The Payment Services Directive (2015/2366 or “PSD2”) which came into effect in January 2018, arguably did not stand the test of time – loose drafting and the rapid evolution of the banking and payments world, have rendered PSD2 an outdated, overly-complex and unwieldy legislative instrument which no longer meets the needs of today’s digital economy. PSD2, originally designed to facilitate digital payments in a secure and efficient manner, is now failing to provide the same level of security and is unable to keep up with the fast-changing needs of digital payments. From a national perspective the provisions of PSD2 are transposed into Maltese law by virtue of the Financial Institutions Act (C. 376 of the laws of Malta or “FIA”).
In its Opinion (EBA/Op/2022/06 or the “Opinion”), the EBA has identified several issues stemming from divergent approaches taken by competent authorities across Member States in relation to the different types of services that PSPs (“PSPs”) may be authorised to carry out under PSD2. Different approaches have led to a fragmented market as well as a prevalence of regulatory arbitrage. To ensure a consistent approach across the bloc, and to avoid forum shopping to the effect that applicants choose their home Member State on the basis of a more favourable regulatory treatment the Opinion establishes a re-imagining of the regulation of payments.
Foreshadowing PSD3, the Opinion also sets out numerous changes and recommendations to the regulatory framework – some of the salient provisions are examined below.
The distinction between an electronic money account and a payment account
By way of background, an electronic money institution (or “EMI”), authorised under the FIA would be permitted to issue and redeem electronic money in addition to providing the payment services outlined in the Second Schedule to the FIA. ‘Electronic money’ represents redeemable digital monetary value (fiat) issued on receipt of funds to make payment transactions, and which is accepted by a person other than the issuer.
In terms of PSD 2, an EMI account is a form of a ‘payment account’ which refers to an account held in the name of a client, for the execution of payment transactions. An unofficial notion had developed across the industry (not borne out by regulatory or legislative guidance) that in payment accounts, funds are only made available for a pre-defined transaction, whereas electronic money is available for the purpose of undefined future transactions. Clients which make use of an EMI account can store a balance, much like they would use a wallet. A payment account would only contain the necessary funds to make a specific pre-defined payment transaction. In other words, payment institutions cannot hold funds on a payment account without a completed payment order. In fact, Article 18(2) (PSD2) provides that where payment institutions engage in the provision of one or more payment services, they may hold only payment accounts which are used exclusively for payment transactions.
However, despite the clear limitation imposed by Article 18(2), the EBA in a 2021 Q&A (ID 2018_4221) stated:
A payment institution may hold clients’ funds on payment accounts for the purpose of providing payment services, including the execution of not yet specified future payment transactions, in accordance with the framework contract for setting up the referred payment account.
This answer now poses difficulty in distinguishing between payment accounts and EMI accounts as they are very similar, if not identical, in nature since they have the same elements and serve the same purpose. It also outlined that there is no difference between the process of crediting money to a payment account and issuing electronic money. In fact, the Opinion proposes merging the two terms in PSD3.
On the basis that currently there is a regulatory limbo, wherein the distinction between a full PSD2 licence and an EMI licence is very narrow, if not completely inexistent, it would appear that a PSP may do away with an e-money licence and merely obtain a PSP licence, if it can argue that it only holds payment accounts. However, since there are convergent approaches across the EU in relation to the regulatory treatment of EMI/PSP accounts, and therefore (until this matter is hopefully resolved through PSDIII) there is still a minimal (but tangible) risk that payment institution (unlike an EMI) passporting its services in another Member State would have its services recharacterized to electronic money services.
Delineation between credit transfer and money remittance
Money remittance under PSD2 refers to the service where a payer gives (usually) cash to a PSP, who in turn “remits the corresponding amount to a payee (or to another PSP acting on behalf of the payee)”. PSD2 also defines the service of execution of payment transactions, including transfers of funds on a payment account with the user’s PSP or with another PSP.
One may note that there is an overlap between the two services, particularly because of the word “including” underlined above, which implies that a payment transaction without a payment account may also qualify under both services. The EBA has proposed that PSD2 be amended to clarify that having a payment account opened by an institution in the name of the payment service user is a prerequisite for executing payment transactions.
Legal Certainty
Legal certainty in the payment regulatory space is vital for ensuring the continuity and development of the European payments industry. It is essential that the building blocks of any legislative instrument, namely the definitions contained therein are clearly delineated in order to ensure legal certainty. Moreover, the substantive regulations must also be robust enough to keep up with the constantly evolving payments market. Establishing clear and unambiguous definitions and forward-looking regulations is instrumental not only for industry efficiency but also to achieve the regulatory aims underpinning financial services legislation generally, namely consumer protection and market harmonisation to not only facilitate payment transactions in the European market but also to foster cross-border cooperation to encourage the development of innovative payment solutions.
This article was first published in the Malta Independent on 2nd March 2023.