Bruno Fatier has been working as a banking and financial service lawyer since 2001. He has an LLM degree from Notre Dame Law School and a degree in political science from the Bordeaux Institute of Political Science. Bruno has written articles on issues such as bank secrecy, fund custody, payment services and e-money and is a regular speaker at payment and e-commerce global conferences.
This paper aims to assess the EU payments framework, as implemented in France, from the standpoint of the freedom of commerce and the vitality of the payments industry, to assess whether too much emphasis has been put on general interest such as consumer protection.
Keywords: freedom of commerce, payments industry, payment services, e-money, EMD2, PSD, PSD2
The PSD1 and the EMD2 have opened up the payments industry to newcomers, thereby rejuvenating a sector long seen (at least in France) as a dusty, back-office piece of furniture, making a sorry comparison with the glamorous worlds of structured finance or derivatives and barely able to generate profits on its own.
Setting aside a few specific initiatives such as the Single Euro Payments Area (SEPA), which is making progress at a snail’s pace for well-known reasons, the European payments industry is fast becoming a fertile crossroad, where people from different backgrounds3 engage with each other to create new and dynamic business models, combining, for instance, debt collection and payment services,4 mobile use and e-money5 or separating the issuance from the administration of payment means for regulatory pooling purposes.6
One cannot help but appreciate the high potential for growth brought about by the strategic choices made at a European level to harmonise and open up the payments industry since the beginning of this century (through the adoption of the EMD). But although the door to the payments industry has indeed been opened, only a few new players have both decided and been allowed to come in.
Why is it that so? There are many possible explanations for why there are so few new market entrants, but among them there appear to be two recurrent, if not prevailing, reasons: first, the choice that has to be made between an e-money or a payment institution licence is frustrating for businesses whose viability largely depends on being able to offer the widest possible range of payment solutions, irrespective of any subtle regulatory distinction between e-money and payment services; and secondly, notwithstanding European Union (EU) harmonisation, local resistance prevents business models from being fully supported by EU cross-border growth.
Can we improve matters? From a legal perspective, it is important to challenge the validity of the choices made, or yet to be made at an EU level, so as to assess whether the right balance has been struck between all the interests at stake in the payments industry. In particular, it is important that regulatory constraints imposed on the freedom of commerce in the name of general interest such as consumer protection (i) are not so burdensome that they discourage newcomers from entering the market and (ii) do actually promote general interest. Legal clarification is also needed on key concepts such as ‘payment services’, so as to reduce the risk of divergent interpretations among market practitioners (licensed and unlicensed service providers, consumers, regulators and courts).
This paper assesses how well EU legislation promotes efficiency and encourages new market entrants in the payments industry from the perspective of: (1) the PSD licensable activities; and (2) the EU harmonisation process.
SCOPE OF PSD LICENSABLE ACTIVITIES
Again, it is important to underline the contribution made by EU legislation to the opening up of the payments industry to participants coming from outside a traditional banking background. The scope of licensable activities still needs to be clarified, however, in order to provide the payments industry with a solid foundation from which it can grow. Market players are experiencing unnecessary difficulties when assessing whether their activities or projects involve ‘payment services’ within the scope of the PSD, owing to the absence of a true definition of ‘payment service’. Unfortunately, the awaited definition is not only absent from the draft of PSD2 proposed by the European Commission,7 but the existing categories of payment services will be extended and divided into (A) existing ‘true’ payment services and (B) new payment services which, in the author’s view, should be subject to much lighter regulation, as they are different in nature from true payment services.
Identifying ‘true’ payment services
Surprisingly, upon the adoption of the PSD, the European legislator did not see fit to include an explicit definition of a payment service setting out its essential characteristics and, from what transpires from the draft PSD2, there is no intention to remedy this defect. Since no such definition is provided, there has been, since the very beginning, an increased risk that each market player, court, regulator or consumer has a different understanding of what constitutes a payment service.
Rather than providing a true definition of payment services, the PSD categorises them, which is different. Article 4 of the PSD ‘defines’ a payment service as ‘any business activity listed in the Annex’.
Like a puzzle, the task of understanding whether a particular activity is a payment service within scope of the PSD then requires fitting together several different pieces: the categories of payment services, negative scope exemptions and ancillary definitions.
And at the end of the puzzle, it appears that only two criteria emerge that, together capture the essential characteristics of a payment service, as described below.
Sine qua non condition of fund manipulation
The ‘coming into the possession of funds’ by8 the service provider is a sine qua non condition for qualification as a payment service, which, bizarrely, is only found incidentally in the negative scope of the PSD.
Concepts such as ‘payment accounts’ are in fact irrelevant for the purposes of defining what a payment service is, since one can provide a payment service (such as acquiring payment instruments) without needing to hold a payment account in the name of the payment service user.
Why a simple, reliable definition containing this sine qua non condition was not initially inserted in the PSD remains a mystery, notwithstanding the long preamble to the PSD explaining the background to the European legislator’s approach.
Such sine qua non condition is (by definition) necessary, but not sufficient, to define what a true payment service is. In addition, the specific purpose of carrying out payment instructions must exist in order for an activity to be qualified as a true payment service.
Specific purpose of carrying out payment instructions
Behind the circular and redundant ancillary definitions set out in Article 4 of the PSD hides the purpose of carrying out instructions entrusted to a service provider to make a ‘payment’ consisting of ‘placing’, ‘transferring’ or ‘withdrawing’ ‘funds’.
From a legal standpoint, it is worth noting how misleading those words can be where (as is more and more often the case) the funds subject to the payment instructions are intangible money. In this case, ‘paying’ virtual funds does not involve their physical transfer, but a mere commitment on the part of the service provider to pay a ‘beneficiary’ upon the instructions of a ‘payer’ and the making of corresponding entries in the relevant accounts.
Regulating ‘false’ payment services?
If the PSD2 draft proposed by the European Commission is adopted as is, two new sub-categories of payment services will be added:9 ‘payment initiation’ and ‘account information’ services. Neither will meet both the above-mentioned conditions, and this paper refers to them as ‘false’ payment services. But while (1) payment initiation services contribute to the carrying out of a ‘true’ payment service, (2) account information services are unrelated to any true payment service.
Related (payment initiation) services
While the purpose of payment initiation services is to facilitate the carrying out of a payment transaction, payment initiation services differ from true payment services as the above-referred sine qua non condition that the service provider comes into possession of the funds is not met. By bringing such services within the scope of licensable payment services, the European Commission proposes that payment initiation service providers be subject to the same licensing requirements as any other payment service provider, despite the fact that the payment initiation service provider never comes into possession of the funds. Those requirements are disproportionate to the lower (albeit non-negligible) risk (attached to data manipulation) incurred. Alternatives to licensing requirements, such as self-regulation, should be considered, and more consideration should be given to the residual liability potentially incurred by account holders obliged to cooperate.
Unrelated (account information) services
Unlike payment initiation services, account information services do not contribute to the provision of a true payment service. Therefore, there is even less justification for account information services to be regulated as heavily as true payment services, given the much smaller (albeit non-negligible) risk (attached to data manipulation) incurred by clients.
In any case, whatever approach is ultimately chosen by the EU, a true assessment must be made of the weight of regulation against the actual risk incurred with payment initiation and account information services, so as to avoid any unnecessary impediment to the freedom of commerce. If licensing is seen by the European Commission as the price to pay for the benefit of an EU passport10 and for protection against uncooperative account holders,11 this might be seen as too high a price, given how vague and uncertain the proposed protections are,12 and how strong local resistance against EU harmonisation can be.
SCOPE OF EU HARMONISATION
‘Full harmonization’13 in Europe in the field of payments is a mantra that has not yet been fully translated into reality. In particular: (A) the divide between e-money and payment services is not justified by a true difference in nature; and (B) even before the PSD and the EMD are merged, the regimes applicable to e-money and payment institutions should be further harmonised so as to minimise the impact of having to choose between an e-money and an e-payment institution licence.
Is electronic money different from a PSD payment instrument or payment account?
The nature of the services provided by an electronic money issuer is the same as that of a payment service. Like a payment service provider (see above), an electronic money issuer, at the request of a client (the ‘payer’ under the PSD and the ‘subscriber’ or the ‘holder’ un14der the EMD), undertakes to ‘deliver’15 funds to a recipient, defined by the PSD as a ‘beneficiary’,16 and by the EMD and EMD2 as an undertaking (other than the issuer) accepting electronic money. The EMD further sets out that the electronic money in question is issued as a means of payment, but EMD2 remains silent in this respect.
In both cases, the undertaking made by the service provider is based on the provision of funds by the client to the service provider, which then owes a debt payable to a recipient upon the instructions of its client.
Under the EMD2, it is now possible to make ‘payment transactions’ using electronic money, within the broad meaning under the PSD, which goes beyond the payment of goods or services to accepting merchants to include, for example, withdrawing cash from an ATM or providing some money remittance services.
No clear line can be drawn between payment services and services offered by an electronic money issuer from the perspective of either the nature or the purpose of those services. And apart from the nature and purpose of those services, there is nothing left to truly distinguish them.
The technical aspects of the definition of electronic money are based on the undefined concept of ‘monetary value’ said to be stored on a server or, as the case may be, the tangible instrument issued as e-money. Electronic money is obviously not money itself, but rather it is evidence of a debt owed by the issuer and, thus, there is no fundamental difference between electronic money and (i) a PSD payment instrument (which can be defined succinctly17 as a tool to make payment instructions) or (ii) a payment account, where electronic money takes the form of an ‘e-money account’.18
Therefore, for the sake of simplicity and certainty, in the author’s view the concept of electronic money should ultimately be merged with the concepts of payment account and payment instrument.
The main reason why two different concepts and regimes exist in the field of payments is simply because the regulation of electronic money preceded that of payment services. The market is the same for both products, however: ie the administering and issuance of payment means within the broad meaning of the Banking Directive19 minus the exclusions from the scope of the PSD and the EMD (eg paper-based cheques).
From experience, newcomers to the market generally find it harder to justify a viable business20 (which they must do to the satisfaction of the regulators in order to get a licence) without being able to provide the fullest range of payment solutions within their line of activities, irrespective of whether these solutions fall into the ‘e-money’ or ‘payment services’ bucket.
Merging EMD2 into the PSD
The plan to merge EMD2 with the PSD has been postponed sine die, which is all the more regrettable, because this further slowing down of the harmonisation process is a sort of unintentional reward for those member states that did not implement EMD2 in time. In the meantime, while, strictly speaking, payment institutions continue to be barred from issuing e-money,21 the legislator should minimise the impact of firms’ having to choose between an e-money and a payment institution licence, by bringing these regimes into line as far as possible, at least in respect of externalised (1) back-office and (2) front-office activities.
Reliance on third parties for back-office activities
In countries such as France,22 the administration of e-money continues to fall within the scope of the regulatory regime provided for e-money issuers. This means that an issuer eager to outsource the administering of e-money is obliged to rely on a service provider also licensed to administer e-money, ie on a likely competitor.
Restrictions of this or a similar type are undoubtedly impediments to an influx of newcomers into the payments industry.
One should also consider whether detailed outsourcing rules borrowed from MIFID23 are truly necessary, to the extent that the licensed entity remains responsible to the regulator and customers, notwithstanding any outsourcing to an unregulated third party. In other words, provided that the licensed entity remains liable towards the regulator and customers for activities carried out ‘behind the scenes’, is there any real need to impede the freedom of commerce by regulating these back-office activities?
Reliance on third parties for front-office activities
Although it is understandable that the issuance of e-money itself cannot be delegated to a third party, as this would amount to transferring the licence itself, there is no legitimate reason for submitting e-money, payment services and similar banking products to different local distribution/marketing rules. One could even dare to wonder whether it is necessary to regulate distribution at all.
Indeed, it can be argued that the principle that the licensed entity remains responsible notwithstanding reliance upon a third party distributor, such as a PSD agent24 or an external French canvasser,25 makes any regulatory requirements imposed on the distributor redundant. This raises the question as to whether such requirements are useful and, if they are not, whether they are an unnecessary impediment to freedom of commerce.
Alternatively, when faced with different local distribution regimes (such as the French IOBSP26 regime and the newly created e-money distribution regime27), the European legislator should consider drafting a harmonised regime applicable to all products, regardless of their nature, light enough to avoid any unnecessary impediment to the freedom of commerce.
There is a need for a more thorough assessment of the reliability, efficiency and effectiveness of the EU regulatory framework for the payments industry. Greater EU harmonisation is needed to combat local resistance against a truly open European market. This does not necessarily require more regulation. What is in fact needed is a clearer, more efficient and balanced regulatory framework, light enough to avoid impeding the freedom of commerce to an unnecessary extent. More enforcement action on the part of the European Commission should be considered too.
Sometimes, better regulation may even mean a reduction in regulation, ie repealing parts of the current framework without introducing new rules. Unfortunately, such an approach currently seems to be relatively taboo, given the current Lamfalussy approach taken at an EU level as a general principle.
REFERENCES AND NOTES
(1) Directive 2007/64/EC of the European Parliament and of the Council of 13th November, 2007, on payment services in the internal market, also referred to in this paper as the ‘PSD’.
(2) Electronic Money Directive, ie Directive 2000/46/EC of the European Parliament and of the Council of 18th September, 2000, on the taking up, pursuit of and prudential supervision of the business of electronic money institutions, also referred to in this paper as the ‘EMD’.
(3) Typically, these would be information technology, telecommunication, banking, debt collection and foreign exchange.
(4) In France, the first payment institution dedicated to debt collection has been authorised by the French banking authorities, leading the way to a new debt-collection business model within the EEC.
(5) Buyster is a French example of such combination.
(6) At the forefront of this new business model are service providers such as Raphael’s Bank.
(7) Proposal for a Directive of the European Parliament and of the Council on payment services in the internal market and amending Directives 2002/65/EC, 2013/36/EU and 2009/110/EC and repealing Directive 2007/64/EC.
(8) Article 3 (J) of the PSD.
(9) As part of a new category of payment services referred to as ‘Services based on access to payment accounts provided by a payment service provider who is not the account servicing payment service provider’ (point 7 of the payment services annex to the PSD2 proposal made by the European Commission).
(10) As licensable services, payment initiation and account information services would benefit from the EU freedom to provide services in any chosen host country within the EU (and the European Economic Area, by extension) or the right of establishment in any such country.
(11) Article 58 of PSD2 as proposed by the European Commission provides that ‘member states shall ensure that a payer has the right to make use of a third party payment service provider to obtain payment services enabling access to payment accounts as referred to in point (7) of Annex I.’
(12) For instance, what about non-harmonised local advisory duties and confidentiality duties owed by account holders? Would this be harmonised to prevent any residual liability for them?
(13) Article 86 of the PSD and Article 16 of EMD2.
(14) It may be so, for instance, in the case of gift cards.
(15) The verbs ‘to pay’ and ‘to transfer’ have not been used on purpose, since the former may convey some unwanted impression that the underlying obligation is concerned, while the latter induces one to think of an actual transfer, which is not true in most cases, ie where accounts are involved.
(16) An ‘instrument’ is defined as a ‘device’, but also, rather strangely, as a set of ‘procedures’.
(17) The PSD defines a payment instrument as ‘any personalised device and/or set of procedures agreed between the payment service user and the payment service provider and used by the payment service user in order to initiate a payment order’ (Article 4.23).
(18) The concept of an ‘e-money account’ is derived from the preamble to the EMD2 (see point 8) and has been widely adopted by market practitioners in the absence of such concept in the legally binding body of EMD2.
(19) Directive 2006/48/EC of the European Parliament and of the Council of 14th June, 2006, relating to the taking up and pursuit of the business of credit institutions (replaced by Directive 2013/36/EU of the European Parliament and of the Council of 26th June, 2013, with effect from 1st January, 2014).
(20) The monetisation of low-value goods or services by way of mobile payment solutions is the most telling example of the importance of volume for business viability.
(21) Articles 1 and 10 of EMD2.
(22) Article L 525-1 of the Financial and Monetary Code (code monétaire et financier).
(23) Markets in Financial Instruments Directive, ie Directive 2004/39/EC of the European Parliament and of the Council of 21st April, 2004, on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC. In France, at least, similar rules have been adopted to apply to credit institutions (CRBF Regulation 97-02) and then to e-money and payment institutions (by way of amendment to CRFB Regulation 97-02).
(24)Governed by Articles 17 and following of the PSD.
(25) Governed by Articles L 341-1 and following of the Financial and Monetary Code.
(26) Intermediary in Banking Operation and Payment Service regime provided for in Articles L 519-1 and following of the Financial and Monetary Code.
(27) Although EMD2 provides for a distribution regime in principle, it has (unfortunately) left it to member states to fill in the gap in their own way.
“this article was originally published in the Journal of Payments Strategy & Systems in March 2014, Henry Stewart Publications, Volume Eight, Number One”
This bulletin should not be taken as definitive legal advice on any of the subjects covered. If you require legal advice on any of the subjects covered please contact Bruno Fatier on 020 7955 1478 or firstname.lastname@example.org