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In a major shift for the EU’s financial sector, the European Central Bank (ECB) has introduced a harmonised policy allowing non-bank payment service providers to access central bank-operated payment systems, including TARGET.
The step is part of the flagship Instant Payments Regulation (IPR), which was implemented on April 8, 2024, and means that a unified policy for non-bank access is set to be rolled out across the EU as member states ready themselves for the regulation’s implementation.
The IPR includes amendments to the Settlement Finality Directive (SFD) and the revised Payment Services Directive (PSD2) that broaden the eligibility for participation in SFD-designated payment systems to include payment institutions (PIs) and electronic money institutions (EMIs).
These non-bank PSPs, defined via PSD2 and its counterpart regulation, the Electronic Money Directive, will be able to access central bank-operated systems for executing and settling payment transactions as part of the IPR.
The amendments to the SFD are intended to achieve a level playing field between bank and non-bank PSPs by ensuring that the latter can offer a full range of payment services without being dependent on banks.
They were pushed for primarily by the European Parliament’s negotiating team, as well as the European Commission, which had planned to enable access via revisions to the PSD2 anyway.
"This initiative will enhance the efficiency of the European retail payments market and support the uptake of instant payments across the euro area," the ECB said in its policy document.
Eurosystem's harmonised approach
The Eurosystem, which is managed by the ECB, now has a consistent approach to granting non-bank PSPs access to central bank-operated payment systems and accounts.
This had been anticipated by some in Brussels, particularly after member states including Latvia jumped ahead by announcing that they would grant access to non-bank PSPs.
The ECB’s policy aims to ensure uniformity across the euro area, preventing any potential discrimination based on geographical location.
The new policy will be incorporated into the TARGET Guideline, expected to take effect on April 9, 2025, pending the transposition of the SFD amendments by member states.
It emphasises a non-discriminatory, objective and risk-based assessment for granting access to payment systems.
"Access to central bank-operated payment systems can be granted to non-bank PSPs provided that all necessary risk-mitigation requirements are in place," the ECB said, underscoring the importance of maintaining financial stability and market integrity.
Safeguarding user funds
One notable aspect of the policy is the provision allowing non-bank PSPs to safeguard user funds in accounts held at central banks.
However, this is at the discretion of the central banks, and they are not obliged to provide such accounts.
This measure aims to mitigate the difficulties non-bank PSPs face in opening and maintaining accounts with commercial banks due to de-risking practices.
"The Eurosystem acknowledges the benefits of offering safeguarding at central banks, as it would be risk-free for non-bank PSPs and support the stability of these institutions," the policy document states.
However, it also raises concerns about the potential for creating "synthetic central bank digital currency [CBDC]" or "narrow bank" scenarios, which could mislead users as well as investors and destabilise the financial system.
“Both of these options could attract depositors looking for a safe haven, especially during periods of market uncertainty or volatility,” the ECB said.
Consequently, such a “synthetic CBDC” or “narrow bank” could in theory crowd out bank deposits, adversely affecting the intermediation role of banks and their lending activity to the economy, the ECB warns.
“It also blurs the distinction between central bank money and commercial bank money,” said the ECB. “Depositing customer funds at central banks could risk conflating e-money and other forms of money, including central bank money, in the minds of the public, thereby distorting perceptions of risk.”
Oversight and implementation
The ECB will monitor the implementation of the policy, ready to clarify and review the approach based on practical experience.
The policy is designed to align with existing Eurosystem strategies, ensuring that non-bank PSPs meet the same operational and technical requirements as credit institutions.
"Regular updates and immediate notifications in case of status changes are expected from non-bank PSPs to ensure compliance," the policy says, highlighting the dynamic nature of non-bank PSPs' business models.
