The European Commission’s Q&A 2022_6336 deals with scheme branded prepaid cards and specifically whether they fall within the definition of e-money. Prior to the Q&A such prepaid cards were accepted as e-money across the EU.
The guidance that it provides: narrows down what products can be electronic money, restricting them to three-party systems. This is where both payer and payee contract directly with a payment service provider (“PSP”). It effectively prohibits any four-party, interoperable, e-money systems, whether national or cross border. Four-party systems are those where the payer and payee can contract with different PSPs, as would be the case for example with interbank payment schemes such as SEPA or card schemes such as Mastercard or Visa. Four-party systems enable different issuers to interoperate with each other, where the e-money issued by one is accepted by merchants of another.
The Q&A makes it a requirement for both payers and payees to have accounts with the same e-money issuer; it does not allow for products where payers and payees (merchants) have relationships with different financial institutions, as would be the case in any four-party scheme. Most prepaid (e-money) cards that are in issue today would no longer be able to continue, and no interoperability of e-money could be contemplated.
Application to existing products
The Commission’s Q&A is being applied retrospectively to all existing e-money products that are based on multi-issuer arrangements. This includes national and cross border schemes, whether targeted at consumers or businesses and whether used by NGOs or governmental organisations. Most are in use in the EU on a daily basis.
Why? And how did this happen?
The Commission has taken a relatively recent CJEU case (C 661/22 (ABC Projektai UAB v Lietuvos bankas)) and extended its findings. The case said that e-money is made up of electronic value that is distinct and resides on the system of the issuer. The Commission took this and went further to suggest that this value must now physically flow from payer to payee. The requirement for the transfer or for the flow of e-money value was introduced in the Q&A and is not found in either primary legislation (the second e-money Directive (“EMD2”)) or in the case itself. It is an interpretation of the European Commission.
How does the transfer of value impact interoperability?
Legislation (EMD2) requires as part of the definition of e-money that e-money value is accepted by third parties as a means of payment. It stops there, it is silent as to whether once accepted, the electronic value must be physically ‘transferred’ to the third party or not, or if so, how this could take place. It simply provides that e-money should be accepted by the payee.
This is important, because in centralised e-money systems, e-money can only exist as electronic value on the transaction platform of the issuer. Therefore, whenever this value needs to be transferred to a third party, then the third party must also have an account with that issuer. Value can only be transferred within that platform. This means that under this requirement, e-money can only exist as a three-party system, and interoperable four-party systems are no longer possible.
The legislative definition in EMD2, on the other hand, which only requires acceptance of electronic value is significantly broader. Acceptance can be achieved without physical transfer of value needing to take place. Acceptance is a legal concept, and a payee can accept e-money value, legally, without the electronic value being transferred to them. This makes it possible for four-party e-money systems to operate and this has been the case since 2001.
A merchant or payee in such a system can accept the e-money but ask for the e-money to be redeemed prior to the settlement payment being made.
As an example, think of any purchase that is denominated in a given currency, say EURO, and the parties agree that the price is denominated in that currency. The payee however asks for the settlement to be made in a different currency, say USD. The payee stipulates and accepts the EURO amount in fulfilment of the debt obligation but receives USD as the currency of preference. Acceptance is in EURO, but the transfer and settlement is in USD.
Acceptance allows the payer to have an account with one issuer, while the payee has an account with another interoperable payment service provider, all participating within a common scheme.
But how can the merchant have a contract with the issuer if it doesn’t also have an account with it?
The contractual relationship between the issuer and merchant is created through scheme rules (multilateral contracts), and this can provide for acceptance as well as redemption rights. This is how all payment schemes operate and create contractual relationships between the various participants in that scheme.
Acceptance is technologically neutral
When a merchant accepts a means of payment, they are saying that it will extinguish the debt that the buyer has with them. Transfer and settlement are distinct processes that come after acceptance, and the Directive is silent on this subject.
This silence allows EMD2 to be technologically neutral, creating the basis for innovation; for three-party, four-party and even DLT systems. This intention is set out at Recitals 7 & 8 of EMD2:
“7. It is appropriate to introduce a clear definition of electronic money in order to make it technically neutral. That definition should cover all situations where the payment service provider issues a pre-paid stored value in exchange for funds, which can be used for payment purposes because it is accepted by third persons as a payment.
8. …That definition [of electronic money] should be wide enough to avoid hampering technological innovation and to cover not only all the electronic money products available today in the market but also those products which could be developed in the future.”
The EMD2 definition, referring to acceptance, makes it possible to construct various interoperable e-money systems, where payees agree to accept e-money from different issuers without needing to hold accounts with each individual issuer. The settlement that follows acceptance can be undertaken using a convenient payment method or indeed a currency of choice.
It is also worth noting the explicit intention of the legislator according to Recital 8 to include all e-money products that were in place in 2009, which included prepaid cards, as well as future products. In contrast, most current and potential products however, under the Q&A’s interpretation, will be excluded.
Current status
The Q&A has the status of guidance but is subject to an EBA convergence process where member state competent authorities are expected to converge on a single interpretation based on its findings. This means that the restrictive interpretation of e-money is being adopted by an increasing number of member state competent authorities and its impact is being felt already.
Further discussion and tracking
We will follow up with further discussions on the impact of this Q&A guidance. We will in the coming weeks and months consider the impact on different stakeholders, on investment, innovation, regulatory certainty as well as on the issuers themselves. The narrowing of an intentionally broad legislative definition by way of Q&A guidance, also merits some consideration.