E-money and payment institution difference. Key aspects of e-wallet and payment account.
Under the PSD2, there are two main types of payment service providers that can offer a payment account service:
Frankly, there is a lot of ambiguity whilst assessing the difference between and functionality of both. This article will analyse e-money and payment institution difference (and their payment accounts difference) to bring more clarity on the subject at hand. It will be done by describing the differences between these two concepts as outlined in the following relevant legislation of the UK and EU:
- Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (hereinafter “PSD”);
- The Payment Services Regulations of 19th July 2017 No. 752 (hereinafter “PSR”);
- Directive 2009/110/EC of the European Parliament and of the Council of 16th September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (hereinafter “EMD”);
- The Electronic Money Regulations of 19th January 2011 No. 99 (hereinafter “EMR”).
PSRs’ view on E-money and payment institution difference.
According to the PSR Article 2 “electronic money” has the meaning given in Article 2(2) of the Electronic Money Directive, whereas “the Electronic Money Directive” means Directive 2009/110/EC of the European Parliament and of the Council of 16th September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC(c).” Hence, in order to define the electronic money in lines with the regulations applicable in the UK, we need to refer to the EMD.
Article 2(1) of EMD states that “‘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 point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer”. Per this definition, electronic money is electronic and magnetic storage of monetary value which is accepted by a natural or legal person who is not the electronic money issuer itself.
The key part in the definition of electronic money concerns three points:
1. electronically or magnetically stored monetary value,
2. represented by a claim,
3. acceptability of electronic money by third unrelated parties.
This means that in order for something to be deemed electronic money it must be a claim which holds monetary value backed by a fiat currency and acceptable by a third party, other than the electronic money issuer and it must be stored either electronically or magnetically.
As indicated by article 1.5 of the EMD, the same exception – which describes the negative scope of the Directive – has been included in identical wording in article 3(l) of the PSD. Consequently, payments relating to the purchase of digital services such as ring tones, music or digital newspapers which are sent to a mobile phone (or some other digital device e.g. a computer) are not covered by the new EMD and the PSD when the telecom provider does not act as a mere intermediary.
The scope of the EMD is further clarified by the exception included in article 1.4, which provides that it shall not apply to the situation set out in article 3(k) of the Payment Services Directive.
Accordingly, the new Directive “shall not apply to services based on instruments that can be used to acquire goods or services only in the premises used by the issuer or under a commercial agreement with the issuer, either within a limited network of service providers or for a limited range of goods or services”.
The EMD gives a hint as to the number of undertakings required (“a limited network”), and the required relationship between the issuer and such undertakings (“under the commercial agreement”) to fall outside its scope.
E-money definition UK
EMD in the UK was implemented by EMR which in article 2 defines “electronic money” as “[…] electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which—
(a) is issued on receipt of funds for the purpose of making payment transactions;
(b) is accepted by a person other than the electronic money issuer; and
(c) is not excluded by regulation 3;”
This definition is the same as one present in the EMD, apart from subparagraph (c) which refers to the exemptions of regulation 3. However, those exemptions are the same as are already outlined above and are included in articles 1.4-1.5 of EMD. In the scope of the EMR word “regulation” refers to “article” and article 3 states that electronic money does not include:
“(a) monetary value stored on instruments that can be used to acquire goods or services only—
(i) in or on the electronic money issuer’s premises; or
(ii) under a commercial agreement with the electronic money issuer, either within a limited network of service providers or for a limited range of goods or services;
(b) monetary value that is used to make payment transactions executed by means of any telecommunication, digital or IT device, where the goods or services purchased are delivered to and are to be used through a telecommunication, digital or IT device, provided that the telecommunication, digital or IT operator does not act only as an intermediary between the payment service user and the supplier of the goods and services.”
The article 3 is not relevant in the scope of our consideration as it (a) concerns electronic money issuers and (b) concerns telecommunication, digital or IT devices. Hence, in order to continue the assessment, there is a prerequisite to refer to the original definition as is present in the EMD article 2(1) and EMR article 2 (a)-(b) listing three conditions for the product to be deemed electronic money.
When looking at first three conditions, as already outlined above, it becomes apparent that they concern specific units which are issued by the electronic money provider as a claim backed by fiat currency, which is recorded on a product electronically or magnetically and accepted by third parties other than the electronic money issuer itself.
Hence, this definition requires a product on which electronic money can be held. Without it, electronic money cannot be used as there would not be any storage for the issued units.
For something to be deemed electronic money, it must have wider acceptance than within one marketplace where people will have a possibility to purchase goods/services for the units of electronic money issued. As well, it required backing by fiat currency which means that fiat does not enter the system itself, but rather other specific units of electronic money are issued for it.
The European Commission stated in their “FAQ on Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC” that product holding electronic money was not defined intentionally as not to create exhaustive list of products falling under this definition. It rather stated that each product should be assessed on a one-off basis by its functionality.
The European Central Bank has provided some clarifications in regard to the type of product holding electronic money in their statistics. According to ECB, the product holding the electronic money can be both hardware-based where the purchasing power resides in a personal physical device, such as a chip card, with hardware-based security features.
In such case, monetary values are typically transferred by means of device readers that do not need real-time network connectivity to a remote server. Secondly, it can be software-based products that employ specialised software that functions on common personal devices such as personal computers or tablets. In such a case, to enable the transfer of monetary value, the personal device typically needs to establish an online connection with a remote server that controls the use of the purchasing power.
Schemes mixing both hardware and software-based features also exist. Such products are not in itself defined in any legislation but are widely known as either an electronic wallet or electronic purse. Per these considerations, it becomes apparent that the electronic wallet/purse can be both physical and software-based.
Now assessment will shift towards the analysis of payment account in order to outline its difference from electronic wallet/purse. In order to define the payment account, there is a prerequisite to refer to PSD regulating the functioning of payment services in the European Union.
Article 4(12) of PSD states that “payment account’ means an account held in the name of one or more payment service users which is used for the execution of payment transactions.” Per this definition, the payment account means any account which allows the execution of payment transactions on behalf of the authorised users.
Furthermore, in Case C-191/17, dealing with the differences between savings and payment accounts, CJEU has stated that “Article 1(6) of the Payment Accounts Directive [(which has the same definition of payment accounts as PSD)], which provides that it applies to payment accounts through which consumers are able at least to place funds in a payment account, withdraw cash from a payment account, and execute and receive payment transactions, including credit transfers, to and from a third party.”
Per the definition of PSD and interpretation of CJEU, the distinctness of a payment account lies in the ability to perform daily payment transactions to and from such an account. Differently, from electronic wallet/purse, it does not hold a claim entitling an authorised person to ask for the execution of transactions involving units of electronic money representing monetary value, rather it requires the direct transfer of funds.
Therefore, whilst looking at the two concepts it is important to distinguish that electronic wallet/purse similarly to savings accounts (as were discussed in the case C-191/17) holds a claim of the authorised user but does not instantly allow for the execution of transactions, rather the monetary value which is held separately is used for this sake. Whereas, in case of payment accounts the transactions are executed directly with the funds placed therein.