EMD2 and PSD2 in Practice:

Foreign FinTechs entering the EU face a critical choice between an Electronic Money Institution (EMI) and a Payment Institution (PI) license. This guide provides clear answers for navigating Czech regulations. As a leading law firm in Prague, EU, ARROWS' English-speaking lawyers specialize in securing FinTech licenses from the Czech National Bank for international businesses.

Need advice on this topic? Contact the ARROWS law firm by email office@arws.cz or phone +420 245 007 740. Your question will be answered by "Mgr. Marek Hučík", an expert on the subject.

The EU Payments Landscape in Prague: Understanding PSD2 and EMD2

To operate successfully in the Czech Republic, it is essential to understand the regulatory framework that governs the European payments market. This framework is built on two key pieces of EU legislation: the second Payment Services Directive (PSD2) and the second Electronic Money Directive (EMD2).

What are PSD2 and EMD2? A Business-Focused Explanation

These directives are not just abstract legal texts; they are the foundation of the EU's single market for payments, designed to foster innovation, increase competition, and enhance security.

• The revised Payment Services Directive (PSD2) focuses on making online payments safer and opening the market to new players. It introduced two critical concepts that directly impact FinTech business models: Strong Customer Authentication (SCA), which mandates multi-factor authentication for most online transactions to reduce fraud, and Open Banking, which requires banks to grant third-party providers access to customer accounts with their consent.
• The Electronic Money Directive (EMD2) specifically governs the issuance of "e-money." This directive modernised the rules for businesses that offer services like e-wallets or prepaid cards, aligning their prudential requirements with those of payment institutions under PSD2.

A key development on the horizon is the introduction of a new Payment Services Directive (PSD3) and a Payment Services Regulation (PSR), which are expected to merge the EMD2 framework into a single, unified rulebook. This creates a strategic window for businesses to secure a license under the current, well-understood regime before these new regulations come into effect.

How These EU Directives Apply in the Czech Republic

As a member of the European Union, the Czech Republic fully implements these directives into its national legislation, primarily through the Act on Payment Systems (Act No. 370/2017 Coll.). This process of legal harmonisation is a core strategic advantage for foreign companies.

It means the rules and standards you comply with in Prague are consistent across the entire EU, making the Czech Republic a predictable and secure European harbour for your business. A license granted here is not just a Czech license; it is an EU license.

The Role of the Czech National Bank (CNB)

The Czech National Bank (CNB) is the sole and highly respected regulator for the entire Czech financial market. The CNB has a dual role: it is responsible for granting licenses to new financial institutions and for the ongoing supervision of existing ones. It has the authority to conduct inspections, impose significant financial penalties, and even revoke licenses for non-compliance, making expert legal guidance essential from day one.

The Payment Institution (PI) License: Your Gateway to Processing Payments

A Payment Institution (PI) license is designed for businesses whose primary function is to execute payment transactions. Think of it as the license for moving money from point A to point B without storing it for future use.

What Services Can You Offer with a PI License?

A PI license allows you to offer a range of specific payment services. These include:

• Money Remittance: Services that allow customers to send money, often internationally, without needing a traditional bank account.
• Payment Processing: Acting as a payment gateway for merchants to accept online card payments.
• Payment Initiation Services (PISPs): With customer consent, initiating a payment directly from the customer's bank account on their behalf, a key feature of Open Banking.
• Account Information Services (AISPs): Consolidating a user's financial information from multiple bank accounts into a single view.

Essentially, a PI facilitates payments but cannot hold client funds indefinitely. Funds can only be held temporarily for the exclusive purpose of executing a specific payment transaction.

Understanding the Capital Requirements

The initial capital requirements for a PI license are significantly lower than for an EMI, making it an attractive option for certain business models. The capital is tiered based on the services you intend to offer:

• €20,000 for businesses offering only money remittance services.
• €50,000 for services like mobile payments.
• €125,000 for a full-service PI offering a wider range of payment services.

It is important to remember that this capital is not a fee paid to the regulator; it is a prudential safeguard that your company must maintain to ensure financial stability.

FAQ – Legal tips about PI services

• Can a PI hold client funds?

No, not in the way a bank or an EMI can. A PI can only hold funds temporarily and for the specific purpose of executing a payment transaction that has already been initiated. For a detailed assessment of your business model, email us at office@arws.cz.

• Do I need a PI license to operate a payment gateway for e-commerce?

Yes, in most cases, if you are involved in processing the payment transaction on behalf of the merchant, you will need a PI license. To confirm your specific regulatory obligations, get tailored legal solutions by writing to office@arws.cz.

The Electronic Money Institution (EMI) License: Storing and Issuing E-Money

The Electronic Money Institution (EMI) license is the more comprehensive and powerful of the two options. It is essential for any business whose model involves storing customer funds for future use.

What is "Electronic Money" and Which Business Models Require an EMI?

In simple terms, "electronic money" is a digital representation of monetary value that is stored electronically. Common business models that require an EMI license include:

• E-wallets and Digital Wallets: Services that allow users to top up an account and store a balance for future online or in-store payments.
• Prepaid Cards: Issuing physical or virtual cards that are pre-loaded with funds.
• Neo-banks and Challenger Banks: Digital-first banking alternatives that offer current accounts where users can hold balances.

If your business plan involves customers holding a balance with you for an indefinite period, you almost certainly need an EMI license.

The EMI Advantage: Expanded Service Capabilities

The single most important distinction between the two licenses is that an EMI can issue and store electronic money, whereas a PI cannot. An EMI license grants you all the permissions of a PI license, plus the crucial ability to hold customer funds indefinitely. This capability allows for far more complex and "bank-like" business models, giving you a significant competitive advantage and greater flexibility for future growth.

The €350,000 Initial Capital Requirement

Reflecting its broader capabilities and the responsibility of safeguarding client funds, the EMI license has a higher capital requirement. Applicants must have a minimum initial capital of €350,000. This capital must be fully paid up and held in a bank account at the time of application. Furthermore, the CNB places immense emphasis on anti-money laundering (AML) compliance and requires applicants to provide indisputable proof of the legal origin of these funds.

Risks and Penalties	How ARROWS Helps
Choosing a PI license when your 3-year plan includes e-wallets. Risk: You will be forced to halt growth and file a completely new, costly, and time-consuming EMI application, losing market share.	Strategic Legal Opinion: We analyze your 3- to 5-year business roadmap to ensure your license choice supports future growth, not limits it. Get tailored legal solutions by writing to office@arws.cz.
Launching an e-money service with only a PI license. Risk: Operating without the correct license is a serious offense, leading to severe CNB fines, license revocation, and potential criminal liability for management.	Regulatory Assessment: We conduct a full audit of your proposed services to determine the precise license required, protecting you from devastating legal consequences. Need legal help? Contact us at office@arws.cz.
Underestimating capital needs for an EMI. Risk: Application rejection due to insufficient capital or inability to prove the legal origin of funds, wasting months of effort and investment.	Capital & AML Documentation Support: We guide you in preparing the necessary documentation to prove the sufficiency and legitimate origin of your initial capital, satisfying the CNB's strict AML scrutiny. Our lawyers are ready to assist you – email us at office@arws.cz.

Strategic Decision: Which License is Right for Your Business Roadmap?

Choosing between a PI and an EMI license is not merely a technical legal question; it is a fundamental strategic decision that will define the future of your business in the EU.

A Direct Comparison: EMI vs. PI

The primary difference lies in their core capabilities. An Electronic Money Institution (EMI) can issue and store electronic money, enabling services like e-wallets and prepaid cards. In contrast, a Payment Institution (PI) is limited to executing payment transactions by moving funds from a pre-existing bank account.   

This distinction directly impacts how they handle client funds. An EMI can hold funds for an indefinite period, ready for future use, whereas a PI can only hold them temporarily for the exclusive purpose of completing a specific payment transaction. In terms of services, an EMI license is more comprehensive, covering all PI services (such as money remittance, payment processing, PIS, and AIS) in addition to e-money issuance.   

These expanded capabilities are reflected in the capital requirements. An EMI requires a minimum initial capital of €350,000, while a PI's requirement is lower, ranging from €20,000 to €125,000 depending on the services offered. Finally, due to the responsibility of safeguarding client funds, an EMI application undergoes more intensive and detailed regulatory scrutiny from the CNB compared to a PI application.   

The Critical Pitfall: Why a "Start Small" Approach Can Backfire

Many foreign companies are tempted by the lower capital requirements of a PI license, planning to "upgrade" to an EMI license later as their business grows. This is a costly and dangerous misconception. Upgrading from a PI to an EMI license is not a simple amendment. 

It requires a completely new, full-scope application process that can take 8 to 14 months. This regulatory delay can be fatal in the fast-moving FinTech market, allowing more agile competitors to capture your target audience. Your licensing decision must be based on your 3- to 5-year business roadmap, not just your immediate needs.

Full vs. Small-Scale Licenses

For businesses intending to test the local market, the CNB also offers "small-scale" licenses for both PIs and EMIs. These have lower initial requirements but come with significant restrictions:

• Geographical Scope: A small-scale license is valid only for operations within the Czech Republic. It does not grant EU passporting rights.
• Turnover Limits: The business is subject to strict financial caps. For example, the monthly average of payment transactions cannot exceed €3 million over a 12-month period.

While suitable for a purely local launch, these licenses are not a viable long-term solution for companies with pan-European ambitions.

Making the right choice from the start is the most cost-effective decision you can make. Our international law firm operating from Prague, European Union, specializes in providing strategic legal consultations to align your licensing with your long-term ambitions. Contact us at office@arws.cz to discuss your business plan.

Applying to the Czech National Bank: A Practical Step-by-Step Guide

The application process with the CNB is rigorous and detail-oriented. Foreign companies, in particular, face challenges with complex documentation and the need for local expertise. A flawlessly prepared application is key to a smooth and successful outcome.

The Application Dossier: Key Documents You Must Prepare

Your application to the CNB must be submitted electronically and will include an extensive dossier of documents. Key components include:

• Proof of Legal Entity: You must first establish a local company in the Czech Republic.
• Proof of Initial Capital: Evidence that the required capital is fully paid up and documentation proving its legal origin.
• Comprehensive Business Plan: The cornerstone of your application.
• 'Fit and Proper' Documentation: Detailed information on all directors, key managers, and significant shareholders.
• Internal Policies: A complete set of internal regulations covering AML, risk management, data protection (GDPR), and safeguarding of client funds.

Many of the CNB's official forms and guidelines are available only in Czech, making partnership with a local Czech law firm indispensable.

The Business Plan: Your Blueprint for CNB Approval

The business plan is the single most important document in your application, and a generic or unrealistic plan is the most common reason for rejection. The CNB expects a highly detailed blueprint for your first three years of operation, including:

• A three-year financial forecast based on realistic economic calculations.
• A thorough market analysis of your target EU customer base.
• A description of your organizational structure, governance, and internal controls.
• A detailed outline of your IT systems, data security measures, and procedures for safeguarding client funds.

The 'Fit and Proper' Test: Scrutiny of Your Leadership

The CNB conducts a deep examination of every individual in a position of authority, assessing them against two core pillars: Trustworthiness (Důvěryhodnost) and Competence (Odborná způsobilost).

• Trustworthiness involves a thorough background check of an individual's integrity, including criminal history, past administrative sanctions (especially fines over CZK 20,000), and previous business conduct such as involvement in bankruptcies.
• Competence assesses professional knowledge and experience. The CNB typically requires a minimum of three years of direct professional experience in a relevant financial or technology sector, along with appropriate education and managerial experience.

Risks and Penalties	How ARROWS Helps
Application rejection due to an unrealistic or incomplete business plan. This is the most common reason for failure, resulting in lost time and significant delays to market entry.	Expert Business Plan Review: We ensure your business plan and financial projections are robust, credible, and meet the CNB's stringent, often unwritten, expectations. Need help with your application? Write to office@arws.cz.
Failing the 'fit and proper' test for directors or founders. A criminal record, past regulatory sanction, or lack of relevant experience can lead to immediate rejection.	Pre-Application Due Diligence: We conduct a confidential pre-screening of key personnel against CNB criteria to identify and resolve potential red flags early in the process. Ensure your management team is compliant by contacting us at office@arws.cz.
Insufficient proof of the legal origin of capital. The CNB will reject applications where the source of the initial capital is not transparently and legally documented, raising AML concerns.	Drafting Documentation for AML Compliance: We assist in structuring and drafting the documentation to clearly demonstrate the legitimate source of your capital, ensuring you pass this critical AML check. Do you need compliant documentation? Contact us at office@arws.cz.
Flawed or generic internal policies. Submitting template AML, GDPR, or risk management policies that are not tailored to your business model will result in lengthy delays and revisions.	Preparation of Internal Company Policies: Our lawyers draft bespoke, compliant internal policies for AML, GDPR, and safeguarding that are tailored to your specific operations. For immediate assistance, write to us at office@arws.cz.

FAQ – Legal tips about the 'fit and proper' test

• Does a minor past administrative fine disqualify a director?

Not automatically. However, any sanction must be proactively disclosed and convincingly explained in the application dossier. Hiding such information is a guaranteed way to fail the trustworthiness test. Our lawyers can assess your management team's profiles. Email us at office@arws.cz.

• What counts as "relevant experience" for a manager?

The CNB typically looks for a minimum of three years of direct professional experience in a field relevant to the proposed role, such as payment services, FinTech, or financial management. For help presenting your team's credentials effectively, contact our firm – office@arws.cz.

Why the Czech Republic is Your Secure European Harbour for FinTech

For international FinTech companies, choosing the Czech Republic as your EU base offers significant strategic advantages that extend far beyond the initial licensing process.

The Power of "Passporting": One License for the Entire EU Market

The most significant benefit of obtaining a full EMI or PI license in the Czech Republic is the automatic access it provides to the entire European Single Market through a mechanism known as "passporting".

Once licensed by the CNB in Prague, your institution gains the right to offer its services across all 30 member states of the European Economic Area (EEA) without needing to apply for a new license in each country. This transforms your business from a local player into a pan-European competitor overnight.

The Post-Brexit Advantage

For companies based in the United Kingdom or those reconsidering their UK strategy, Prague offers a stable and compelling alternative. Since Brexit, UK-licensed financial institutions have lost their automatic EU passporting rights, effectively cutting them off from seamless access to the single market. 

As a leading Czech law firm in Prague, EU, ARROWS is perfectly positioned to help businesses navigate this new reality by establishing a fully compliant and passportable EU entity in the heart of Europe.

ARROWS International: Your Global and Local Partner

Navigating cross-border legal complexities is our specialty. Over the past 10 years, ARROWS has built its ARROWS International network, which now operates in 90 countries worldwide. This global reach, combined with our deep knowledge of Czech and EU law, allows us to understand the legal differences between your home jurisdiction and the European environment, ensuring a smooth and compliant market entry.

Risks and Penalties	How ARROWS Helps
Severe fines (up to CZK 130 million) and license revocation for AML/CTF breaches. The CNB is tightening its enforcement in this area.	Professional Training & Internal Policies: We provide certified AML training for your staff and draft robust internal policies to ensure ongoing compliance. Need legal help? Contact us at office@arws.cz.
Massive GDPR fines (up to 4% of global turnover) for data breaches or non-compliance. This is a major risk for any tech company handling customer data.	Legal Consultations on Data Protection: We help you draft compliant privacy policies, data processing agreements, and data breach response plans. Want to understand your legal options? Email us at office@arws.cz.
Immediate license revocation for failing to properly safeguard client funds. This is considered a grave breach by the CNB.	Legal Opinions on Safeguarding: We review and help design your internal fund segregation processes to ensure they are fully compliant with regulatory requirements. Our lawyers are ready to assist you – email us at office@arws.cz.
Administrative penalties and reputational damage from inaccurate or late regulatory reporting to the CNB. The CNB publishes its final decisions, making failures public.	Representation Before Public Authorities: We manage your regulatory reporting obligations, ensuring your submissions are accurate, timely, and maintain a positive relationship with the regulator. For immediate assistance, write to us at office@arws.cz.

Your Next Step Towards EU Market Entry

From initial uncertainty to market-ready clarity, ARROWS provides comprehensive, end-to-end legal support for your FinTech venture. Our services are designed to handle every aspect of the licensing process, allowing you to focus on your business. We provide initial legal analysis to determine the correct license, handle the drafting of all required documentation, including business plans and internal policies, conduct contract reviews, and provide full representation before the CNB.

ARROWS has a proven track record of success, supporting over 150 joint-stock companies and 250 limited liability companies. Our firm is known for its speed, quality, and deep understanding of both local and international business needs.

Your entry into the EU market starts with a single, strategic decision. Let our experts guide you. For a confidential consultation on your FinTech project, contact our team of English-speaking lawyers in Prague today. Do not hesitate to contact our firm – office@arws.cz.

FAQ – Most common legal questions about EMI and PI licenses

1. How long does the EMI/PI licensing process take in the Czech Republic?

The official timeline can vary, but a realistic estimate is between 6 and 12 months, depending on the complexity of your business model and the completeness of your application. Thorough preparation with expert legal assistance is the best way to avoid unnecessary delays. To start your application process, write to us at office@arws.cz.

2. Do I need to have a physical office and local staff in Prague?

Yes. The CNB expects applicants to have a genuine operational presence and at least part of the business managed from within the Czech Republic. This includes establishing a physical office and often hiring local staff, such as a compliance officer. For expert guidance on establishing your Czech entity, contact us at office@arws.cz.

3. Can a foreign company from outside the EU apply for a Czech license?

Yes, absolutely. However, the application must be submitted by a Czech legal entity. Therefore, the first step for any foreign company is to establish a local subsidiary, typically a limited liability company (s.r.o.) or a joint-stock company (a.s.). Our firm can manage this entire company formation process for you. For assistance, please email office@arws.cz.

4. What is the main difference between a Czech and a UK EMI license after Brexit?

The most critical difference is market access. A full EMI license obtained in the Czech Republic grants automatic "passporting" rights, allowing you to provide services across the entire 30-nation EU/EEA single market. A UK license, following Brexit, does not provide these automatic rights. To access the EU market from a UK base, you would need to establish and license a separate entity within the EU. To discuss your EU market entry strategy, please write to office@arws.cz.

5. How does ARROWS help if the CNB requests additional information during the review?

This is a common part of the process. Our lawyers manage all communication directly with the CNB on your behalf. We analyze their requests, prepare clear and legally sound responses, and gather any supplementary documentation needed to ensure the process continues to move forward smoothly and efficiently. For seamless representation before the CNB, contact us at office@arws.cz.

6. Besides the initial capital, what are the main costs involved?

The main costs include legal fees for preparing the comprehensive application dossier, company formation costs, and ongoing operational expenses. These include salaries for local compliance staff, rent for a physical office, and costs for implementing and maintaining the required IT and security infrastructure. For a detailed breakdown of expected costs for your project, please get in touch with our experts at office@arws.cz.