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The Court of Justice of the European Union (CJEU) last week ruled on a case between the Bank of Lithuania and a payment institution, with the outcome being that payment institutions are able to hold customer funds much longer than previously established.
A ruling made in favour of Lithuanian payment institution ABC Projektai looks set to reset licensing requirements for EU member states, which has often divided national regulators in the EU.
The Bank of Lithuania had revoked the licence of ABC Projektai in 2020, as in the central bank’s view, it was issuing e-money without being authorised as an e-money institution.
The central bank, which oversees one of the EU’s largest concentrations of payment and e-money firms, said that ABC Projektai had retained customers’ funds for longer than the time required for the execution of payment transactions.
Outgoing payments, meanwhile, did not take place for several days or, in some cases, months and, in the authority’s view, this amounted to the issuance of e-money, which was disputed by ABC Projektai.
The CJEU said in its final ruling that no provision of the revised Payment Services Directive (PSD2) “precludes funds from being credited in advance to a payment account for the purpose of executing future payment orders, including payment orders not yet specified, or lays down any time limit within which, after such an account has been credited with a certain amount, that amount must be used for the purposes of a payment transaction”.
“It is basically blurring the difference between payment service providers and e-money institutions,” said Kenan Haskovic, a payments compliance professional. “I am curious to see how the regulators will interpret this ruling, but it could remove the need for e-money institutions to a certain level.”
What changes?
From the legal perspective, “this is noteworthy”, according to Emanuel Van Praag, counsel at Kennedy Van der Laan law firm. “There has been a huge debate over what payments and e-money institutions are allowed to and what would require a licence as a credit institution,” he said.
Van Praag pointed out that, as it stands, firms have to operate as a bank to be able to hold funds for longer and therefore easily facilitate the functioning of ordinary payment accounts. “Many other parties want to do the same thing but don't want to be a bank due to the compliance burden.”
“E-money — as is generally believed by legal scholars and regulators — can be held for longer and therefore goes a long way towards all banking functions, but has needed to be defined as its own system with platforms like PayPal,” he pointed out.
According to van Praag, the CJEU’s decision means that that reasoning is now “totally gone”.
“The CJEU has accepted that payment institutions can nevertheless hold money for longer, and facilitate and operate accounts similar to an e-money institution and bank."
Szymon Zych, a partner at DLK Legal, said that it can be expected that the judgment will have an impact on the supervisory practice of member states that have so far considered that payment institutions are not allowed to hold a balance of funds for a user.
“In this respect, one can point to the Bank of Lithuania, which has explicitly ruled out this possibility claiming that a payment institution, unlike electronic money institution, is not allowed to keep users’ funds for an indefinite period of time.”
However, the Krakow-based lawyer said that this stance is not replicated throughout the EU, seeing as the Polish Financial Supervision Authority has not questioned the right of a payment institution to operate so-called e-wallets, where the storage of users' funds for an indefinite period of time takes place, and has not seen this as issuing electronic money.
“If, in fact, the judgment causes a change in the supervisory approach of some countries, a payment institution licence may turn out to be an attractive alternative to electronic money institution therein due to lower capital requirements,” he said.
Van Praag, who also advises the European Commission services on financial data and is a law professor of fintech and law with Erasmus University School of law, also pointed out that operating as an e-money firm comes with the need to have relatively higher capital requirements, whereas payments institutions have a lighter regime.
“This will be positive for financial institutions, as they can do more with fewer obligations,” he suggested. “Now that payment institutions can in essence do the same as e-money institutions, obtaining an e-money licence is not necessary anymore due to this outcome."
Van Praag pointed out that what a payment institution can do now is say that they are open for business in providing more products that can hold funds longer.
“What we could see if e-money institutions go back to their regulators and say that they are going to operate as a payment institution,” he suggested. “Regulators would not be able to reject this, as they would need to listen to CJEU law."
To be e-money or not to be
"The judgment is also a part of a discussion as regards the nature of electronic money and the differences between e-money and scriptural money," said Zych. "The question is whether a potential modification of the supervisory approach in line with the CJEU judgment could consistently tighten the understanding of definition criteria for electronic money in such countries."
If so, this could even lead to a model similar to the Polish one, where only one electronic money institution is authorised, compared with 43 payment institutions.
Zych also suggested that the judgment may have consequences in terms of reporting obligations, methods of calculating the own funds of electronic money institutions, which depends on whether a given payment service is related to the issuance of electronic money or not, or with regard to the possibility of applying the customer due diligence measures exemption for e-money products.
The ruling meanwhile also comes at an important time for payments regulation.
This is because the EU is currently negotiating updates to the PSD2, with a Payment Services Regulation (PSR) and a third directive (PSD3).
The European Commission’s proposal already suggested merging the Electronic Money Directive and the PSD. However, different services are still defined.
"The package unfortunately does not resolve the fundamental doubts about the nature of electronic money," said Zych.
This is because although the package ends the distinction between an electronic money institution licence and a payment institution licence, it still differentiates between payment services and electronic money services.
"I am afraid that the CJEU judgment did not provide a clear enough differentiating criterion between those two to expect that it could end completely the supervisory divergence in this area."
According to van Praag, that distinction “isn’t really justified, given the risk payment institutions now can carry as well”.
What we could now see is the decision reflected in the negotiations, with triologues expected to start after the EU’s elections in June.
"The question now is what legislators need to do and should do,” said van Praag. “In the EU, parliament can decide not to act on this court decision based on PSD2 which than will be carried over into PSD3 but if they don't like it, they can reaffirm the view held by the Bank of Lithuania in the new texts."
