UK Fintech Modulr, a Payments as a Service API Platform, Comments on Differences in Protections between its Services and Incumbents

Modulr, a Payments as a Service API Platform for digital businesses, notes that they work hard every day to make sure that all of the client communications are clear. The UK-based Fintech is also committed to playing its part in enhancing established standards across the industry.

Modulr has published a blog post in which it provides more clarity around the key differences in protections between their services and regular banking.

The Fintech company notes that Modulr is the Payments as a Service API platform for digital or online businesses that require a  faster, easier and more dependable way to transfer funds.

Modulr also mentions in an update, dated July 6, 2021, that they offer the digital infrastructure that allows businesses to automate their payment flows, while also maximizing their overall efficiency and “put payments at the heart of their platforms, workflows, and customer experiences.”

The company clarifies that Modulr is not a bank, but an E-money Institution (EMI).

As explained by Modulr, an EMI is an organization that has been authorized  or granted permission by regulatory authorities  to issue electronic money and eMoney accounts. In the United Kingdom, they have been authorized and are currently being regulated by the Financial Conduct Authority (FCA). In the European Union, they are regulated by the Central Bank of Ireland.

Through their authorized EMI status, Modulr provides payments as a service as an alternative to conventional wholesale and commercial transaction banking infrastructure, the company notes while adding that they “come with sort codes or Euro IBANs, access to payment schemes and everything you’d expect, but they’re faster, easier and more reliable.”

While commenting on how they protect customer funds, Modulr explains that since they are not a bank, and they don’t put their customers’ funds at risk by lending them out, protection schemes like the Financial Services Compensation Scheme (FSCS), which provides consumer protection “up to £85,000 (or £170,000 for a join account) in the event of a bank failure, do not apply to our business model.” Instead, Modulr uses safeguarding to protect customer funds.

Going on to comment on how Modulr operates differently from banks, the Fintech firm adds that the primary difference between Modulr, an EMI, and a bank is that “banks lend money, whereas EMIs are prohibited from lending money.” Modulr further notes that their payments service is “regulated by the same payments regulations as a bank’s payment service but we don’t lend or offer interest. ”

The company points out that banking institutions take deposits from clients in order to lend money out and “make money on the difference (the Net Interest Margin) whereas an EMI holds 100% of clients’ funds at all times and makes its money on the volume of payments and accounts. ” This means Modulr is built “to optimize and encourage payments and accounts growth, making it our job to scale your business with you.”

The company adds:

“We ensure that 100% of the funds we receive in exchange for electronic money are safeguarded on receipt, meaning that these are segregated from all other funds that we hold and they cannot be used for any other purposes. This is completely separate from the additional capital resources that Modulr holds to meet its corporate obligations.”

The Fintech firm further notes:

“As an EMI, we must also hold an additional 2% of the total value of safeguarded client funds in our own funds, which are held separately to those client funds.  The purpose of the funds is to ensure that, in the case of any business issues, there are enough funds to support an orderly business wind-down and the process of returning of client funds held back to clients.”

Combining this “own funds” requirement with the safeguarding means customer money is always available to them, and there’s a protection mechanism to ensure an “orderly wind down,” if needed.

Although the FSCS isn’t applicable, the regulatory regime mentioned above may be relied upon instead and “protects the balance of customer funds, as opposed to only compensating up to a limit,” the company noted.

As mentioned in the blog by Modulr:

“In addition to the safeguarding and further ‘own fund’ requirements we’re also required to prepare orderly wind down planning. These plans include the early identification of a potential insolvency event and the return of your funds before an insolvency process. We have to provide these plans to the FCA and they are subject to external audit review.”

This further reduces the “unlikely event” of your money having to be returned during their insolvency. In the “unlikely event” that Modulr becomes insolvent, your money is kept separate from the funds of Modulr and “therefore the creditors of Modulr (other third parties that are owed money from Modulr) are not able to make a claim or have any effect on your funds,” the Fintech firm explained.

The company also noted that an independent insolvency professional (an ‘insolvency practitioner’) will be appointed to return your money to you. But where an insolvency practitioner cannot take their costs of sending the money to you from elsewhere (for instance, the general pot of Modulr funds remaining) they are “entitled to take their costs from your funds.”

The company also mentioned:

“In this unlikely circumstance, while you’ll likely receive most of your funds you may not receive the total value if costs are deducted. The process of returning your funds by an insolvency practitioner is likely to take longer than if you were making a claim in the FSCS.”

While revealing where customer funds are stored, Modulr noted:

“Modulr uses a range of clearing banks for different services but, with our direct access to Faster Payments and Bacs, Modulr is one of a few non-bank Payment Service Providers to hold funds associated with GBP domestic flows directly at the Bank of England. Our safeguarding processes are subject to independent external audit, providing confidence that we adhere to the regulations.”

Going on to address a question about which entity regulates Modulr in the UK, the company confirmed that Modulr FS Limited (FRN 900573) is an Authorized Electronic Money Institution (AEMI), regulated by the Financial Conduct Authority. This allows Modulr FS Limited “to issue electronic money (e-money) to clients, holding client funds in safeguarded accounts, and provide related payment services to customers. Modulr Finance Limited (FRN: 900699) is registered with the Financial Conduct Authority as an EMD Agent of Modulr FS Limited.”

Payment services within the United Kingdom are all subject to the Payment Services Regulations (PSR). This is “the common regulation which applies to all payment services, meaning there is no material difference between how a payment service at Modulr or a bank is regulated,” the company explained.

The firm also noted that Modulr FS Europe Limited is a company registered in Ireland “with company number 638002, authorised and regulated by the Central Bank of Ireland as an Electronic Money Institution (Institution Code C191242).”

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