Strategies for Obtaining a SEMI License in Europe

A small EMI or SEMI license is an essential regulatory permit for businesses operating in the financial sector within Europe, particularly those handling electronic payments and issuing electronic money (e-money). This license allows companies to provide e-money services and payment solutions across European Union (EU) member states, albeit with certain restrictions on transaction volumes and geographical reach compared to larger e-money institutions (EMIs). One of most appealing and beneficial is SEMI license in Lithuania.

In the evolving digital economy, the demand for convenient, secure payment methods is at an all-time high. SEMI license Europe provides a legal framework for businesses to issue digital wallets, prepaid cards, and facilitate online payments. For startups and small to medium-sized enterprises (SMEs), a SEMI-license is an attractive option due to its lower capital requirements compared to full EMI licenses. However, navigating the regulatory landscape to obtain this license can be challenging, requiring careful planning and strategy.

Key SEMI Regulatory Framework 

SEMI licenses are regulated under the Electronic Money Directive (2009/110/EC) and Payment Services Directive 2 (PSD2), which establish the legal framework for electronic money institutions in Europe. These directives are enforced by each country’s national financial regulator, such as the Financial Conduct Authority (FCA) in the UK, BaFin in Germany, and the Bank of Lithuania, among others.

The Electronic Money Directive defines e-money as a monetary value stored electronically and used for transactions with third parties. Meanwhile, PSD2 expands on payment services, ensuring stronger consumer protection, innovation in the financial sector, and transparency. Both directives require SEMI-licensed institutions to meet stringent conditions regarding financial stability, consumer safeguards, and anti-money laundering (AML) policies.

Licensing Requirements and Application Procedures

Obtaining SEMI license involves a series of rigorous steps that ensure a company is financially stable, operates securely, and complies with all relevant laws. Below are the key requirements and the procedure to apply for a SEMI license.

1. Business Structure: The applicant must establish a legal entity in the country where they are applying for the license. Most often, the entity is incorporated as a private limited company or its equivalent.
2. Capital Requirements: SEMI licenses require a lower initial capital compared to full EMI licenses. Typically, it doesn’t require a share capital contribution depending on the jurisdiction and the size of business. When it’s required, this capital is intended to cover operational costs and provide a buffer against financial risks.
3. Fit and Proper Criteria: The directors, board members, and key management personnel must demonstrate that they are fit and proper to run a regulated financial institution. This involves criminal background checks, financial history reviews, and experience in the payment services or e-money sector.
4. Business Plan and Financial Forecast: A comprehensive business plan outlining the company’s objectives, services, target markets, and risk management strategies is essential. Additionally, financial projections for at least three years must be provided, showing the company’s ability to remain solvent.
5. AML Compliance Policies: Companies applying for a SEMI license must have robust AML policies and a designated compliance officer. These policies ensure that the business can prevent fraud, money laundering, and terrorist financing.
6. Technology and Data Security: Given the nature of digital payments, companies must implement secure IT systems that safeguard consumer data and transactions. Evidence of robust cybersecurity measures is mandatory.

The application process typically involves submitting these documents to the relevant national financial regulator, who will then review the materials and assess the company’s eligibility. The process can take several months, and applicants should be prepared to provide additional information or make adjustments to meet the regulatory body’s standards.

SEMI Compliance Europe and Reporting Obligations 

Once a small EMI license is obtained, ongoing compliance is critical to maintaining the license and avoiding penalties. Regulatory bodies closely monitor SEMI licensed entities to ensure they comply with the following obligations:

1. Financial Reporting: SEMI licensed institutions must regularly submit financial statements, including balance sheets and profit-and-loss statements, to the regulator. These reports ensure that the institution is financially sound.
2. Consumer Protection: SEMIs are required to safeguard customer funds by either holding them in segregated accounts or obtaining insurance. This ensures that in case of insolvency, customers’ money is protected.
3. AML/KYC-Compliance: Regular audits of AML procedures and customer due diligence (KYC) must be conducted. Companies are also required to report suspicious transactions to the relevant authorities.
4. Operational and IT Audits: Regulators may require periodic audits of the company’s IT infrastructure and operational processes to ensure compliance with data security and operational integrity standards.

SEMI License Benefits

A SEMI license offers numerous advantages, particularly for smaller companies and startups looking to enter the financial services market. Some key benefits include next-mentioned.

1. Lower Capital Requirements: Compared to full EMI licenses, the capital required to obtain a SEMI license is significantly lower, making it accessible for smaller businesses.
2. Access to EU Market: A SEMI license allows companies to operate across the chosen EU country;.
3. Increased Consumer Trust: Holding a regulated SEMI license signals to customers and partners that the company adheres to strict financial and operational standards, building trust and credibility.
4. Flexibility for Growth: While the SEMI license imposes certain transaction volume limitations, it offers a flexible foundation for businesses to scale gradually. Once the business grows, it is easier to transition to a full EMI license.

Risk Management and SEMI License Challenges

Despite the advantages, obtaining a SEMI license presents several challenges that businesses must address to ensure a successful application:

1. Regulatory Scrutiny: The application process involves extensive regulatory checks. Companies must ensure their business plans, compliance policies, and IT systems are watertight to meet these requirements.
2. Transaction Limitations: SEMI licenses typically come with transaction caps, meaning companies cannot exceed a certain volume of payments or e-money issuance annually. Businesses with ambitions for rapid growth may find these limits restrictive.
3. General Limits: SEMIs are allowed to issue e-money up to a certain threshold of 5 million EUR, have a monthly transaction turnover below 3 million EUR and operate within the country where the license is obtained (no passporting rights to other EU states is applicable). 
4. Time-Consuming Application Process: SEMI licensing process can be lengthy, taking several months in some cases. Companies must allocate sufficient time and resources to complete the process without jeopardizing their business timelines.

Tips for a Successful SEMI License Application

To increase the chances of success when applying for a SEMI license in Europe, businesses should follow these strategic tips:

1. Choose the Right Jurisdiction: Some European countries, such as Lithuania and Poland, offer more favorable regulatory environments for SEMI licensing. Research the pros and cons of different jurisdictions before starting the application process.
2. Prepare a Comprehensive Business Plan: Regulators expect to see a detailed, realistic business plan that outlines the company’s services, target market, risk management strategies, and financial forecasts. Be transparent and thorough in your documentation.
3. Invest in Strong Compliance Systems: Implementing robust AML, KYC, and data security systems is critical. Work with experienced compliance professionals to ensure these systems meet regulatory standards.
4. Work with Legal and Financial Advisors: Hiring legal and financial advisors with experience in SEMI licensing can significantly speed up the application process and ensure compliance with all regulatory requirements.
5. Maintain Open Communication with Regulators: Establishing a clear line of communication with the regulatory authority can help resolve any issues during the application process and ensure your company meets all criteria.

SEMI business opportunities present a valuable environment for organizations looking to enter the e-money and payment services market. By understanding the regulatory framework, preparing a comprehensive application, and investing in robust compliance measures, companies can navigate the challenges of the licensing process and position themselves for success in this growing sector. The SEMI license not only offers lower barriers to entry but also provides a strong foundation for businesses to operate within a certain EU country.

Article’s author is Denys Chernyshov – founder and CEO of the leading international law firm Eternity Law International.