PSD3 keeps the own funds methods payment institutions know from PSD2, but changes how they apply. Article 7 makes method B, based on payment volume, the default, with methods A and C available where the regulator requires them. Article 8 brings e-money into the same framework, with method D at 2% of average outstanding e-money added to the requirement for any other payment services. Initial capital under Article 5 becomes cumulative across service bands and sets the floor below which own funds cannot fall.
This article sets out the calculation in detail, with examples, for finance and compliance teams preparing the capital section of a PSD3 re-authorisation file.
Initial capital: the floor
| Annex I service | Initial capital |
|---|---|
| Point 5, money remittance, as the only service | EUR 40,000 |
| Point 6, payment initiation | EUR 50,000 |
| Points 1 to 5, the core payment services | EUR 150,000 |
| Point 7, account information only | None; insurance or comparable guarantee |
| Point 8, issuing e-money | EUR 250,000 |
Where an institution provides services in more than one band, the amounts are added together. A combined e-money and payments institution therefore holds at least EUR 400,000. Own funds must never fall below this figure.
Method B: the default
Method B starts from payment volume (PV): one twelfth of the total payment transactions executed in the preceding year. The requirement is the sum of the following slices, multiplied by a scaling factor k.
| Slice of PV | Percentage |
|---|---|
| Up to EUR 5 million | 4.0% |
| EUR 5 million to EUR 10 million | 2.5% |
| EUR 10 million to EUR 100 million | 1.0% |
| EUR 100 million to EUR 250 million | 0.5% |
| Above EUR 250 million | 0.25% |
The scaling factor k is 0.5 where the institution provides only money remittance, and 1 where it provides any of the services in points 1 to 4. A new institution without 12 months of trading uses projected volume from its business plan, subject to the regulator's view.
Example. An institution executes EUR 1.2 billion of payment transactions a year, so PV is EUR 100 million. The slices give EUR 200,000 on the first EUR 5 million, EUR 125,000 on the next EUR 5 million and EUR 900,000 on the EUR 90 million up to EUR 100 million, a total of EUR 1,225,000. With k of 1, own funds are EUR 1,225,000.
Method A: fixed overheads
Method A requires own funds of at least 10% of the preceding year's fixed overheads. The regulator can adjust the figure after a material change in the business, and a new institution uses projected fixed overheads from its business plan. Regulators may require method A, or method C, where a business executes a small number of high-value transactions, for which payment volume would give a misleading result. The EBA will define what counts as a small number of high-value transactions.
Example. A business payments firm executes a few hundred high-value transfers a month for corporate clients, with fixed overheads of EUR 3 million last year. Method B on its volume would give a very large figure that does not reflect its risk, so the regulator may require method A instead. Own funds under method A are at least EUR 300,000, compared with EUR 150,000 initial capital.
Method C: the relevant indicator
Method C applies a sliding scale to the relevant indicator: the sum of interest income, interest expenses, commissions and fees received and other operating income, excluding extraordinary or irregular income. Outsourcing costs paid to a supervised undertaking can reduce the indicator.
| Slice of relevant indicator | Factor |
|---|---|
| Up to EUR 2.5 million | 10% |
| EUR 2.5 million to EUR 5 million | 8% |
| EUR 5 million to EUR 25 million | 6% |
| EUR 25 million to EUR 50 million | 3% |
| Above EUR 50 million | 1.5% |
The result is multiplied by k, and cannot fall below 80% of the average relevant indicator over the previous three financial years.
Method D: e-money
An institution issuing e-money holds own funds of at least 2% of average outstanding e-money. Where it also provides payment services in points 1 to 5, its own funds must at least equal the sum of the Article 7 requirement for those services and the method D requirement. Where the amount of outstanding e-money is not known in advance, for example because funds can be used for either e-money or payment services, the institution may calculate on a representative portion that can be reasonably estimated from historical data, with the regulator's agreement. Funds held by distributors before they reach the institution still count towards outstanding e-money once e-money has been issued, so the calculation should use the issuer's ledger rather than amounts received in its own accounts.
Example. An EMI has average outstanding e-money of EUR 40 million and provides card payments and transfers unrelated to e-money with PV of EUR 8 million. Method D gives EUR 800,000. Method B on the payment services gives EUR 200,000 plus EUR 75,000, a total of EUR 275,000. Own funds must be at least EUR 1,075,000, well above the EUR 400,000 initial capital.
Example: a remittance business
A money remittance business with no other payment services executes EUR 300 million of transfers a year, so PV is EUR 25 million. The slices give EUR 200,000 on the first EUR 5 million, EUR 125,000 on the next EUR 5 million and EUR 150,000 on the remaining EUR 15 million, a total of EUR 475,000. With k of 0.5 for remittance only, own funds are EUR 237,500, comfortably above the EUR 40,000 initial capital. If the business adds card issuing, k rises to 1, the requirement doubles to EUR 475,000 and initial capital rises to EUR 150,000.
Supervisory adjustment and ring-fencing
Based on an assessment of risk management, loss data and internal controls, the regulator can require own funds up to 20% higher than the method gives, or permit up to 20% lower. Own funds held for the payment services in points 1 to 5 cannot be counted towards other regulated or unregulated activities. For groups and for institutions that also carry on other business, such as crypto-asset services or lending, the capital allocated to payment services needs to be identified and reported separately.
As under PSD2, what counts as own funds follows the banking definitions in the Capital Requirements Regulation: paid-up share capital, share premium and audited reserves at the core, with deductions for losses and intangible assets. Subordinated debt can count within limits, and interim profits only once verified by the auditor. Payment initiation and account information providers sit outside Article 7: the first holds EUR 50,000 initial capital and the second holds professional indemnity insurance or a comparable guarantee instead of capital.
Errors that recur in capital calculations
Reviews of capital calculations by payment institutions and EMIs regularly find the same mistakes:
- using the wrong payment volume, such as gross card scheme volume instead of transactions executed by the institution, or counting both legs of a transfer;
- applying the scaling factor for remittance when the institution also provides services in points 1 to 4;
- using month-end e-money balances instead of the average outstanding amount;
- counting unaudited profits or intangible assets as own funds;
- relying on capital held at group level or already used for another regulated entity;
- not updating the calculation after a new product changes the service mix.
Each of these is easy to fix before filing and awkward to explain afterwards. A short reconciliation in the file, from the audited accounts to each input used in the calculation, prevents most of the questions regulators would otherwise ask. Have the calculation reviewed by someone outside the team that prepared it, and keep the working papers with the version of the file submitted.
Planning capital before re-authorisation
Run the PSD3 calculation now, using the latest audited figures and the services the institution will list. Compare the result with current own funds and with the institution's internal buffer. Where headroom is thin, the options are a capital injection, retained profits, a change in service mix, or a supervisory reduction of up to 20% where risk management supports it. A capital injection that changes ownership above the regulatory thresholds needs change of control approval, which takes months, so decide early. Our compliance support team prepares the PSD3 capital section and the projection regulators expect.
Documenting the calculation
Article 3(3)(c) requires evidence of initial capital in the authorisation file. For re-authorisation, regulators will also expect the own funds calculation, the method used, the inputs and their source, the composition of own funds and how the institution monitors and reports capital. A clear capital section includes:
- services mapped to Annex I and the initial capital that results;
- the own funds calculation under each applicable method, reconciled to audited figures;
- the composition of own funds and any deductions;
- a two to three year projection showing headroom;
- the monitoring process and board reporting.
Our comparison of EMIs and payment institutions explains how the choice of licence interacts with these requirements, and our article on the EMI changes under PSD3 covers the wider move from EMD2.