Overcoming EMI safeguarding challenges

Emre Eryilmaz
Emre Eryilmaz

The rise of Electric Money Institutions (EMIs) continues to go from strength to strength, driven by the thrust of faster payments and the general population's appetite for such financial innovation which had been lacking before the turn of the century. Yet, with adoption and notoriety increasing, EMIs are finding themselves under more scrutiny from those who seek to uphold safeguarding requirements.  

Regular regulations

Regulators are nothing but regular in their enforcement of rules, especially when it comes to ensuring that client funds are secure. As such, the popularity of EMIs offers little protection from sanctions if they fail to comply with the likes of the FCA, something that both Wirecard and Premier FX witnessed in recent years.

Plus, with an announcement expected this year to signal that the FCA will gain “enhanced rule-making powers” to strengthen the safeguarding requirements, this is something which EMIs cannot afford to get wrong.

Fortunately, safeguarding client funds, and in turn the operations of your EMI, is easily achievable. Read on to discover how common complications of safeguarding can all be overcome.

Reconciling high volumes of transactions daily

When it comes to safeguarding, two fundamentals that can’t be overlooked are segregation of client funds and knowing client balances without delay. The importance of these outcomes is emphasised by the FCA’s wish for them to both be achieved through daily internal and external reconciliations.

Despite reconciliation being an easy task to achieve on paper, doing so on a daily basis for millions of transactions is anything but. Not only are back-office finance teams likely to run out of hours in the day to complete the necessary reconciliations, but mistakes will also undoubtedly become more common. Ultimately, being responsible for protecting client funds, EMIs cannot leave any job partially done nor work with an error-strewn spreadsheet.

Speed and accuracy must therefore be attained if EMIs are to meet reconciliation requirements – a certainty when deploying automated reconciliation. Purpose-built to reconcile millions of transactions in seconds, no matter how many data variables are present, the likes of Aurum mean that internal and external reconciliations could be done not just once a day but even multiple times.  

Diversifying and consolidating at the same time

The whole point behind safeguarding is to ensure that even if an EMI fails, clients’ funds are safe and can be sent back to them. As such, EMIs must also ensure that where they choose to segregate client funds is equally well protected. To increase the likelihood of this, the FCA strongly recommends diversifying safeguarding accounts.  

Inevitably, this adds a level of complexity with firms having to vet and approve multiple custodians but it is nevertheless a worthwhile process. However, complexity doesn’t end once these accounts have been set up. Instead, it persists because reconciliation is now required to take place across even more accounts.  

Data must therefore be sourced from more locations, extracted in time, and transformed into a standardised format ready for reconciliation. Not only are additional steps added to the reconciliation process, but further variables are too. Once more, meeting safeguarding requirements becomes time-consuming and prone to complications if done manually.

However, thanks to APIs, the convoluted steps for preparing reconciliation across multiple accounts can be made obsolete. This is especially true when using Aurum and its collection of over 600 APIs with payment providers, banks, and more. These connections ensure that rather than having to manually source data from various locations, they are extracted, transformed, and loaded into Aurum with a click of a button and ready for equally speedy reconciliation.

Changing FX rates

The digital nature of EMIs has made them a global success, allowing money to journey across borders like never before. However, not even EMIs have all the answers to cross-border transactions. This is especially true when funds are converted from one currency into another.

Yet again this is a complication which exasperates typical reconciliation processes. For instance, for the same transaction, one data set might show £15,000 and another show $19,000. At first glance a discrepancy therefore appears between the two transactions – that is before FX rates are taken into account. To identify this is one thing, to make sure that it is actually the reason behind the supposed discrepancy is another considering that FX rates are perpetually changing.  

Whilst these fluctuations are far too much for any individual to keep up with, it is another matter altogether for software. Just like how exchange rates are in constant movement, Aurum’s digital technology is forever evolving, and even updating to reflect the latest FX rates. As a result, automated reconciliation is also contemporary reconciliation – capable of reconciling even when things change.

Swift resolution management

A main reason why regulators wish for EMIs to conduct reconciliation as a major safeguarding action is to ensure that numbers stack up. The fact that this is a requirement is enough to indicate that they sometimes don’t. Unfortunately, when this problem arises, it strongly implies that safeguarding of client funds is failing.

If an exception is spotted as part of a reconciliation process, EMIs must do everything they can, as quickly as they can, to get to the bottom of why this is the case. However, an error can only be firstly identified if reconciliation is done quickly. After all, if reconciliation takes the best part of a day to complete, an exception discovered near the end of this process will only have a little amount of time to be resolved before the end of play. An automated solution, completing reconciliation in seconds, is therefore integral for when things go wrong too.

Moreover, another benefit exists when it comes to resolving exceptions and employing an automated reconciliation platform – that of ensuring that a resolution actually takes place. By having an inbuilt messaging system tied to every transaction, along with the ability to assign individuals to investigations, Aurum users can rest assured that no exception will fall through any cracks.

Document and control

Since the Electric Money Regulations came into force in 2011, on multiple occasions the FCA have felt the need to increase their legislation regarding EMIs and even write letters directly to CFOs within the industry. Evidently, the FCA is not content with taking firms’ word for the fact that they are safeguarding client funds as they should. As such, they employ an “if you didn’t record it – it didn’t happen” mindset, demanding that all movement of client money is documented.

Given the fact that EMIs typically grow at scale and the majority of their business models enable payments to move at faster rates than ever before, having to suddenly document their movement becomes an additional complication. Yet the best technology communicates with the human world. We’re not talking about AI in this instance, we’re simply referring to financial technology being able to tell the story of funds as it moves from account to account.

As Aurum ETLs transactional data from any source and reconciles all movement of funds, it makes sense for it to also document said movement automatically as it operates. That is why Aurum does precisely that, making it an audit-ready solution which will allow any regulator to track the entire movement of client funds from the moment it is received, to it being segregated within 24-hours, all the way through to it eventually being paid out.

Keeping everyone safe

Safeguarding is integral to regulators and unsurprisingly clients. It therefore shouldn’t be a priority for EMIs, instead it must be. This is especially true with industry experts and regulators all pointing to the fact that safeguarding regulations will become even more closely aligned with the highly scrutinised and watertight CASS protocols.

Importantly, it is not just legislation which regulators wish to see be updated to ensure safeguarding compliance, it it also the systems in operation. In fact, EMI audits insist that up-to-date safeguarding systems are employed, something which no Excel spreadsheet has ever fulfilled. To safeguard your EMI from compliance failures, book your demo today to find out more about Aurum’s next-gen automated reconciliation platform.

Emre Eryilmaz
Emre Eryilmaz

Business Development Manager

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