Own funds for EU payment and e-money institutions — initial capital and Methods A, B, C and D

Initial capital is the number in the licence application; own funds is the number you have to hold every day afterwards — and for most firms they are not the same number. Articles 7 to 9 of Directive (EU) 2015/2366 set initial capital and three calculation methods for payment institutions. Articles 4 and 5 of Directive 2009/110/EC add a fourth method for e-money issuance and a rule that a hybrid e-money institution must add the two together. This walks through all four methods, the two traps in the drafting, and what a finance team actually has to build.

1. Initial capital: three amounts, tied to the service set

Article 7 of PSD2 requires member states to make payment institutions hold, at the time of authorisation, initial capital comprised of one or more of the items referred to in Article 26(1)(a) to (e) of Regulation (EU) No 575/2013. The amounts are fixed by reference to the Annex I service list, and each is drafted as a floor the capital may at no time fall below:

• EUR 20,000 where the institution provides only the service in point (6) of Annex I — money remittance.
• EUR 50,000 where it provides the service in point (7) — payment initiation.
• EUR 125,000 where it provides any of the services in points (1) to (5) — the account, execution, acquiring and instrument-issuing set.

Account information services, point (8) of Annex I, do not appear in Article 7 at all. An AIS-only provider is registered rather than authorised and holds no initial capital; Article 5(3) instead requires professional indemnity insurance or a comparable guarantee against liability towards the account servicing provider or the user arising from non-authorised or fraudulent access to, or use of, payment account information. A payment initiation provider carries both — the EUR 50,000 floor and, under Article 5(2), insurance or a comparable guarantee covering the territories in which it offers services, sized against its liabilities under Articles 73, 90 and 92. For e-money, Article 4 of Directive 2009/110/EC sets a single figure: initial capital of not less than EUR 350,000, with no service-based scale.

2. Own funds: the higher of two numbers, every day

Article 8(1) states the operative rule in one sentence: own funds shall not fall below the amount of initial capital as referred to in Article 7 or the amount of own funds as calculated in accordance with Article 9, whichever is the higher. Initial capital is not a one-off entry ticket; it is a permanent floor.

Two further rules sit alongside it. Article 8(2) requires member states to prevent the multiple use of elements eligible for own funds within a group containing another payment institution, credit institution, investment firm, asset management company or insurance undertaking — and expressly extends that to hybrids. Article 8(3) allows member states not to apply Article 9 at all to payment institutions included in the consolidated supervision of a parent credit institution, where the conditions in Article 7 of Regulation (EU) No 575/2013 are met.

Article 9(1) then carves out a group many firms miss: the calculation applies except to those offering only services referred to in point (7) or (8), or both, of Annex I. A pure payment initiation provider is subject to the EUR 50,000 floor and the insurance requirement — but not to Methods A, B or C. Add any other Annex I service and the calculation switches on for the whole institution.

3. The three methods, and who picks

Method choice is not the firm’s. Article 9(1) requires own funds to be calculated under one of the three methods as determined by the competent authorities in accordance with national legislation. In practice a firm proposes a method in the application file and the authority confirms or redirects it, and the answer varies by member state.

Method A is the simplest: own funds of at least 10% of fixed overheads of the preceding year. Competent authorities may adjust that requirement where there has been a material change in the business since the preceding year. Where the institution has not completed a full year’s business at the date of calculation, the requirement is 10% of the corresponding fixed overheads as projected in its business plan, unless the authority requires that plan to be adjusted.

Method B is volume-based. Payment volume (PV) is defined as one twelfth of the total amount of payment transactions executed by the institution in the preceding year — a monthly average, not an annual figure, which is the single most common modelling error. The requirement is the sum of five slices, multiplied by the scaling factor k: 4.0% of the slice of PV up to EUR 5 million; plus 2.5% of the slice above EUR 5 million up to EUR 10 million; plus 1% of the slice above EUR 10 million up to EUR 100 million; plus 0.5% of the slice above EUR 100 million up to EUR 250 million; plus 0.25% of the slice above EUR 250 million.

Method C is income-based. The relevant indicator is the sum of interest income, interest expenses, commissions and fees received, and other operating income, each element included with its positive or negative sign. Income from extraordinary or irregular items is excluded, and outsourcing expenditure may reduce the indicator only where it is incurred from an undertaking subject to supervision under PSD2. The indicator is calculated on the 12-monthly observation at the end of the previous financial year, and own funds under Method C shall not fall below 80% of the average of the previous three financial years for the relevant indicator; where audited figures are not available, business estimates may be used. The multiplication factor is 10% of the slice up to EUR 2.5 million; 8% from EUR 2.5 million to EUR 5 million; 6% from EUR 5 million to EUR 25 million; 3% from EUR 25 million to EUR 50 million; and 1.5% above EUR 50 million. The result is then multiplied by k.

The scaling factor k under Article 9(2) has only two values: 0.5 where the institution provides only money remittance, and 1 where it provides any of points (1) to (5). There is no k for initiation or information services, because those firms are outside Article 9 in the first place.

Finally, Article 9(3) gives competent authorities a two-way adjustment: based on an evaluation of the institution’s risk-management processes, risk loss database and internal control mechanisms, they may require up to 20% more than the chosen method produces, or permit up to 20% less.

4. Method D and the addition rule for e-money

Article 5(3) of Directive 2009/110/EC states Method D in a single line: own funds for the activity of issuing electronic money shall amount to at least 2% of the average outstanding electronic money.

The definition is where the work is. Article 2(4) defines average outstanding electronic money as the average total amount of financial liabilities related to electronic money in issue at the end of each calendar day over the preceding six calendar months, calculated on the first calendar day of each calendar month and applied for that calendar month. That is a rolling six-month average of end-of-day balances, refreshed monthly — a daily data series, not a month-end snapshot, and it has to exist before the first calculation date rather than be reconstructed afterwards.

Article 5(2) then does the thing that catches hybrid firms. For activities under Article 6(1)(a) that are not linked to the issuance of e-money, own funds are calculated under one of Methods A, B or C. For the activity of issuing e-money, Method D applies. And then: the institution shall at all times hold own funds that are at least equal to the sum of the requirements referred to in both subparagraphs. The two populations are added, not compared — and the result still cannot fall below the EUR 350,000 floor.

Where outstanding e-money is unknown in advance, Article 5(4) requires authorities to allow calculation on a representative portion assumed to be used for issuance, reasonably estimated from historical data and to the satisfaction of the competent authorities; for an institution without a sufficient period of business, on projected outstanding e-money evidenced by the business plan. Article 5(5) repeats the ±20% supervisory adjustment, and Article 5(6) the prohibition on multiple use of eligible elements.

5. The cross-reference trap

Article 5(2) of the e-money directive still points at “Article 8(1) and (2) of Directive 2007/64/EC” — the first Payment Services Directive. That directive no longer exists. Article 114 of PSD2 repealed it with effect from 13 January 2018, and provides that any reference to the repealed directive shall be construed as a reference to this Directive and shall be read in accordance with the correlation table in Annex II. The methods a hybrid EMI must apply to its non-e-money payment services are therefore the Article 9 methods set out above, reached through a correlation table rather than through the text in front of you.

Facts: a licensing team drafting an EMI application reads Article 5(2), follows the citation to Directive 2007/64/EC, finds it repealed, and treats the non-e-money limb as inapplicable — planning capital on Method D alone.

What the rule says: the reference survives. Article 114 PSD2 converts it into PSD2 Article 9, and Article 5(2) EMD2 requires the two requirements to be summed at all times.

What the practitioner does: plans capital as Method D on the e-money book plus the authority-determined method on the payment-services book, floored at EUR 350,000, and puts that arithmetic in the application so the authority is not the one to discover the omission.

6. The four methods side by side

Scaling factor k applies only to Methods B and C: 0.5 for money remittance only, 1 for any of points (1) to (5). Competent authorities may vary the outcome of any method by up to 20% in either direction.

7. What a finance team has to build

Three build consequences follow directly from the drafting. Method B needs a transaction-value ledger, not a revenue ledger — PV is gross executed flow, not net revenue and not settled amounts, and the divide-by-twelve step has to be visible in the workpaper because it is the step reviewers check first. Method C’s sign convention is not intuitive: interest expenses enter the sum with their own sign, and the 80% floor against the three-year average means a firm whose income falls sharply does not get the full benefit of the fall in the same year. Method D needs a daily liability series, snapshotted every calendar day including weekends and holidays, with at least six months of history retained.

Facts: a payment institution authorised for points (1) to (5) executed EUR 900 million of payment transactions last year. Its fixed overheads were EUR 4 million.

What the rule says: under Method B, PV is one twelfth of EUR 900 million, i.e. EUR 75 million. The slices are 4.0% of the first EUR 5 million, 2.5% of the next EUR 5 million, and 1% of the remaining EUR 65 million — EUR 200,000 plus EUR 125,000 plus EUR 650,000, or EUR 975,000, multiplied by k = 1. Under Method A the requirement would be 10% of EUR 4 million, i.e. EUR 400,000. Both are above the EUR 125,000 initial capital floor, so the floor is not the binding constraint; the method determination is.

What the practitioner does: models all applicable methods before proposing one, and treats the gap between them as a licensing negotiation input rather than an accounting detail. It also plans for Article 9(3): a 20% uplift on the Method B figure in this example is a further EUR 195,000 of permanent capital, and the trigger for it is the quality of the risk-management and internal control evidence in the file.

8. FAQ

9. What to do, today

• Model all applicable methods before you file. The authority determines the method, and the modelling is what makes that determination predictable.
• Check whether Article 9 applies to you at all — a firm offering only points (7) and/or (8) is outside the calculation entirely.
• Build the payment-volume extraction separately from revenue, and show the divide-by-twelve in the workpaper.
• If you issue e-money, start the daily liability snapshot now. Six months of end-of-day balances cannot be reconstructed retrospectively with confidence.
• Assume the 20% uplift is on the table and treat risk-management and internal control documentation as capital-relevant evidence.
• Keep own funds and safeguarding separate in the model — neither substitutes for the other. See our note on safeguarding under PSD2 and EMD2.

Related: Safeguarding compared across the EU · The small payment institution exemption · Where to base your EMI · E-money tokens under MiCA