How is E-money Defined in EU law?
The definition of e-money is in the second E-money Directive (EMD2), which is implemented by statute or regulations by each member state (and the UK prior to Brexit) and is intertwined with definitions in the second Payment Services Directive (PSD2) which governs payment services more generally, including those that involve e-money as the form of 'funds':
“electronic money” means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in [the second Payment Services Directive (PSD2)], and which is accepted by a natural or legal person other than the electronic money issuer;
‘payment transaction’ means an act, initiated by the payer or on that payer’s behalf or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee.
'payee' means a natural or legal person who is the intended recipient of funds which have been the subject of a payment transaction";
‘payment order’ means an instruction by a payer or payee to its payment service provider requesting the execution of a payment transaction;
‘acquiring of payment transactions’ means a payment service provided by a payment service provider contracting with a payee to accept and process payment transactions, which results in a transfer of funds to the payee;
In other words, e-money is monetary value issued for the purpose of enabling the e-money holder to pay an intended third party, such as a merchant, as the payee.
There's some protection for the e-money account holder, in terms of a requirement to immediately redeem any unspent e-money and repay the funds on demand; and safeguard the corresponding amount of cash until the e-money is spent, for example.
Of course, there has to be a mechanism for getting the stored value to the payee. It's possible, in a wallet-to-wallet e-money system that the payee will be another e-money account holder with the same issuer, in which case, the e-money issuer will simply debit the payer's account and credit the payee's account. But that use-case is very difficult to scale (trust me), so e-money issuers also issue debit cards that draw on the e-money balance to enable it to be spent with any merchant who accepts that brand of card (so-called 'prepaid cards'). Most commonly, these cards are issued under membership of the major card schemes. A merchant payee will have contracted with another payment service provider (the 'acquirer', in the case of a card transaction) to do what's necessary at its end to process payment transactions involving the payer's means of payment - the prepaid card that draws on the payer's e-money balance - and transfer the resulting funds to the merchant's own account.
I mean, it wouldn't be great, would it, if the protection of immediate redemption of unspent value could be lost because the value is technically available via a card and doesn't pop out as the actual original e-money at the other end... (in fact, that 'e-money' status that is lost immediately within the issuer's own systems as the first step in the payment flow) so, as the FCA explained in its guidance under UK E-money Regulations implementing EMD2 pre-Brexit:
The fact that the device on which monetary value is stored is made available, for example, on a plastic card that also functions as a debit or credit card or is a mobile phone does not stop that monetary value from being electronic money. [FCA perimeter guidance ("PERG") 3A.3, Q11]
The real significance of requiring that e-money must be 'accepted by persons other than the issuer' is to avoid regulating 'basic gift cards', for example, which are issued and redeemed by a merchant to enable its customers to purchase only the goods or services that it offers. The FCA also explains this by saying that:
"...these basic gift cards do not initiate payment orders; payment for the goods or services is made by the customer to the retailer of the goods in advance, when the card is purchased from the retailer." [PERG 15.5 Q40]
The stored value in some electronic travellers cheques is also not considered e-money (PERG 3A.3, Q13).
And there's an express exemption from the definition of e-money and payment services for payment instruments that are only accepted within 'limited networks' of third party payees, which we don't need to cover here.
The ABC case
ABC was a payment institution authorised in Lithuania. As a payment institution, ABC was not authorised to issue e-money, but it could provide the following payment services: execute payment transactions, including: transfers of funds on a payment account with the user’s payment service provider or with another payment service provider; direct debits, including one-off direct debits, and payment transactions through a payment card or a similar device; and/or credit transfers, including standing orders. It could also offer money remittance.
Under (Lithuania's implementation of) PSD2, any funds that ABC received from customers had to be the subject of a specific payment order, which had to be executed within specific time limits; and those funds could not be held longer than necessary to process the transaction. Under guidance of the Lithuanian regulator (approved by the European Commission), this meant that the funds held in ABC’s payment accounts without a payment order would be regarded as 'deposits', 'other repayable funds' or 'electronic money'. If it wished to issue e-money, ABC would have needed to be authorised as an e-money institution, necessitating higher initial and ongoing capital requirements based on the amount of e-money issued and outstanding. If it wished to accept deposits, ABC would have needed to be authorised as a credit institution with much higher capital requirements still.
As it turned out, ABC had been allowing customers to deposit funds without a payment order and to hold balances in its payment accounts for long periods, so the Lithuanian regulator revoked ABC's authorisation as a payment institution, for going beyond the scope of that authorisation by issuing e-money.
The question for the ECJ was whether ABC's activities actually amounted to issuing e-money, which the ECJ said it did not, based on findings that:
- 'direct debits', for example, contemplate a payment institution receiving funds "in advance" of receiving a payment order (missing the obvious point that the direct debit instruction involves a (future dated) payment order under Article 78).
- the rules on safeguarding funds held beyond a business day suggest that PSD2 contemplated there being no corresponding payment order in place (whereas the need for safeguarding arises because PSD2 contemplates both future dated payment orders and longer time limits for processing some payment transactions, as well as the fact that some may fail, as well as to preserve funds in the event of issuer insolvency or malfeasance).
- for funds received by the institution to constitute e-money (my emphasis):
"47. the issuance of electronic money [must be] distinct from the mere entry in a payment account in that, inter alia, before being used for the purposes of such a payment, such money must be electronically ‘stored’, which implies that it has been issued beforehand, that is to say, converted into a monetary asset separate from the funds received, and that its use as a means of payment is accepted by a natural or legal person other than the electronic money issuer...""48. ...in order for an activity to come under the issuance of ‘electronic money’, within the meaning of Article 2(2) of that directive, it is at the very least necessary that there be a contractual agreement between the user and the electronic money issuer under which those parties expressly agree that that issuer will issue a separate monetary asset up to the monetary value of the funds paid by the user. However, transferring and holding funds on a payment account without immediately mandating payment transactions up to the value of those funds does not mean that the user of the payment service has given his, her or its express or tacit consent to the issuance of electronic money.""49. It is not apparent from the documents before the Court that ABC Projektai converted some of the funds which it received into electronically, including magnetically, stored money which could be used by a network of customers who would accept it voluntarily. On the contrary, all the indications are that the funds in question were deposited in payment accounts and could be used solely to execute payment orders from the users concerned."
In other words, the court held that:
- (in paragraph 47) as a matter of legal interpretation, the use of the stored value had to be accepted as a means of payment by third parties (consistent with the FCA's view, for example) [- not that the 'actual stored value had to end up with the payee'];
- in this case, there was no explicit agreement with users that ABC was issuing stored value on the basis that it could be used to pay third parties (in paragraph 48) - [whereas the fact that the value in the payment account could be used for payment transactions means it could and would indeed be accepted by third parties];
- (in paragraph 49) in this case, there was no evidence that any particular 'network' of third parties had accepted that they could be paid using the 'stored money' in ABC's payment accounts. The funds could simply be used to 'execute payment orders' (i.e. to request the execution of a payment transaction, according to the definition) - [again, missing the point that this implicitly means that third parties were indeed accepting this];
- By receiving and holding funds that were not the subject of a payment order but could simply be used for payment transactions at a later date, ABC was not issuing e-money, but merely providing a payment service under PSD2. Therefore, it did not need authorisation as an e-money institution under EMD2.
In other words, I interpret the court as dealing with the interpretation of the final part of the e-money definition in paragraph 47; and referring to the lack of evidence in paragraphs 48 and 49. I do not read paragraph 49 to colour or restate what was already plainly stated in paragraph 47.
However, from an evidentiary (and logical) standpoint, the court simply ignored the notion there would eventually be an intended recipient of the funds (payee) who must thereby have accepted the means of payment afforded to the payer by ABC.
Mind blown!
Fortunately, it should be possible to restrict any application of the ABC case to its fairly narrow facts.
EBA Guidance on the definition of e-money in the context of prepaid cards
While the ABC case was ongoing, there was also a pending request to the EBA for regulatory guidance from a bank (credit institution) that was planning to issue e-money that customers could spend on prepaid debit cards issued under the major card scheme rules. The EBA accepted that the presentation of such a card as a means of payment at a merchant checkout triggers a series of payment transactions, including the debit of the customer/payer's account associated with the card, and a series of debt-creditor obligations that are net-settled from the payer's card issuer/account service provider, to the card scheme, to the card acquirer and ultimately to the merchant payee.
In other words, in the case of the major card transactions there is never a direct payment of funds from the cardholder's payment account to the merchant's payment account (often referred to as 'account-to-account' or 'A2A' payments).
The bank claimed that it's application to become an e-money institution [let's put aside why it applied] had been wrongly rejected because the local regulator interpreted the wording at the end of the definition of e-money “accepted by a natural or legal person other than the electronic money issuer” as requiring that a party other than the issuer must accept the electronic money as a means of payment by becoming a holder of the actual electronic money (meaning that the payee must also have an agreement directly with the same e-money issuer to accept that e-money as payment).
"The local regulator thus takes the view that there is no issuance of electronic money in a situation where no third party (payee) becomes the holder of the issued e-money (other than the EMI’s customer holding the e-money)."
In answering this question, the ECB cited the strange decision in ABC v Lietuvos as the basis for agreeing with the local regulator, meaning that prepaid card programs do not involve the issuance of e-money!
In light of the reasoning of the Court, the last condition of the definition of electronic money (acceptance by a natural or legal person other than the electronic money issuer) should be understood as entailing the transferability and voluntary acceptance of electronic money as a separate monetary asset, and not simply as the reception by the payee of funds resulting from redeemed e-money. The submitter states that the payees (merchants in this case) are paid in scriptural money. Therefore, in accordance with the Court’s ruling in case C 661/22 and the reasoning outlined above, there is no acceptance of electronic money by a party other than the issuer in the case in question.
This paragraph of the EBA guidance of course, misconstrues what the ECJ said in paragraph 47 of the ABC case, which was only that the stored value (in this case, any balance on the prepaid card) must have been "issued beforehand, that is to say, converted into a monetary asset separate from the funds received, and that its use as a means of payment is accepted by a natural or legal person other than the electronic money issuer...". In other words, applied to this case, the court would only have meant that the use of the value on the prepaid card must be accepted as a means of payment, not that the e-money itself must be accepted (consistent with FCA guidance cited above).
That paragraph of the EBA guidance also ignores the fact that the merchant who accepts a card payment is the 'payee' because that merchant is the "intended recipient of funds which have been the subject of [the multiple] payment transaction[s]" triggered by the presentation of the card, as contemplated by recital 68 of PSD2:
The use of a card or card-based payment instrument for making a payment often triggers the generation of a message confirming availability of funds and two resulting payment transactions. The first transaction takes place between the [payer's card] issuer and the merchant’s [payee's] account servicing payment service provider [to pay for the goods/services], while the second, usually a direct debit, takes place between the payer’s account servicing payment service provider and the issuer [to pay the payer/cardholder's bill, though they may be the same account for a debit card]. Both transactions should be treated in the same way as any other equivalent transactions.
The next paragraph of the EBA guidance then continues as if the payee is somehow required to have a customer agreement with the e-money issuer, when that would only be the case where the payee already held such an account and the transaction occurred within the e-money issuer's system (as a wallet-to-wallet or account-to-account payment):
Furthermore, with regard to the question of whether the payees must be in a contractual agreement with the electronic money issuer, recital 18 of the EMD2 lays out redeemability as an intrinsic feature of electronic money, by stating that “electronic money needs to be redeemable to preserve the confidence of the electronic money holder”. In that respect, Article 11(3) of the EMD2 establishes that the conditions of redemption should be stated in the contract between the electronic money issuer and the electronic money holder. Article 11(7) further establishes that “redemption rights of a person, other than a consumer, who accepts electronic money shall be subject to the contractual agreement between the electronic money issuer and that person”. Consequently, the acceptance of electronic money whereby the person who accepts electronic money becomes a holder of electronic money, should therefore be understood to require a contractual arrangement with the electronic money issuer.
The [prepaid card] scenario described in the question therefore fails to meet all of the criteria of the definition of electronic money.
