Time To Come Together? Why Merging EMD/PSD Makes Sense

September 15, 2022
A senior official at the European Banking Authority (EBA) has explained why the regulator backs bringing E-money and Payment Services Directives (EMD/PSD) together in Europe, as panellists at a VIXIO webinar discuss what a future PSD3 could look like.

A senior official at the European Banking Authority (EBA) has explained why the regulator backs bringing E-money and Payment Services Directives (EMD/PSD) together in Europe, as panellists at a VIXIO webinar discuss what a future PSD3 could look like.

During the summer, the EBA endorsed the idea of merging PSD2 and the second Electronic Money Directive (EMD2) in the Opinion that it submitted to the European Commission.

This was after the commission first hinted at bringing the two regulations together in its 2020 Retail Payments Strategy.

“We expressed strong support for doing a merger because it would be an opportunity to resolve a significant number of challenges that we think the industry faces and that we as supervisor authorities face,” said Dirk Haubrich, the EBA’s payments chief.

Haubrich was speaking at VIXIO’s webinar, How To Prepare For PSD3, and outlined that the EBA’s feedback had suggested that such a move would end regulatory arbitrage while also ensuring a level playing field and greater clarity.

“In delineating between the two legal frameworks, it will also allow for further harmonisation, simplification and a more consistent application of the legal requirements for payment institutions and electronic money institutions,” commented Haubrich.

Haubrich highlighted that the EBA has seen issues when dealing with the two regulations — for example, the ability to distinguish between a payment account and an e-money account.

“We see very creative business models of financial players that are trying to play a game in order to avoid one or the other,” he said.

The delineation between payment services and electronic money services is also very difficult, he said.

For example, in the EBA’s Opinion, the authority recommended that the commission apply identical legal requirements for payments institutions (PIs) and electronic money institutions (EMIs).

In particular, this is in relation to the authorisation process and the requirements on safeguarding, initial capital and own funds.

Not everyone, inevitably, is convinced by these proposals.

For example, VIXIO has previously spoken with the Electronic Money Association (EMA), which represents a variety of firms including Airbnb, Uber, and Google’s payments wing.

The EMA has said that a merger wouldn’t help payments firms.

“We think there’s a distinction to be made”, a spokesperson for EMA said, arguing that products were best left in their respective legal frameworks and that trying to combine them was like “trying to combine apple and pears”.

It “extends the remit of PSD2 beyond payment services, into product regulation”, which the EMA was not in favour of.

However, during the webinar, Haubrich insisted that the recommendation does not mean that the two will come together completely.

“I need to be clear though, that the merger does not automatically mean that all requirements in the directives will apply equally to all types of institutions,” he said, adding that already under PSD2 that is not so.

For example, certain things are already “carved out” from the PSD2, such as rules that apply to credit institutions that do not apply to other licensed institutions.

“A directive can separate things out and define nuances anyway,” he said. “The two separate frameworks sometimes create more confusion than adding value.”

Acknowledging industry concerns, Haubrich played down the prospect of a major overhaul.

“Some of the concerns I've heard from the industry, primarily in the electronic money sector, that this will mean overburdening the EMIs, is not necessarily the case. It depends on the details of the PSD3.”

EU/UK Divergence On The Horizon?

As the EU ponders this potential merger, panellists also discussed what this could mean for the UK.

“The UK has already gone a different route to the EU on this topic,” noted John Burns, managing director of payment services at Compliancy, who was speaking alongside Haubrich at the webinar.

For example, the EBA has an answer that says payment institutions issuing payment accounts can hold funds on the payment accounts which are not allocated for future-dated payment transactions.

“The FCA takes an entirely different view,” he said. “As far as they’re concerned, if you’re a payments institution offering payment accounts, you can only hold funds in there if they are allocated to specific future-dated transactions.”

This means that a lot of firms in the UK, particularly FX firms who want to hold customer funds, are therefore applying for e-money authorisation.

“The treatment of e-money and payment firms in this respect is likely to be an area where the UK’s approach ends up differing from that of the EU, Burns, a former UK financial regulator himself, said.

“One thing that I am not sure has been picked up in the EBA’s analysis of it is the definition of e-money, specifically being something that is issued on receipt of funds,” he said, linking to the e-money/structural money split referred to by Haubrich.

E-money, he said, is defined as being accepted by a person other than the issuer.

“The analysis in the UK is, if you’re doing a transfer from someone’s bank account to an e-money account, that is not acceptance of the e-money by someone other than the issuer, it’s redemption of e-money to put it into the banking system,” he said, referring to “innovative setups” that Haubrich had described.

Burns anticipated that unless the FCA changes their mind on this, which they are showing no signs of doing, from the UK perspective, the differentiation is here to stay.

Yet, the UK’s Financial Services and Markets Bill does suggest merging the two into one set. “That will need careful consideration and it will be interesting to see where the UK diverges with the EU and PSD3.”

For example, there are capital requirements differences, he said.

“If someone is able to show that their average end of day e-money issue is less than €5m, they could have billions going through each day, and still only have a maximum capital requirement of €100,000 as long as the average end of day balance over the preceding six months is less than €5m.”

Burns explained that this means that there's a discrepancy there, in that a firm can have massive amounts of transactions with a very small capital requirement, which in fact is smaller than a payment account authorisation requirement of €125,000.

“This is a sort of oddity that has appeared in this, and will need to be addressed at both sides,” he said, discussing the FCA and EU’s approaches. “It's a difficult one and it will be interesting to see how both sides deal with it in the end.”

Did you miss VIXIO’s webinar on what to expect in PSD3? You’ll be able to stream it on our website in the coming days. In addition, VIXIO’s editorial team will be covering what panellists had to say about a single Application Programme Interface (API) in tomorrow’s newsletter.

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