.svg)
The member state’s delegation to the European Council recommends a greater degree of flexibility in the rules covering safeguarding and non-bank payment service providers’ (PSPs) use of client funds to ensure liquidity.
In documents seen by Vixio, the delegation has cautioned that “the efficient participation of non-bank PSPs in payment systems may be not possible” under current amendments to the Settlement Finality Directive (SFD).
One of the big wins for the fintech industry with the Instant Payments Regulation (IPR) was the decision to amend the SFD, yet there are still concerns about how the direct access to payment systems for e-money and payment institutions will work.
The documents, which have been circulated to the European Council, warn that “the new setup has some practical implications for non-banks’ ability to ensure liquidity in payment systems and at the same time fulfil the safeguarding requirements”.
This has resulted in “funds held by non-bank PSPs in the accounts of payment systems” being at risk of having an “uncertain status”.
Addressing liquidity challenges
The Lithuanian proposals highlight the liquidity challenges non-bank PSPs face in payment systems.
For example, to participate in payment systems, non-bank PSPs must open accounts where both incoming and outgoing client payments are processed. To maintain smooth, especially instant, payment processing, they rely on client funds for liquidity.
However, using client funds may conflict with safeguarding requirements, which mandate that client funds be held separately and protected.
Current safeguarding rules require client funds to be transferred to safeguarding accounts by the end of the next day, and the delegation warns that, in the experience of the Bank of Lithuania, which runs the fintech-friendly CENTROlink payments platform, this process can be insufficient to support smooth payment flows.
It is not viable for most PSPs to use their own funds, as their reserves typically fall short of payment volumes, and separating them from client funds adds complexity.
If client funds in payment system accounts are not safeguarded, they could be at risk of legal freezes or enforcement actions, the delegation explains, stating that this scenario underscores the need for policy adjustments to allow PSPs greater liquidity flexibility while maintaining fund protection.
“As a result of these circumstances, the efficient participation of non-bank PSPs in payment systems may be not possible, or proper compliance with supervisory requirements might be not ensured,” the delegation says, adding that it also “might have a negative effect on nonbank PSPs’ competitiveness which was the goal of the amendments to the SFD”.
In the upcoming PSR negotiations, the Lithuanian delegation says, the Council “should seek to ensure the possibility for non-bank PSPs to smoothly use access to payment systems and use clients’ funds for processing payments in payment systems”.
In its proposals, the delegation suggests introducing flexibility in rules requiring non-bank PSPs to keep client funds separate from their own funds.
The current rules mandate that client and PSP funds cannot be commingled, but the proposal would allow these funds to be held together temporarily in payment system accounts to help non-bank PSPs manage liquidity more effectively.
Under the exception proposed by the Lithuanian delegation, the European Banking Authority would define how and when commingling can occur, as well as the supervision requirements to ensure non-bank PSPs still meet safeguarding standards, in an approach that aims to prevent liquidity issues for PSPs while still protecting client funds.
The delegation also suggests that member states should ensure these funds remain protected from claims by third-party creditors.
