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In its latest Q&As, the European Banking Authority (EBA) has issued a series of important clarifications concerning payment services and electronic money under EU law.
The rulings address legal uncertainty for the payments and e-money industry in the EU, and over the next two days, Vixio is looking at what has been clarified by the EU’s banking watchdog and how it will affect firms.
The questions focus on issues arising from compliance with both the revised Payment Services Directive (PSD2) and the Electronic Money Directive (EMD2).
Third-country PSPs and PSD2 compliance
In one question, the EBA has responded to concerns raised by the Croatian National Bank about third-country payment service providers (PSPs) offering acquiring services for EU-based webshops post-Brexit
The EBA reaffirmed in its response to the central bank that acquiring payment transactions is a regulated service under PSD2, requiring authorisation by a national competent authority.
Non-EU PSPs are prohibited from operating within the trading bloc without such authorisation.
Third-country PSPs may collaborate on a cross-border basis with EU-based PSPs, but cannot maintain a physical presence or actively take on customers in the EU.
The EBA's clarifications here have a significant impact on third-country PSPs, and the regulator has particularly geared its response towards firms in its former home of the UK that offer acquiring services in the EU. PSPs and merchants in the EU will need to structure their partnerships carefully.
The cost and complexity of gaining authorisation may ultimately deter some third-country PSPs from entering the EU market, while others may instead opt to rely on partnerships with authorised EU PSPs, potentially raising costs for cross-border acquiring services.
Definition of electronic money under EMD2
The EBA also addressed a query from a credit institution on whether payees must have direct contractual agreements with e-money issuers for transactions to qualify as electronic money.
Citing a Court of Justice of the European Union ruling (Case C-661/22), the EBA clarified that electronic money must be a separate, transferable monetary asset, voluntarily accepted by a third party other than the issuer.
Payments settled in fiat currency following e-money redemption do not meet this definition, as they lack transferability.
The EBA further stressed the importance of redemption rights, which must be outlined in contractual agreements between issuers and both holders and accepting payees, as per Article 11 of the EMD2.
Going forward, firms must distinguish e-money from other payment forms to uphold its regulatory classification and avoid legal risks.
PSPs facilitating e-money transactions must also align their services with this ruling.
EMIs prohibited from applying negative interest rates
The EBA also confirmed that electronic money institutions (EMIs) are not permitted to apply negative interest rates to clients’ electronic money holdings.
In response to a question from a competent authority that has remained anonymous, the EBA explained that, under Article 12 of the EMD2, interest or other benefits linked to the duration of electronic money holdings are prohibited.
This aligns with electronic money’s unique regulatory status, as distinct from deposits or repayable funds.
The ruling means that EMIs cannot shift costs resulting from negative interest rates on their own accounts to electronic money holders, and EMIs currently doing this will need to explore alternative cost-recovery methods.
This could include adjusting service fees or operational efficiencies that do not contradict expectations set out by the EMD2.
Flexibility for framework contracts
In another response, the EBA clarified that PSPs are not required to provide immediate transaction details to payees if a framework contract specifies periodic reporting.
According to Article 58 of PSD2, PSPs can agree to deliver transaction information at least once a month in a manner that allows the payee to store and reproduce it unchanged.
Recital 57 of PSD2 supports this flexibility, permitting framework contracts to define reporting frequency and methods.
In its response, the EBA provided some operational flexibility to PSPs, as allowing transaction details to be delivered periodically on a monthly basis means that they can streamline reporting processes and reduce administrative burdens that could be associated with immediate notifiers.
However, this also comes with some risks because consumers may be less attentive to their spending and fail to notice unauthorised payments in cases of theft or fraud.
Consumers may remain unaware of fraudulent activity until the next report arrives, allowing fraudsters to exploit the account without immediate intervention, especially if consumers rely solely on monthly summaries.
