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In its new report, the ACPR, France’s prudential regulator, has laid out what needs to be addressed in the upcoming review of the revised Payment Services Directive (PSD2), while also highlighting the issues that the payments ecosystem currently faces.
The Banque de France’s prudential supervisor, the ACPR, has published a report on the main developments in the payments sector in the country.
This was undertaken with a view to offer insight on supervisory practice in light of the upcoming PSD2 review.
"Our report shows that these new players have helped to transform and modernize the means of payment available to consumers and businesses, whether it be to foster the development of online commerce, digitalize the customer relationship, develop multiple payments offers or enable better exploitation of payment data," said Dominique Laboureix, secretary-general of the ACPR, in a press statement.
At present, the ACPR has authorised 62 payment institutions (PIs) and electronic money institutions (EMIs), more than half of which were set up after 2018.
Among the issues raised include the existing distinction between the activities of electronic money issuance and payment services, which the ACPR says should be reviewed.
“Indeed, these are now extremely similar and pose similar risks but involve the application of different prudential and AML-CTF [anti-money laundering/counter-terrorist financing] regimes,” the ACPR pointed out.
For example, the qualification of electronic money enables firms to benefit from a lighter AML/CTF regime, known as "anonymous electronic money".
This, however, does not exist for the provision of payment services, which the prudential supervisor cautions may give rise to arbitrages when the type of licence is chosen.
The ACPR has also called for prudential requirements relating to the provision of payment services to be specified more precisely.
Among the three methods offered by the regulation for the calculation of own funds requirements, most national authorities rely on the method based on the total amount of payment transactions executed by the institution in the preceding year.
However, the way the total amount of payment transactions executed is computed is not specified in the directive currently, which has led to different interpretations between authorities. That divergence translates into different requirements for the provision of the same payment service.
“The lack of harmonisation can therefore jeopardise the level playing field between players operating on a single market but that are supervised by different authorities,” the regulator pointed out.
The ACPR has also said that it sees merit in there being consolidated supervision encompassing companies that are different in nature, performing both regulated and non-regulated activities.
“This should be introduced in order to give authorities a better and global overview of said activities,” the ACPR recommended.
The Paris-based regulator also raised alarm bells about divergences in how the PSD2 is being interpreted in the EU.
“There may be discrepancies in interpretation between authorities as regards the qualification of innovative payment solutions which have not necessarily been anticipated by the directives,” the ACPR said.
These divergences were noted in particular by the ACPR during Brexit, when some UK institutions decided to set up their continental business in France.
In certain cases, the supervisor said, these divergences may lead institutions to select the geographical location according to the qualification adopted by the competent authority with regard to its business model.
“Supervisory convergence work by the European Banking Authority should therefore be continued to avoid such phenomena,” the ACPR recommended.
The plans v the results
Within the report, the ACPR noted that there are significant differences between the business plans presented by new players during the licensing process and the results they actually achieve.
“In this context, many of them still show little to no profitability, which is usually the consequence of the marketing and R&D (research and development) investments they have to make in order to succeed in a highly competitive market,” the ACPR pointed out.
These investments usually result in, among other things, staff costs and external costs, in particular relating to technology providers and IT hosting, which are much higher than foreseen in initial development plans.
For PIs and EMIs that had not yet reached their break-even point, these charges represented on average 373 percent of the operating income. “The capacity of these new players to achieve sustainability therefore mostly depends on their ability to obtain long-term funding, especially from venture capital investors,” the ACPR said.
In this regard, the ACPR pointed out that despite the adequate level of capital of many electronic money and payment institutions, the median coverage rate of own funds requirements reached 300 percent in 2020, and some did not comply with the prudential requirements applicable to them by the end of 2020.
Remediation measures have since been taken to ensure that these institutions comply with the regulatory requirements but the Paris-based regulator said that these situations underline the need to find long-term funding sources, especially in case of adverse conditions restricting the possibility of raising funds from venture capital investors.
“The ACPR, therefore, invites applicants for a license to factor this in their business plans, since those are often too ambitious,” the report says.
Outsourcing
The report also warns that institutions based in the country are often reliant on outsourcing, including their core services.
“We recall that institutions remain fully responsible for delegated actions undertaken by these outsourced service providers, including agents, and that therefore they need a system of ongoing supervision and oversight over these operations,” the ACPR said.
As part of their business operations, firms need to perform regular internal controls on their outsourced work, with the central bank recommending that these services are governed by a consistent contractual framework, including commitments on the level of quality of service and audit rights provisions so that institutions are enabled to carry out on-site and off-site inspections without restrictions.
Regulatory reporting is also proving an issue for institutions, according to the report.
“Institutions must continue their efforts to improve the quality of the supervisory data reported to the ACPR and the Banque de France,” the report says.
For example, in the second quarter of 2020, 70 percent of payments and e-money institutions that were not part of a banking group submitted their reporting after the regulatory deadline.
“It is therefore important that those institutions ensure that they comply with the deadlines for the submission of regulatory reporting, that they check the quality and consistency of the data, and the compliance of the signature used for the submissions,” the supervisor said.
Banking problems
As with other national competent authorities, the ACPR has sympathised with payments and e-money firms over their inability to easily obtain banking partnerships.
Here, the ACPR has told entities that they must inform it of any refusal to open segregated accounts, which are used for the purposes of safeguarding.
Both PIs and EMIs are required to safeguard funds received from their customers for the execution of payment transactions and the issuance and management of electronic money.
However, the regulator has found that this has become increasingly difficult for payments and e-money institutions to fulfil. This does not bode well for the firms, considering that the lack of safeguarding for customers' funds can be grounds for the withdrawal of a licence.
Among the reasons why safeguarding services are becoming harder to comply with are de-risking, which has been a long-term priority for the EU. Due to this phenomenon, banks are limiting the amounts covered by guarantees.
As well as this, when accepting to open segregated accounts for payment or e-money institutions, in view of the current interest rate environment, a growing number of banks are passing on the negative interest costs to these institutions, and to make matters worse, there are fewer and fewer providers of guarantees or comparable surety in the market.
