How a Small-Scale Electronic Money Issuer Operates

Are you a foreign company, FinTech founder, or international investor planning to launch a Small-Scale Electronic Money Issuer (SSEMI) in the Czech Republic? This guide provides clear, actionable answers on navigating the licensing process and meeting the strict regulatory expectations of the Czech National Bank (CNB). As an English-speaking lawyer in Prague can confirm, understanding these rules is the first step to success. ARROWS, a leading Czech law firm in Prague, EU, specializes in guiding foreign clients through this complex but rewarding journey.

Need advice on this topic? Contact ARROWS Law Firm at office@arws.cz or +420 245 007 740. Your question will be answered by "Mgr. Marek Hučík", an expert on the topic.

The SSEMI License: Your Strategic Gateway to the Czech FinTech Market

For international businesses looking to enter the European Union's dynamic financial technology sector, the Czech Republic offers a stable and supportive environment. The Small-Scale Electronic Money Issuer (SSEMI) license is a powerful tool for this purpose, providing a regulated yet accessible entry point into the market.

What is a Small-Scale Electronic Money Issuer (SSEMI)?

An SSEMI is an entity authorized by the Czech National Bank (CNB) to issue electronic money. This includes products like prepaid cards, e-wallets, digital tokens, virtual vouchers, and payment wristbands. The legal framework is primarily defined by the Czech Act on Payment Systems (No. 370/2017 Coll.), which transposes key EU directives like the second Payment Services Directive (PSD2) into national law. This ensures that your operations align with a harmonized European standard.

Why is this License Ideal for Your International Business or Startup?

The SSEMI license is often described as a "mini-bank" permit. It allows your company to offer a comprehensive suite of payment services without the high barriers associated with a full Electronic Money Institution (EMI) license. This makes it an excellent solution for startups and established companies that want to test a new product in the EU market or do not yet have the financial capacity for a full-scale launch.

A key advantage is the significantly lower capital requirement; unlike the €350,000 needed for a full EMI, the SSEMI license does not have a mandated initial capital threshold, making it highly attractive.

Key Legal Differences: SSEMI vs. a Full Electronic Money Institution (EMI)

Understanding the operational boundaries of an SSEMI license is critical for strategic planning. The primary limitation is a cap on the volume of issued electronic money, which must not exceed an average of €5 million over the preceding six months. If you provide other payment services not related to e-money, their average monthly volume is capped at €3 million.

Most importantly for international firms, the SSEMI license is for domestic operations within the Czech Republic only. It does not grant "passporting" rights, which would allow you to establish branches or actively provide services in other European Economic Area (EEA) countries. This is a crucial distinction from a full EMI license.

These limitations are not merely restrictive; they effectively create a regulatory sandbox. This framework allows innovative FinTech companies to launch and validate their business models in a live, regulated EU market without the substantial capital and compliance overhead of a full EMI license.

The financial and geographical limits are designed by the CNB to contain systemic risk while still fostering the innovation that makes the Czech Republic a "FinTech-friendly" country. For a foreign company, this reframes the SSEMI from a "limited license" to a strategic first step for proving a concept to investors and regulators before scaling up.

How to Secure Your SSEMI License from the Czech National Bank (CNB)

The path to obtaining an SSEMI license involves a rigorous review by the Czech National Bank, the country's sole financial market supervisor. A meticulously prepared application is essential to ensure a smooth and timely approval process.

What is the Step-by-Step Application Process?

The formal application must be submitted electronically to the CNB. This initiates a comprehensive review of your business's viability, operational readiness, and the fitness of its management team. The process requires the preparation of a complete license application with all necessary appendices and payment of a state duty, which is currently 10,000 CZK (approximately €380).

What Key Documents Will the CNB Scrutinize?

The business plan is the cornerstone of your application. It must be detailed, realistic, and demonstrate a clear, well-researched strategy for the Czech market. The CNB's insistence that the plan be "mainly focused on attracting customers from the Czech Republic" is a crucial test of your commitment. It serves to filter out "license shoppers" and ensures that licensed entities have a substantive operational presence and contribute to the local financial ecosystem, as required by the Act on Payment Systems.

Other critical documents include:

• Detailed financial projections and a capital adequacy calculation.
• Proof of the legitimate origin of funds for the company's share capital.
• A complete set of internal policies, especially for Anti-Money Laundering (AML/CFT).
• Personal documents for founders and key managers, including passports, proof of address, and criminal record checks from both their country of citizenship and the Czech Republic.

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What is the Expected Timeline for Approval?

Setting realistic expectations for your project timeline is vital. The preparation of the comprehensive application package, a service ARROWS regularly provides, typically takes one to two months. Once submitted, the CNB's official review and licensing process generally takes an additional three to nine months. It is important to note that for founders who are not EU residents, this period may be longer.

FAQ – Legal tips about the SSEMI application

• Do I need to have a physical office in Prague?
  While your employees can be located anywhere, the Act on Payment Systems requires that at least part of your payment service business is operated in the Czech Republic. A legal address is mandatory, and demonstrating operational substance locally is crucial for the CNB application. Need help establishing your presence? Contact us at office@arws.cz.
• What is "proof of the origin of funds"?
  The CNB requires you to demonstrate that the funds used for your company's share capital are from legitimate sources. This can typically be proven with documents like an income certificate or official bank statements. Our lawyers can advise on the specific documentation required for your situation. Get tailored legal solutions by writing to office@arws.cz.
• Can ARROWS write my business plan for me?
  While you provide the core business information (services, target audience, financial goals), our team will structure this information into a comprehensive business plan and financial forecast that meets the specific expectations of the CNB. For immediate assistance, write to us at office@arws.cz.

Meeting the CNB’s Expectations: Your Ongoing Compliance Duties

Obtaining your license is only the beginning. As a regulated financial institution, your SSEMI will be under the continuous supervision of the CNB. Meeting your ongoing compliance duties is non-negotiable and requires robust internal systems in three key areas.

A. Mastering Your Anti-Money Laundering (AML/CFT) Obligations

Compliance with anti-money laundering and countering the financing of terrorism (AML/CFT) regulations is a top priority for the CNB. The legal framework is demanding and aligns with strict EU-wide standards.

What do the AML Act and EU Directives Require?

Your operations will be governed by the Czech Act No. 253/2008 Coll., on Selected Measures against Legitimisation of Proceeds of Crime and Financing of Terrorism (the AML Act). This law transposes EU AML Directives, making compliance a matter of both national and European law. As an SSEMI, your firm is considered an "obliged entity" and is supervised by both the Financial Analytical Unit (FAU) and the CNB.

How to Build an Effective Internal AML System?

An effective AML system is built on several pillars. You must conduct robust Customer Due Diligence (CDD) to identify and verify your clients and their beneficial owners. You are also required to develop a written system of internal principles, conduct an internal risk assessment, provide annual AML training to all relevant employees, and report any suspicious transactions to the FAU without delay. All client and transaction records must be kept for at least 10 years.

Navigating AML/CFT Compliance Risks

Legal risk and potential issues	How ARROWS helps
Inadequate Customer Due Diligence (CDD): Failure to properly identify clients and beneficial owners, especially from high-risk jurisdictions. This can lead to heavy fines from the FAU and CNB.	Drafting Documentation: We prepare a complete, tailored set of internal AML/CFT policies, including robust CDD and KYC procedures. Need legal help? Contact us at office@arws.cz.
Failure to Report Suspicious Transactions: Your system fails to flag unusual activity, or your staff fails to report it to the FAU, violating the AML Act. This can result in severe penalties and criminal liability.	Professional Training: We provide certified training for your management and employees on how to identify and report suspicious transactions effectively. Get tailored legal solutions by writing to office@arws.cz.
Outdated Internal AML System: Your internal risk assessment and control measures do not reflect the latest regulations or the evolving nature of financial crime, leaving you exposed during a CNB audit.	Legal Consultations: Our lawyers provide ongoing legal advice to ensure your AML system remains compliant with all Czech and EU regulations. For immediate assistance, write to us at office@arws.cz.
Poor Record-Keeping: Inability to produce complete client and transaction records for the required 10-year period during an inspection, leading to fines for non-compliance.	Preparation of Internal Policies: We design internal record-keeping policies and procedures to ensure you meet all statutory requirements. Do not hesitate to contact our firm – office@arws.cz.

B. Ensuring Robust Operational and Security Standards

The stability and security of your payment services are paramount. The CNB expects SSEMIs to maintain high operational standards to protect both customers and the financial system.

What are your duties under the Act on Payment Systems (PSD2)?

The Act on Payment Systems (No. 370/2017 Coll.), which implements the EU's PSD2, imposes strict requirements on all payment service providers. Your SSEMI must establish and maintain an effective system for managing operational and security risks, as well as a transparent and efficient system for handling user complaints and claims.

How can you manage ICT and security risks effectively?

The CNB expects you to implement robust security controls, risk mitigation measures, and a clear mechanism for reporting major operational or security incidents. Your framework should align with best practices and guidelines issued by the European Banking Authority (EBA) on ICT and security risk management, as these are highly influential in the CNB's supervisory approach. This includes protecting customer data, preventing fraud, and ensuring the resilience of your systems.

Mitigating Operational & Security Risks

Legal risk and potential issues	How ARROWS helps
Non-Compliance with PSD2 Security Rules: Failure to implement required security controls, such as strong customer authentication (SCA) where applicable, leading to CNB sanctions.	Legal Opinions: We provide detailed legal opinions on how PSD2 and the Act on Payment Systems apply to your specific business model. Need legal help? Contact us at office@arws.cz.
Inadequate Incident Reporting: A security breach or major operational failure occurs, but you fail to report it to the CNB correctly and within the required timeframe, resulting in penalties.	Drafting Documentation: We draft your internal incident response and reporting procedures to ensure compliance with CNB notification obligations. Get tailored legal solutions by writing to office@arws.cz.
Insufficient Risk Management Framework: Your internal systems for identifying, managing, and mitigating operational risks (e.g., system downtime, internal fraud) are deemed insufficient by the CNB during an audit.	Preparation of Internal Policies: Our team drafts a comprehensive operational risk management framework tailored to your SSEMI operations. Our lawyers are ready to assist you – email us at office@arws.cz.
Improper Outsourcing Controls: You outsource key operational functions (e.g., IT, compliance) without proper due diligence or contractual safeguards, making you liable for the vendor's failures.	Contract Drafting or Review: We review and draft your outsourcing agreements to ensure they meet regulatory standards and protect your interests. For immediate assistance, write to us at office@arws.cz.

C. Upholding Consumer Protection and Safeguarding Funds

Protecting your customers and their money is not just good business practice—it is a core legal requirement enforced by the CNB.

What are your obligations to your customers?

Your relationship with users is governed by Czech consumer protection laws, primarily Act No. 634/1992 Coll., on Consumer Protection. The CNB actively supervises financial institutions' adherence to these rules, including a strict prohibition on unfair commercial practices, such as providing misleading information or using non-transparent pricing. Should a dispute arise, customers can turn to the Financial Arbitrator, an independent body that provides fast and free out-of-court dispute resolution.

How do you correctly safeguard client funds?

This is one of your most critical duties. The principle of fund safeguarding requires you to hold unencumbered, liquid assets equal to the total amount of e-money you have issued. These funds must be held in a dedicated account, completely separate from your company's own operational funds. This measure is designed to protect your customers' money and ensure it can be returned to them in the event your company becomes insolvent.

Avoiding Consumer Protection Pitfalls

Legal risk and potential issues	How ARROWS helps
Failure to Safeguard Client Funds: Mixing client e-money funds with your company's operational capital. This is a severe breach that can lead to immediate license revocation.	Legal Consultations: We provide critical legal guidance on establishing compliant safeguarding accounts and procedures from day one. Do not hesitate to contact our firm – office@arws.cz.
Unfair Commercial Practices: Using misleading marketing, unclear terms of service, or hiding fees, leading to complaints, CNB fines, and proceedings before the Financial Arbitrator.	Contract Drafting and Review: We draft and review your client-facing documentation (Terms & Conditions, contracts) to ensure they are transparent and comply with consumer protection laws. Need legal help? Contact us at office@arws.cz.
Improper Dispute Resolution: Failing to handle a customer complaint properly, leading to an adverse and binding decision from the Financial Arbitrator, causing financial and reputational damage.	Representation Before Public Authorities: Our lawyers can represent your company in proceedings before the Financial Arbitrator and the CNB. For immediate assistance, write to us at office@arws.cz.

What Are the Financial and Legal Consequences of Non-Compliance?

The CNB takes its supervisory role seriously and has a range of enforcement tools to address regulatory failures. Understanding the potential consequences is key to appreciating the importance of a robust compliance framework.

How does the CNB enforce its regulations?

The CNB has broad powers to ensure the stability and integrity of the financial system. Its supervisory activities include conducting on-site inspections, demanding documentation, and imposing remedial measures to correct any identified shortcomings. Importantly, the CNB publishes its final penalty decisions, creating a public record of non-compliance that can cause significant and lasting reputational damage to a company.

What penalties can you face for compliance failures?

Non-compliance can result in severe financial penalties. These can include fixed fines for specific administrative violations, such as obstructing an inspection, which can be up to CZK 500,000. The new EU Payment Services Regulation (PSR) also envisions the possibility of fines up to 10% of a firm's total annual turnover for serious breaches. These penalties are designed to be dissuasive and underscore the financial risks of inadequate compliance.

How can you avoid the ultimate risk: license revocation?

For the most serious breaches, such as a failure to safeguard client funds or systemic non-compliance with the Act on Payment Systems, the CNB holds the ultimate sanction: revoking your SSEMI license. This is not a theoretical threat. When the new Act on Payment Systems was introduced, the CNB set a firm deadline for existing issuers to comply, stating clearly that failure to do so would result in license revocation. The stakes for maintaining continuous compliance could not be higher.

How ARROWS Can Secure Your SSEMI Operations in Prague

Navigating the CNB's requirements is complex, but your company does not have to do it alone. As an international law firm operating from Prague, European Union, ARROWS combines deep local regulatory knowledge with a nuanced understanding of the needs and expectations of foreign clients. Our experience includes supporting over 150 joint-stock companies and 250 limited liability companies in the Czech market.

Through our ARROWS International network, built over 10 years and now operating in 90 countries, we are uniquely positioned to handle cross-border matters and explain the legal differences between the Czech environment and your home jurisdiction.

We provide a full suite of legal services to mitigate the risks and ensure your SSEMI is built on a solid legal foundation:

• Preparation of internal company policies for AML/CFT, security, and risk management.
• Drafting all legally required documentation for the CNB license application and client-facing contracts.
• Ongoing legal consultations to prevent inspections and ensure you remain compliant with evolving regulations.
• Contract drafting or review for critical agreements with vendors, partners, and outsourcing providers.
• Representation before public authorities, including the CNB, FAU, and the Financial Arbitrator.
• Professional training for your employees and management on their AML and data protection obligations.

To ensure your FinTech venture is set up for success, contact our experts today. Get tailored legal solutions by writing to office@arws.cz.

FAQ – Most common legal questions about SSEMI Operations in the Czech Republic

 

• Can my SSEMI serve clients outside of the Czech Republic?
  An SSEMI license is for domestic operations only. You can have foreign clients, but the services must be provided from the Czech Republic, and you cannot actively market or establish a branch in another EU country. This is a key difference from a full EMI license, which allows for EU "passporting." To discuss your international growth strategy, contact our lawyers at office@arws.cz.

• What are the ongoing reporting requirements to the CNB?
  As a licensed entity, you will have regular reporting duties to the CNB. This includes submitting statements and reports on your financial activities, payment volumes, and issued e-money, as stipulated by decrees such as Decree No. 454/2017 Coll. ARROWS can assist in setting up your compliance reporting framework. Need legal help? Contact us at office@arws.cz.

• How does the Czech SSEMI regime compare to other EU countries?
  The core principles are harmonized by EU directives, but national implementation varies. The Czech Republic is known for its stable, "FinTech-friendly" but strict approach. Unlike some other jurisdictions, the CNB places a strong emphasis on a substantive local business plan. Our ARROWS International network can provide a comparative analysis for your specific needs. For immediate assistance, write to us at office@arws.cz.

• What happens if my business grows and exceeds the €5 million e-money limit?
  Exceeding the SSEMI financial thresholds requires you to apply for a full Electronic Money Institution (EMI) license, which has higher capital requirements (e.g., €350,000) and more extensive compliance obligations. It is crucial to plan for this transition well in advance. Our firm can guide you through the process of upgrading your license. Get tailored legal solutions by writing to office@arws.cz.

• Are the managers of my company subject to CNB approval?
  Yes. The CNB must be satisfied that the persons responsible for managing the electronic money and payment services are of good repute and possess appropriate knowledge and experience. Background checks, including for criminal records related to financial crime, are a standard part of the application process. ARROWS can advise on the "fit and proper" test requirements. Do not hesitate to contact our firm – office@arws.cz.

• What are the main differences in AML rules compared to my home country (e.g., USA, UK)?
  While the core principles of AML/CFT are global standards set by the FATF, the specific implementation is governed by EU directives and Czech national law (the AML Act). Key differences can include the definition of a beneficial owner, specific reporting formats for the FAU, and the list of high-risk third countries. Our lawyers are experts in these cross-jurisdictional legal differences. Our lawyers are ready to assist you – email us at office@arws.cz.

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