.svg)
The UK and Switzerland have opened up access to key payment systems to non-banks, but Brussels continues to drag its heels and time is beginning to run out for the current European Commission.
"The Settlement Finality Directive (SFD) is just not a top priority right now,” said Andrea De Matteis, founder of De Matteis Law. “The way that the EU works means that it ascertains a lot of work and has to put priorities on top, with the rest following.”
This issue, however, will be discussed in meetings that DG FISMA is having with the industry in the coming weeks via the Payment Systems Market Expert Group.
“So, access to payments systems is something that the commission has not forgotten about and is actively working on,” he suggested.
The SFD was first adopted in 1998. Fast forward 25 years and with next year’s election getting closer, the clock is ticking for it to be amended in the current parliament to open up direct access to payments and electronic money (e-money) institutions.
Many in the payments world are pushing more than ever for a change.
"The limited list of institutions in the SFD eligible for direct access to designated payment systems has become a relic of the past when you consider how many innovations there have been introduced in the EU by payment institutions and e-money institutions,” said Jakub Górka, a professor of finance at the University of Warsaw.
Górka, who serves on the European Commission’s Payment Systems Market Expert Group, explained to VIXIO that with regard to payments and e-money institutions, there are no justifications now to keep non-banks excluded from access to central banks' infrastructure and discriminated against unlike banks. “This is why there should be an amendment.”
"The entities who fell within the scope of SFD were banks and investment firms while payments firms remain excluded from the system,” said Emőke Péter, deputy head of public and regulatory affairs at Worldline.
At the time, these entities were not regulated but now they are, and have similar compliance requirements.
Some payments and e-money firms have expanded exponentially as well.
“These actors are of systemic importance and the idea is that there should be a level playing field in the market,” said Simone Giordano, a partner at De Matteis Law, who described the current system of indirect access for payment firms as being costly.
“Direct access, meanwhile, would be more convenient."
Non-bank payment services providers (PSPs) can be larger than some banks, agreed Górka. “Moreover, if we want instant payments to be the new normal, we need to take care of reachability and network effects.”
“The more PSPs offering instant payments, the higher their utility for payers and payees and the stronger network effects to the benefit of both sides of the market,” he suggested. “If the SFD isn't amended, there is a risk that instant payments won't be fully exploited.
Risky business?
There are, of course, risks in this area.
"Opening up access to non-bank players does not necessarily mean that these new players would decide to go via direct access,” said Giordano.
Even advocates such as Péter, who has coordinated letters to the European Commission on the topic, stressed that smaller players in the payments world would not necessarily need to transition from indirect access.
“Risks can exist, but as we have said, we are not asking to put all firms under the same hat,” said Péter.
Instead, the aim is for firms to have the possibility to choose direct access with those who are smaller players, and not mature enough, to be able to continue using indirect access.
“If access is optional, such institutions could also indirectly access through another payment or e-money institution, for example,” suggested Giordano. “This would improve competition and mean that costs could be lowered if there are more players acting as an intermediary."
Kjeld Herreman, a consultant at RedCompass Labs, meanwhile, explained that one of the main drivers for payments and e-money firms not being direct participants is the insolvency risk, which has materialised in the UK.
Although in favour of opening up access, Herreman did point out that banks are much less likely to go bankrupt due to their robust capital and liquidity constraints.
“However, in allowing these firms access, we could switch to a model where bankruptcy is no longer theoretical and instead becomes business as usual, and not a highly exceptional issue."
Protections can also be introduced. For example, non-bank PSPs applying for access to the UK payment system must be either an e-money or a payment institution that is authorised, as opposed to registered, in the UK by the Financial Conduct Authority (FCA).
In addition, the applicant will need to undergo an operational assessment by the FCA.
Meanwhile, firms need to have the operational capacity to participate in and efficiently settle transactions in real-time gross settlement (RTS), which involves having a connection to SWIFT.
"Sanctions and anti-money laundering screening is also an issue,” suggested Herreman. “Traditional banks have pretty robust systems in place.”
On the other hand, there have been questions surrounding the adequacy of payments and e-money firms, the Brussels-based consultant said. “For example, look at the FCA's concerns about how the sector is performing.”
“If firms go through commercial banks, regulators have some reassurances that are provided by the commercial/national banks’ financial crime prevention capabilities; reassurances that would fall away should they get direct access,” said Herreman.
De Matteis agreed, stating that although payments would benefit from better protections, the risks do exist.
“Another side to the coin is that if there is a market failure, such as an insolvency of a big payment institution that gives indirect access to other payments and e-money firms, then this could trigger wider systemic risks.”
Nevertheless, the benefits of opening up direct access, according to De Matteis, outweigh the disadvantages.
The risk has been subject to plenty of debate. For example, the G20 and Bank for International Settlements have both said that they would like to see improvements in direct access, noted Górka. “I can't see any major negatives. Rather, attention is drawn to the benefits."
The European Commission first made moves on this in 2021, when it released a consultation document on the matter.
However, since then, the issue has gone under the radar, even while major proposals such as improving instant payments have been published.
"It is obvious that there should be an amendment to SFD, and with the PSD2 change and the instant payments regulation, this is the right time,” said Górka.
There should be the same legal ground for all EU member states, he said. “Only Hungary and Lithuania have so far been brave enough to facilitate direct access to payment systems for non-bank PSPs without waiting for the SFD amendment."
Hungary allows non-bank PSPs to apply for a settlement account if they comply with the necessary requirements, while Lithuania has also gone beyond the norm in Europe by providing regulated companies with access to the SEPA network through CENTROlink.
"In an analysis of the EMI/PI market performed by RedCompass Labs in 2022, we saw that payments and e-money firms almost all go through CENTROlink and that the number actually going via commercial banks is negligible,” said Herreman.
CENTROlink pricing is incredibly competitive and has negligible fixed costs, making it very difficult for commercial banks to compete against the Bank of Lithuania, he pointed out.
Tick tock
"Time is critical! The worrying point is, everybody seems to agree, but no one seems to rush to do anything and the PSD2 revision is slipping away,” cautioned Péter.
“Originally, it was supposed to be launched in March, but now we expect it to be at the end of June,” she said. “There is a high risk it won’t be completed under the current mandate.”
She was particularly concerned that if it did not get completed in time for the current parliament, the focus could change with new political leadership.
“The process of SFD revision started two years ago yet neither the actual revision has happened nor the results have yet been published,” Péter complained.
PSD2 and the drive for instant payments are not the only issues to consider here either, she said.
"There is also an interplay between the SFD and the future digital euro,” she explained. “SEPA infrastructure is restricted to banks, and these very discussions will also determine whether e-money and payments firms will be able to carry out functions or not.”
It is hoped that these firms will play a role with the digital euro. “So, it is critical to discuss the SFD issues before the design of a digital euro is complete for e-money and payment institutions to play an active role."
"If the digital euro settlement is designated as a payment system under the SFD, access rules for payments and e-money institutions would be the same as they are for euro today,” said Péter.
However, with an amendment to SFD, e-money and payments firms would be able to play a much bigger role in the digital euro development, directly introducing payment orders into the settlement layer, and therefore directly distributing the digital euro and providing wallet management services.
“We are waiting for the draft digital euro legislation to understand which way decision-makers choose, but we trust they will choose the road of level playing field, fairness and competition,” she said.
“It would be a big mistake that in the era of AI, the metaverse, and blockchain when deciding the future of payments technology we rely on the provisions of a directive that was put in place even before the internet was widely available in Europe.”
When approached by VIXIO, a spokesperson for the European Commission said that the next step for the SFD will be the publishing of a report, while confirming they could not comment on the “substance” of the PSD2 review.
