Evolving Landscape of Payment Services Regulation in Europe

Josef Bergt
2023

Introduction

In the dynamic and ever-evolving domain of financial services, the legislative framework governing payment services plays a pivotal role in shaping the operational landscape for financial institutions. This article delves into the nuances of the Directive (EU) 2015/2366 on payment services in the internal market (Payment Services Directive II; PSD2), while PSD3 and PSR (Payment Services Regulation) are on the horizon. The European Union Directive focuses on harmonization efforts within the EU to create a seamless and efficient market for payment services, while ensuring robust consumer protection and financial stability.

Historical Context and Legislative Evolution

The evolving legislative tapestry starting with PSD1, including the implementation of the Second Electronic Money Directive (Directive 2009/110/EC or EMD2), further refined the regulatory landscape, segregating electronic money business from traditional banking activities and integrating it into the payment services framework. reached a critical juncture with the advent of the Second Payment Services Directive (PSD2), which aimed to build upon the foundations laid by PSD1 and address the emerging challenges and opportunities in the digital payment ecosystem.

Core Provisions

At the heart of the PSD2 lies a comprehensive catalogue of payment services, encapsulating a wide array of activities ranging from traditional transactional services to novel digital payment solutions. The Directive meticulously delineates the scope and nature of these services, embodying the legislative intent to foster an inclusive and adaptable regulatory environment.

A critical aspect of the PSD2 is its treatment of payment service providers (PSPs), subjecting them to a robust regulatory framework that includes licensing requirements, operational guidelines, and consumer protection measures. This framework is designed to ensure the integrity and reliability of payment services, safeguarding the interests of all stakeholders involved in the financial transaction chain.

Implications and Challenges

The implementation of PSD2 presents a complex array of challenges and opportunities for financial institutions. The expansion of the scope of regulated services to include payment initiation and account information services, for instance, necessitates a reevaluation of existing business models and operational strategies. Furthermore, the Directive’s nuanced approach to exceptions and exemptions underscores the need for a deep understanding of its provisions to effectively navigate the regulatory landscape.

As the financial services sector continues to evolve in response to technological advancements and shifting market dynamics, the payment service regime stands as a testament to the proactive and forward-looking approach of Europe’s regulatory approach. 

Deposit or Withdrawal Business

In the realm of the payment services, the provision of services enabling cash deposits into, or withdrawals from, a payment account, as well as all operations necessary for the management of such an account, constitute the deposit or withdrawal business.

This area, integral to the functioning of the financial system, serves as a critical junction between physical cash and book money. It encompasses services that facilitate the conversion of cash to book money and vice versa. 

Payment Accounts

At the center of this discussion lies the concept of the payment account. A payment account is an account in the name of one or more payment service users, used for executing payment transactions. This definition is stipulated in Art. 4 No. 12 PSD2. A payment account is essentially a current account between the payment service provider and the user, reflecting the obligations and entitlements within their business relationship. It determines the user's claim against the provider in the context of payment transactions. The concept of a payment account is markedly distinct from conventional current accounts, especially those used as salary accounts. It's tailored to offer basic services in payment processing, with the directive intentionally limiting the account management scope of payment institutions.

These accounts represent more than just internal technicalities for payment service providers; they embody an obligation to pay the account holder or transfer funds to a third party, possibly involving another payment service provider.

The Scope and Implications of Payment Accounts

The definition of payment accounts extends to current accounts and credit card accounts maintained by banking institutions. However, it excludes savings accounts that are used in conjunction with a corresponding reference account, term deposit accounts, pure loan accounts, deposit-only accounts, and purely internal accounts used for technical, intermediary, or accounting purposes.

Furthermore, PSD2 does not consider accounts held by electronic money issuers, used solely for tracking the circulation of their issued electronic money, as payment accounts. However, if such accounts are accessible by third parties (e.g., PayPal), they may qualify as payment accounts.

Involvement with Payment Accounts

A payment service always relates to a payment account, but not necessarily one maintained by the institution potentially qualifying as a payment institution. This account could be held at another payment institution or a different type of payment service provider. Thus, any multilateral clearing system outside the established banking sector is based on payment accounts managed by the central clearinghouse.

Understanding the Transactional Dynamics

Every transaction involving the transfer of funds in a tripartite arrangement, going beyond mere financial transfer, establishes an current account, even in the absence of partial withdrawals or the agreement for such withdrawals.

The legal framework outlines three types of payment account-supported transactions:

• Depositing cash to create book money.
• Withdrawing cash by dissolving book money.
• Transferring book money.

Documentation and Legal Obligations

Payment transactions and the acquisition of money by the payment service user must be documented in a manner understandable to the user or a knowledgeable third party. This requirement ensures transparency and accountability in financial transactions, forming the basis of a legal relationship that qualifies as a payment account.

Variations in Deposit and Withdrawal Business

Cash Deposits into a Payment Account

The service facilitating cash deposits into a payment account presupposes the existence of a payment account, either as a current account at a credit institution or as a basic payment account with another payment service provider. Any assistance provided by the institution holding a payment account, enabling the account holder to credit a sum to this or another payment account, falls under this definition.

For instance, a supermarket that transfers change due to a customer at the checkout to a bank account specified by the customer performs a payment service in this regard.

An advanced version of this service is the acceptance of cash deposits at an independent ATM operator, where a user can deposit money into their account held at a licensed credit institution. 

Cash Withdrawals from a Payment Account

Cash withdrawals are the converse of cash deposits. This encompasses any action within a cash withdrawal process that would correspond to a cash deposit. This service requires the payment account to be held by a third party, either as a current account at a licensed credit institution or as a basic payment account at another payment service provider. Commonly, credit and debit cards, such as girocards, have cash withdrawal functions.

The independent operation of cash dispensing machines constitutes a withdrawal service, allowing customers to convert bank balances or overdraft facilities into cash.

Operations Required for Managing a Payment Account

A company that maintains a payment account for a customer falls under PSD2 from the moment of account setup. If planned future transactions involve deposits and withdrawals, it is advisable to obtain a license covering both services from the outset.

Payment Transaction Business

Payment transaction business involves executing payment transactions, including transferring money to a payment account with the payment service user's provider or another provider, through:

• Direct debit transactions, including one-time direct debits (Direct Debit Business).
• Payment transactions using a payment card or a similar payment instrument (Card Payment Business).
• Executing transfers, including standing orders (Transfer Business), all without granting credit.

Operational Role in Payment Transaction Business

To qualify as an operator in the payment transaction business an entity must execute the payment transaction rather than merely initiating it. Assisting in the transmission of a payment order or submitting a direct debit to the collecting agency, or even interposing one's own bank account, does not suffice unless the operator is involved in a multilateral clearing system. The operator must play an integral role in the payment process, which is indispensable for the transaction's completion.

Payment Card

A payment card refers to any instrument documenting a legal relationship that facilitates non-cash payments in business transactions, such as credit cards, debit cards, or similar instruments. Transactions not conducted with a card or card-specific data, such as transfers, checks, or electronic money, fall outside the definition of a payment card.

Payment Transaction Business with Credit Provision

These payment services refer to the execution of payment transactions but with the provision of credit. The concept of credit as mandated by PSD2 is broader than the civil law concept of loan. It encompasses not only various forms of credit regulated as banking business but also includes other types of credit, such as the acquisition of loan receivables. It generally covers any credit risk or counterparty default risk assumed by the service provider in the course of a payment service transaction.

Acquiring Business

These payment services involve the issuance of payment instruments or the acceptance and settlement of payment transactions (Acquiring Business).

There are two variants of this business:

• The issuance of payment instruments.
• The acceptance and settlement of payment transactions.

It also covers the receipt of payments for merchants not triggered by a payment instrument but, for example, by direct debit or transfer.

The first alternative regulates the issuance of payment instruments. The acceptance and settlement (‘Acquiring’) of payment transactions is the second case. This type of payment service enables payments with a payment card at supermarket or department store cash registers and online by collecting the payment amount for the merchant from the card issuer.

Acquiring Business is more specific compared to Payment Transaction Business and Financial Transfer Business. ‘Subacquiring’ or ‘Aggregating’ may also fall under this category. Otherwise, it may fall under the catch-all category of Financial Transfer Business."

The acceptance and settlement of payment transactions (Acquiring Business) refer to a payment service that effects the transfer of monetary amounts to the payee and involves the payment service provider entering into a contractual agreement with the payee for the acceptance and processing of payment transactions. The issuance of payment instruments comprises all services where a payment service provider enters into a contractual agreement with the payer to provide an instrument for initiating and processing payment transactions.

Acquiring Business refers to activities of companies that include concluding contracts with merchants accepting the card as a payment method, even if more than one acquiring institution or Acquirer is involved. These acquiring institutions or Acquirers are significant in terms of the market penetration and importance of the card in question, influencing customer acceptance and economic success. The classification as an Acquirer is independent of whether the Acquirer conducts the actual data processing themselves or outsources it to an Acquiring Processor.

Payment Instrument

• Definition: A payment instrument is any personalized tool or method agreed upon between the payment service user and provider for initiating a payment order. This includes traditional magnetic stripe or chip cards and extends to cutting-edge technologies in near-field and telecommunications. Future methods might involve biometric recognition like facial or voice recognition, fingerprints, or unique behavioral patterns.
• Examples: Common examples are telephone banking with a password, online banking with SMS-TAN or TAN-generator, card transactions using PIN or signature, and contactless or code-based payment methods, as long as they facilitate a payment order.
• Variants of Acquiring Business
  • First Variant: Issuance of Payment Instruments (Issuing)
    • This involves a central entity issuing a personalized instrument or method, agreeing on its use as a payment instrument with the payer. The entity could be any legal form, from individuals to corporations.
    • Entities distributing payment instruments on behalf of a payment institute fall under the agent category 
  • Second Variant: Acceptance and Settlement of Payment Transactions (Acquiring)
    • This extends beyond traditional models of card-based transaction processing to include other business models and multilateral arrangements. It's not limited to card transactions but also includes transfers, direct debits, and other transaction types.
    • Entities like merchants setting up card readers don't necessarily conduct acquiring business; they usually act as acceptants. Service providers dealing with transaction processing, especially involving customer funds, engage in acquiring business.
    • Service providers enabling online merchants to accept payments through various means, including cash services, also fall under this category if they handle the funds.

Financial Transfer Business

• Definition: This service involves accepting a payer's money without setting up a payment account in the payer's or payee's name, solely for transmitting a corresponding amount to a payee or another payment service provider acting on behalf of the payee.
• Range of Activities: Covers not only traditional money remittance agencies but also various activities in the area of book money transfers, where concrete money laundering risks may not be immediately apparent.
• Legal Interpretation: Financial transfers have evolved from simple cash transfers to encompass more complex transactions. These services are considered financial transfers if they don't fall under other payment services.

Notable Aspects of Financial Transfer Business

• Scope and Nature: Includes any payment transaction where no account-based relationship is established between the payment service provider and user. Methods of transferring funds (e.g., cash, transfer, check, electronic cash) are irrelevant to the classification.
• Inclusion and Exclusion Criteria: The service is not confined to cash deposits and can be conducted by various means. It does not include cash-on-delivery payments in mail order purchases or the collection of unpaid claims.
• Role of Service Providers: A service provider is considered a payer not only when transferring or handing over money but also when they can demand payment from the service provider and instruct payment to a third party.
• Legal Reductions and Exclusions: If a service provider's activities are limited to specific, non-money laundering-related services, such as certain types of representation, they might not fall under financial transfer business.
• Practical Applications: The provision also covers escrow services in online trading platforms, where the provider handles payment transactions between buyers and sellers. However, if a platform operator uses a licensed payment institution for transaction processing, they must ensure that each party in the transaction has a separate agreement with the payment institution.

Overall Context and Implications

• Regulatory Framework: These regulations aim to capture a wide array of financial transactions while ensuring compliance with anti-money laundering and counter-terrorism financing measures.
• Technological Adaptation: The regulations are designed to be adaptable, accommodating various forms of financial transactions, including emerging digital and online payment methods.
• Legal Interpretation and Compliance: Service providers must carefully assess their activities to determine whether they fall under the scope of financial transfer business and comply with the associated regulatory requirements.

Payment Initiation Services (PIS)

• Definition and Scope:
  • Payment Initiation Service is a service that initiates a payment order at the behest of the payment service user concerning a payment account held with another payment service provider.
  • Implementation: This new category, implemented by Article 4 Number 15 of the Second Payment Services Directive, captures services that facilitate the transfer of funds from one payment account to another. These services require access to the payer's account but never possess the payer's funds at any point in the payment chain.
  • Objective: The aim is to minimize the risk of unauthorized payment initiation while ensuring that established payment service providers, particularly licensed credit institutions, open up to competition from new market entrants in payment initiation services.
  • Distinguishing Features: Payment initiation services must transmit a payment order. Simply conveying an authorization request does not qualify as a payment initiation service. They are distinct from purely technical service providers, who only transmit authorization requests and data sets for payment settlement without accessing the payment account.

Account Information Services (AIS)

• Definition and Function:
  • Account Information Service is an online service providing consolidated information about one or more payment accounts of a payment service user with one or more other payment service providers.
  • Rationale and Regulation: Introduced with the Second Payment Services Directive and subject to a simplified supervisory regime, these services provide users with consolidated online data about their payment accounts accessible through online interfaces of the account-holding payment service provider. The service aims to protect customers' account-related data from unauthorized access.
  • Operational Details: These services are legitimate only if they involve accessing and retrieving account information. Merely providing processed account information does not constitute an account information service. The service must have the ability to access payment account data.
  • Exclusions from Scope: Services providing credit-related information or business analysis for companies are not covered hereunder. The provision applies only to services that access information of payment accounts and associated transactions.

Both Payment Initiation Services and Account Information Services represent significant advancements in digital payment and account management, fostering innovation while ensuring user security and compliance with regulatory standards. These services highlight the evolving nature of the financial sector, accommodating new technologies and consumer needs in the digital era.

Payment Services Exclusion Catalogue - General Overview & Key Excluded Services:

• Direct Payments
  • Transactions involving direct cash payments from the payer to the payee, without intermediary entities, are not considered payment services. 
• Trade Agents and Central Regulators (§ 2 Abs. 1 Nr. 2 ZAG):
  • Payment transactions involving a central regulator or trade agent authorized to negotiate or conclude the sale or purchase of goods or services solely on behalf of the payer or payee are not considered payment services. This provision is clarified in the Second Payment Services Directive, specifying that trade agents can only claim this exemption if they act solely on behalf of either the payer or the payee, not both.
  • The exemption applies if the agent has genuine negotiation authority or decision-making power in the underlying transaction. Merely forwarding pre-defined declarations of intent does not qualify.
• Other Exclusions:
  • Value Transport Companies/Service Providers: These entities are not covered under the payment services definition.
  • Reverse Cash Payments: Transactions involving reverse cash payments are excluded.
  • Currency Exchange Services: These services are not considered payment services.
  • Cheques, Bills of Exchange, Vouchers, and Postal Orders: Transactions involving these instruments are excluded from the definition of payment services.
  • Transactions within Payment and Securities Settlement Systems: Excludes transactions that occur within these systems.
  • Interest and Dividend Payments by Authorized Institutions or Investment Management Companies: These types of payments are also not considered payment services.

These exclusions are intended to ensure that the scope of regulated payment services is appropriately confined to relevant financial activities while preventing potential abuse of the legal framework. The exclusions are aimed at maintaining the integrity of the payment services sector, ensuring that only activities genuinely constituting payment services are subject to regulatory oversight. The detailed categorization reflects the legislative intent to precisely define the boundaries of payment service regulation, emphasizing clarity and specificity in the legal framework governing financial transactions.

Technical Infrastructure Services

• Services provided by technical service providers that contribute to the execution of payment services but never possess the funds to be transferred are not considered payment services. These include data processing, trust-building measures, privacy protection, message and entity authentication, providing IT and communication networks, and maintaining devices and facilities used for payment services, excluding payment initiation and account information services.
• Technical Services: The law excludes purely technical services from the definition of payment services. This includes data processing, privacy protection, and other IT-related services, as long as these do not cross into the realm of payment initiation or account information services.
• Non-Possession of Funds: A crucial condition for these services is that the providers must not at any time possess or have control over the funds being transferred. This is understood in terms of the ability to exercise control or give directions regarding the funds.
• Exclusion of Payment Initiation and Account Information Services: The services must not fall under the categories of payment initiation or account information services.

Additional Excluded Services:

• Payment Transactions in Electronic Communication Networks/Services:  Transactions that occur within electronic communication networks or services are also excluded from the definition of payment services.
• Payment Transactions Among Payment Service Providers: Payment transactions conducted between payment service providers themselves are not considered payment services under this law.
• Group/Internal Consortium Payment Transactions: Payment transactions within corporate groups or consortia, where the transactions are internal and do not involve external clients or customers, are excluded from being considered payment services.

These exclusions recognize the unique role of technical service providers in the payment ecosystem, acknowledging that while they contribute significantly to payment services, they do not engage in the financial aspects directly.

The regulations aim to clearly demarcate the boundaries of payment services, ensuring that entities that do not handle or control customer funds directly are not subject to the same regulatory requirements as traditional payment service providers.

The differentiation between technical and financial aspects of payment services reflects an understanding of the diverse roles and activities within the digital payments landscape, ensuring that each entity is regulated appropriately according to its specific functions and responsibilities.

Payment Systems in Limited Networks or with Very Limited Product Range 

PSD2 excludes certain payment services based on specific payment instruments, used only for limited purposes such as purchasing goods or services within a defined network or range, or for certain social or tax purposes.

The law exempts payment instruments used exclusively for purchasing in the issuer's premises, within a limited network of providers, or for a very limited range of goods or services. It also covers instruments used for specific social or tax purposes, following public law regulations.

Examples include customer cards, fuel cards, membership cards, public transport tickets, parking tickets, meal vouchers, or coupons for specific services.

Exclusions Not Applicable for General Use Instruments: The exemption does not apply if an instrument initially intended for a specific purpose evolves into a general-use instrument.

The European Banking Authority (EBA) guidelines provide clarity on applying these exemptions. Compliance with these guidelines is essential for service providers seeking to use these exemptions.

• Geographical Limitation:
  • Exemptions are applicable only for instruments intended for domestic use. This is inferred from the limited network requirement and aligns with EBA guidelines.
• Instrument Design Variations:
  • Payment instruments can vary in design, including physical cards or digital applications, and must adhere to technical or contractual limitations to ensure functional restrictions.
• Mutual Exclusivity of Exemptions:
  • An instrument can only use one of the exemptions at a time; these categories are mutually exclusive and cannot be combined.

Store Card or Limited Network

• Shop-in-Shop Solutions, Store Cards:
  • Payment instruments used exclusively for purchases in a store's physical premises, including shop-in-shop solutions, are covered by the exemption. This does not extend to online shops, focusing only on physical store locations.
• Limited Network:
  • Instruments used within a network of providers connected through a commercial agreement with a professional issuer, such as a store chain, are included by the exemption. A unified market appearance, often signified by a common payment brand, is crucial.

These exclusions acknowledge the existence of specialized payment instruments used in limited or specific contexts, ensuring they are not unnecessarily burdened by broader financial regulations.

By setting clear boundaries for what constitutes a limited network or range, the law aims to prevent misuse while allowing flexibility for technological innovations and various business models.

The guidelines by EBA play a crucial role in interpreting and applying these exemptions, ensuring consistency and clarity for service providers and regulators.

The distinction between instruments for general use and those for specific, limited purposes is significant in determining the applicability of these exemptions.

Payment Systems in Limited Networks - Specific Details and Applications

• Unified Brand Appearance:
  • The concept of a payment brand,  includes any name, term, sign, symbol, or combination thereof, used to identify under which card payment system transactions are executed.
  • This definition is broad, accommodating various forms of representation, and is technologically neutral, allowing future innovations.

The exemption applies to various settings, including university campuses, corporate facilities, hospitals, prisons, sports stadiums, shopping centers, and holiday resorts, where payment instruments are used within a defined scope.

• Geographical Scope:
  • For city-wide schemes like City-Cards, the exemption may apply to immediate surrounding postal code areas, with certain cities considered as a single area due to their postal code structures.
• Limited Network Application:
  • The payment instrument must be used within a limited network, excluding usage outside this network or mutual acceptance among different issuers.

Very Limited Range of Goods and Services

This category covers payment instruments restricted to purchasing a very limited range of goods or services. Examples include fuel cards for vehicle-related purchases, public transportation cards, fashion and beauty cards, fitness cards, streaming services, and specific types of vouchers.

Instruments for Social or Tax Purposes

This category includes instruments used for purchasing goods or services for specific social or tax purposes, as defined by public law. It covers cards for healthcare, employee benefits, food vouchers, transportation subsidies, and asylum seeker benefits.

Prepaid Cards / E-money Balances:

Monetary values stored on payment instruments are not considered e-money and are thus not subject to licensing requirements. The exemption typically applies if the stored value on each instrument does not exceed €250, or €250 in total transactions per month for reloadable instruments.

Context and Implications:

• These detailed provisions and exemptions reflect the nuanced approach of the law towards specialized payment instruments and systems. They balance regulatory oversight with flexibility for various business models and technological advancements.
• The broad and technologically neutral definitions allow for future innovations and adaptations in payment systems.
• The law differentiates between instruments based on their scope, purpose, and geographical use, ensuring that exemptions are applied appropriately and not exploited for circumventing broader financial regulations.
• Specific categories like social or tax purpose instruments demonstrate the law's consideration for instruments used in public welfare and employee benefit schemes.
• Overall, these provisions offer a framework for recognizing and regulating diverse payment instruments and systems, accommodating both traditional and emerging payment methods.

Source: BaFin Factsheet Information on the Payment Services Supervision Act (ZAG)

Executive Summary:

• PSD2 encompasses a broad range of payment services, highlighting the legislative intent to adapt to emerging trends in the financial sector.
• PSPs are subject to stringent regulatory requirements, emphasizing consumer protection and operational integrity.
• The integration of payment initiation and account information services under PSD2 presents new challenges and opportunities for financial institutions.
• Definitions and Classifications: Detailed definitions of payment instruments, services, and systems, considering technological advancements and varied business models.
• Exemptions and Limitations: Specific exemptions for certain types of payment services, including limited network payment systems and social or tax purpose instruments.
• Regulatory Compliance: Emphasis on adherence to regulatory requirements, with a focus on consumer protection and financial stability.
• Technological Neutrality: The law accommodates future technological innovations in payment services.
• Specific Provisions and Applications
  • Limited Networks and Product Range: Exemptions for payment systems in limited networks or with a limited range of products, considering both physical and digital realms.
  • Social or Tax Purpose Instruments: Special category for instruments used for specific social or tax purposes, reflecting the law's consideration for public welfare schemes.
  • Geographical Scope: Considerations for city-wide schemes and their geographical extensions.
• Technical and Functional Aspects
  • Payment Brands: Definition and role of payment brands in identifying card payment systems, accommodating various forms of representation.
  • Prepaid Cards and E-money Balances: Regulations regarding the monetary values stored on specific payment instruments, not classified as e-money under certain conditions.
• Overall Implications
  • Balanced Regulatory Approach: The law provides a nuanced framework for diverse payment systems, balancing oversight with business model flexibility.
  • Future-Ready Legislation: Provisions are designed to be technologically neutral, allowing for adaptation to future payment technologies and methods even with PSD3 and PSR being on the horizon.
  • Consumer and Market Protection: Emphasis on protecting consumer interests and maintaining market integrity through detailed regulatory provisions.