Know your Credit Institution from your Payment Institution

May 17, 2021 by Mark Davis

The financial management space has been filling up with new terms in recent years: online banks, payment institutions, credit institutions, neobanks, fintech…it can be hard to keep up. As the digital age multiplies our opportunities, the traditional banks have been disrupted by a host of newcomers to the scene.

To help you get to grips with the myriad of services out there, we’d like to start by laying out the differences between credit institutions and payment institutions.

Credit intitutions

To keep things simple, these are the “traditional banks”. The ones you found on your local High Street before the internet came along.

According to French law, credit institutions are companies whose activity consists of “receiving repayable funds from the public [...] and granting credit” (article L511-1 of the financial monetary code). They are approved by the ACPR (l’Autorité de Contrôle Prudentiel et de Résolution), which comes under the control of the Bank of France.

The scope of activities open to credit institutions is very broad. As well as receiving money from and lending money to the public, they can also offer other banking services. These include:

  • foreign currency exchange;
  • advice and support in wealth and asset management;
  • investing in, underwriting, buying and selling securities and any other financial product;
  • making available and managing means of payment.

If these are the old-timers of the banking industry, a proportion of their customers have been turning to the new kids on the block: payment institutions that specialize in business finance management. There is a variety of factors behind this trend, notably:

  • the fact that traditional banks offer digital services that are already obsolete, with clumsy, unintuitive interfaces;
  • the added fees and tariffs these banks charge to their customers, costs that are sometimes high and opaque.

Payment institutions

Essentially, payment institutions specialize in online accounts. They started to appear only recently on the market, in 2010, following the European Union’s Payment Services Directive (DSP1, which was updated in 2016). There are already several dozen payment institutions in France alone, some catering to a professional clientele, others to the general public. All have been given the approval of the ACPR.

These payment institutions do not offer credit, but otherwise deliver the same service as the traditional banks:

  • means of payment;
  • transfers and direct debits;
  • deposit and withdrawal of money from accounts.

Their popularity is growing, particularly among businesses. This can be put down to the fact that the services they provide are well-suited to the needs of professionals. Their online apps, for example, are developed specifically to simplify or even automate finance management. The online accounts are far more accessible and easier to use on a daily basis, and the fees and tariffs are clear and transparent.

Safe and secure funds

Just as is the case with credit institutions, customers’ funds are protected when placed with a payment institution, thanks to two levels of security.

At the first level, funds deposited in a payment institution are stored in a holding account with a credit institution. If the payment institution goes bankrupt, its customers can still access their money from this holding account.

At the second level of security, if the credit institution administering the holding account goes bankrupt, the customers’ funds are guaranteed. In France, they are guaranteed up to €100,000 by the FGDR (Fonds de Garantie des Dépôts et de Résolution).

What about loans from payment institutions?

While payment institutions may not grant credit directly, they are allowed to offer their customers loans in partnership with credit institutions. Such partnerships are rare, but it is the case for Qonto: it recently joined forces with October, a European lending platform for SMEs, to be able to give small and medium businesses access to loans from independent and institutional lenders.

What about fintech and neobanks?

The terms “fintech”, “online bank” and “neobank” are commonly used in the media.

Fintech” generally refers to a startup that offers innovative solutions in the banking and finance sector. It’s a generic word that reflects the rapid evolution of the relationship between tech and finance.

In its literal sense, “neobank” means “new bank”. Variations of it include “online bank”, “virtual bank” or “digital bank.” Deployed widely in the media, these terms are all something of a misnomer: payment institutions approved by the ACPR in France receive a payment certification but are not awarded a banking license. They are not, technically speaking, banks. They are payment institutions.

These payment institutions are a catalyst for change in the banking sector. They stand out from traditional banks by bringing innovation to the way business accounts and everyday finance tasks are managed. They might not be able to grant loans directly, but they are forging partnerships with the credit institutions that can.

To put it another way, payment institutions are using innovation to find solutions that allow their customers to take the credit.

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