authorised by, or registered with a financial regulator in the European Economic Area. In the UK, this is the FCA. You can contact us for more information about regulated firms. The Financial Services Register (FS Register) will tell you what type of firm you are dealing with, whether that be a bank or a non-bank payment provider.

The activities that non-bank payment providers can undertake are based on their FCA permissions. These can also be found on the FS Register.

Some e-wallet and prepaid card products offered by EMIs can look and function a lot like bank accounts. EMIs can provide regulated payment services to their customers but are limited in what they can do with your money – for example, they can’t pay you interest. The FS Register will tell you whether you are using a bank or an EMI.

If you decide to use an API, SPI or EMI instead of a bank there are different protections for your money. The protection you have depends on the type of service you use.

What protections do I have and how are they different?

 

Bank account (deposit taking institutions)

eg bank account with a high street bank

Electronic money institution

eg an e-wallet or prepaid card

Authorised Payment Institution

eg a company that sends money for you internationally

Small Payment Institution

eg local shop that sends money abroad for you

FSCS protection

Yes

No

No

No

Required to safeguard

No

Yes

Yes

No

Complaints can be considered by the Financial Ombudsman Service

Yes

Yes

Yes

Yes

Financial Services Compensation Scheme (FSCS)

UK-authorised banks, building societies or credit unions are protected by the FSCS. If one of these firms were to become insolvent, the FSCS protects up to £85,000 per depositor.

Money held with EMIs, APIs and SPIs is not covered by the FSCS.

Safeguarding

APIs and EMIs protect your money through an internal process known as safeguarding. SPIs are not required to safeguard your money.

APIs and EMIs must either keep your money separate from their own money, or protect it with an insurance policy or comparable guarantee. This should mean that, if that company becomes insolvent, you get most of your money back.

But it could take longer to be refunded than if your money was in a bank, and some costs are likely to be deducted by the administrator or liquidator of the insolvent company. For that reason, you may not get all your money back.

Once an API or EMI is authorised, the FCA expects that they safeguard correctly. To check whether an API or EMI is authorised, use the FS Register. If the EMI or API is not safeguarding properly, you could get nothing back at all. 

 

SPIs are not required to safeguard your money, so if you are using a payment institution it is worth checking whether it is an SPI. You should ask the firm what protections it has in place in the first instance and if they need to hold your money, the reason for them doing so. You can also check the FS Register.

Complaints

Find out how to complain if you are unhappy with the service you receive from a firm. You should complain to the payment provider you are dealing with in the first instance and you may be able to appeal to the Financial Ombudsman Service if you are unsatisfied with their response.

What happens if things go wrong?

If the payment provider you use enters insolvency proceedings, it will stop providing services. This means you won't be able to access your money in the usual way. If you are using a bank the FSCS will contact you about returning your money. If you are using a non-bank payment provider you will have to contact the liquidator or administrator. This is because the administrator will be responsible for distributing any funds to customers. The firm should produce Frequently Asked Questions (FAQs) including information on who the insolvency practitioners are and update its FAQs and its customers regularly

Case study: Foreign exchange (FX) providers

The purchase of foreign currency is not, on its own, a regulated payment service. For example, buying euros for your holiday at a bureau de change is not regulated. However, foreign exchange providers might be providing regulated payment services if you purchase foreign currency and then send the purchased foreign currency to someone else (money remittance) or if the firm issues you with e-money (eg on a prepaid card).

Because safeguarding obligations only apply to regulated payment services, an FX provider may not be safeguarding your funds at all times.

Some foreign exchange firms providing payment services operate as agents of another FCA regulated payment services firm (the principal). The principal is responsible for safeguarding your funds, and any complaints relating to the activities of its agent provided on its behalf. You can check whether you are dealing with an agent on the FS Register.

Page updates

06/08/2020: Link changed