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Monday, 29 January 2018

Review of E-money Regulation: More Regulation For Retailers?

The European Commission has just reported on the status of EU e-money regulation, raising the prospect of more regulation for retailers who offer 'gift cards' and other loyalty schemes.

Electronic money, or "e-money" is basically electronically stored value that can be used to make payments to people other than the issuer, while "limited network" or 'closed-loop' stored value can only be used to pay the issuer (as with a loyalty points scheme, fuel card or gift card, for example).

E-money is not to be confused with "crypto-currencies" like Bitcoin, Ether etc. which are not considered "funds" for regulatory purposes because they are not 'fiat' currencies that are backed by governments as a matter of law ('legal tender').

The issuance of e-money was first regulated distinctly from banking by the EU in 2000, under the E-money Directive (EMD) which was replaced by a new directive (EMD2) from 2011. By then the activities of electronic money issuers/institutions (EMIs) had also become regulated under the Payment Services Directive (PSD) from 2009, which was replaced in mid-January 2018 by regulations implementing PSD2.


These directives are supposed to be applied the same way by all member states in the European Economic Area (28 EU member states plus Iceland, Liechtenstein and Norway). But the Commission has found that EMIs "engage in "forum shopping", choosing to register in the Member States that provide the most beneficial legal frameworks from their viewpoint." EMIs can then use a "passport" process to offer their services in the remaining EEA member states.

For example, the Annex to the report shows that the UK is home to 87 of the EU's 172 E-money institutions (EMIs), with Malta being the next most popular base (13) then Cyprus (10). This also means that the 87 EMIs based in the UK will need a new base in one of the remaining EEA member states from which to passport their EEA-facing services after Brexit.

The UK is also home to 19 of the EU's 74 small EMIs (who transact less than €3 million a month over a 12 month period), with the Netherlands home to 23 and Latvia 12. But small EMIs have no passport rights, anyway, so do not raise the same concerns.

Benefits of EMD2

The benefits of EMD2 were cited as more clarity and lower capital requirements than EMD1; on top of the fact that payment services regulated under PSD2 and e-money services can be provided under the EMD2 authorisation.

The Commission did not find any consumer harm associated with using e-money or redeeming it for cash (withdrawing the funds equivalent to their e-money balance to another payment account or via an ATM).

Compliance costs are said to range from 1% to 5% of overall costs (€25,000 to €500,000) offset to some degree by the reduction in capital requirements from €1 million under EMD1 to €350,000 for full EMIs under EMD2 (compared to €125,000 for full payment institutions under PSD2).


Negative factors associated with EMD2 were found to be mainly the inconsistencies in how each EEA member state views the role of an EMI's "agent" (which the EMI has to register) and "distributor" (of which an EMI just has to notify its regulator); and "limited network" or 'closed-loop' stored value, which is unregulated. The inconsistencies make it more difficult to predict the regulatory status and related requirements from case to case and state to state.

EMIs also complain that banks won't allow them to open bank accounts as easily as other types of firms, although the Commission hopes this will be improved by various access provisions in PSD2, and moves by central banks to allow EMIs (and PIs) access central bank accounts and settlement systems.

Next steps

The Commission will explore ways to improve consistency in interpreting the role of agents, distributors and "limited networks". In addition, it will consider making large 'limited network'  providers subject to some (unspecified) aspects of EMD2, even though they must already register with the local regulator when their network transaction volume exceeds €1 million over a 12 month period).