Electronic payments and electronic money

In January the European Commission launched a consultation for a secure and transparent integrated payments market throughout the EU, entitled "Towards an integrated European market for card, internet and mobile payments".

With a deadline for submissions of 11 April, it seems an appropriate time for a summary of the green paper's purposes, and a re-cap of the regulatory regime for e-money which was implemented across Europe last spring.

The green paper

The green paper identifies three types of electronic retail payments:

• card – e.g. paying for goods or services using debit/credit cards, either in physical shops or online;
• internet – e.g. money transfers between users of person to person ("P2P") transfer services, or exchange of virtual currencies;
• mobile – e.g. payments made by using a mobile phone, premium SMS-based payments, or payments at the point of sale, using technologies such as near field communication.

These three categories are not mutually exclusive and the boundary between each of them can be blurred. For example, an internet payment made via a smartphone and using a payment card would fall into each of them.

The purpose of the consultation is to collect information from all interested stakeholders about the current market situation for card, internet and mobile payments in Europe, and the ways in which market integration can be improved and encouraged. In support of the Single Euro Payments Area initiative of the European banking industry, the Commission wants a true single market, with the option for consumers to use the same payment means domestically, abroad and generally across borders, with technical standardisation of payments processes, inter-operability of payment instruments, and payment security.

Some would argue that these processes of integration should be left to the forces of the marketplace (or the application of competition law), but the Commission seems to be positing that there are too many of what it describes as "structural anti-competitive obstacles and problems", requiring "fast and comprehensive solutions".

It is certainly true that the European cards payments environment is largely fragmented along national borders, with only two major players (Visa and Mastercard), and a business model fundamentally skewed by the inter-bank fees agreed between payment service providers which are commonly known as "multilateral interchange fees" or, more simply, the "interchange". Every party involved in a credit card transaction takes a cut of the interchange: the merchant bank, the issuing bank, and the credit card company. Issuing banks favour payment solutions with the highest interchange, and encourage consumers to use these payment cards; and merchants are reluctant to refuse them. The interchange therefore, is not transparent, and is a considerable problem (though the consultation doesn't propose an obvious solution).

The green paper is less persuasive in convincing of its concerns that the present fragmentation of the market means that many internet and mobile payment solutions are being restricted to their respective domestic markets. On the contrary, there appear to be a wide range of companies trying to position themselves for the expected explosion in growth. Google Wallet has been developed by Google in collaboration with Mastercard, Verifone, Citi, Sprint and First Data. Visa is moving into P2P transfer services, while Paypal is moving into physical retail. (Apple's plans are currently unknown.)

In summary the green paper invites comment on a wide array of potentially relevant areas of policy, which is perhaps an inescapable reflection of the novelty of policy in this area. Card, internet and mobile payments are a relatively new concept for everybody, policy makers included! Following 11 April, all contributions will be published on the Commission's Payment Services website, there will be a public hearing with stakeholders, and next steps will be announced by the second quarter of 2012.

The Electronic Money Regulations 2011

The Second Electronic Money Directive, which aims to encourage the growth of the electronic money market, was implemented in the UK on 1 May 2011 through the Electronic Money Regulations 2011 ("EMRs").

Regulation 2 defines “e-money” as monetary value represented by a claim on the issuer that is:

• stored electronically, including magnetically;
• issued on receipt of funds for the purpose of making payment transactions;
• accepted as a means of payment by persons other than the issuer; and
• is not excluded by reg 3 of the EMRs.

There are two express exclusions in reg 3.

The first covers monetary value stored on instruments that may be used to purchase goods and services only in or on the issuer’s premises, or under a commercial agreement with the issuer within a limited network of service providers or for a limited range of goods or services (such as store cards, transport cards or meal vouchers).  

The second covers monetary value used to make payment transactions executed by any telecommunication, digital or IT device where the goods or services are delivered to and used through such a device, but only where the operator of the device does not only act as an intermediary between the user and the supplier (helpful examples being ringtones and apps). 

Electronic money institutions 

Electronic money issuers are defined in the EMRs as "electronic money institutions" ("EMIs"), and are split into "authorised EMIS" and "small EMIs". 

Authorised EMIs are subject to the full FSA e-money regulatory regime, including capital, safeguarding and conduct of business requirements. The application fee to become an authorised EMI is £5,000.  

In comparison, becoming a "small EMI" is cheaper and more straightforward, but small EMIs are subject to various restrictions. For example small EMIs cannot have outstanding e-money exceeding €5 million, and have no "passporting" rights to issue, distribute or redeem e-money or provide payment services in EEA states outwith the UK. 

Credit institutions, credit unions and municipal banks do not require authorisation or registration under the EMRs, but if they propose to issue e-money they must have permission under the Financial Services and Markets Act 2000. (The theoretical difference between EMIs and banks is that e-money and deposit-taking entail different activities, and therefore different risks from a prudential perspective.) 

Capital requirements 

Initial capital for authorised EMIs is €350,000 and the ongoing capital requirement is 2% of the average daily outstanding e-money over six months (subject to never falling below the initial capital threshold).  

Small EMIs whose business activities generate (or are projected to generate) average outstanding e-money of €500,000 or more must hold an amount of initial and ongoing capital at least equal to 2% of their average outstanding e-money (therefore at least €10,000). There is no initial capital requirement for small EMIs whose business activities generate or are projected to generate average outstanding e-money of less than €500,000.  

EMIs can provide payments services that are unrelated to the issuing of e-money, and engage in other business activities, but they must notify the FSA of the types of payment services they wish to provide. Small EMIs can only provide unrelated payment services if the average monthly total of payment transactions does not exceed €3m, on a rolling 12-month basis.  

Examples of unrelated payment services include:

• granting of credit;
• provision of payment services permitted in the Payment Services Regulations 2009, such as: debit and credit card payments; direct debits and credits; standing orders; issuing/acquiring payment instruments; money transfers.

Safeguarding and segregation 

Under the EMRs, EMIs must safeguard and segregate funds received from customers for e-money, so that if there is an insolvency event the e-money issued will be protected from other creditors' claims, and repaid to customers.

For example, if an account that an EMI holds with a credit institution is used not only for holding funds received in exchange for e-money, but also for funds received for other activities, this is likely to corrupt the segregation. 

Financial regulations and anti-money laundering 

Anti money-laundering may be an unfamiliar concept for some electronic money entrants, but they will be expected to establish and maintain controls to comply with the Money Laundering Regulations 2007, the Transfer of Funds (Information on the Payer) Regulations 2007, the Counter Terrorism Act 2008 and the UK’s financial sanctions regime. 

Additional legislation 

The Financial Ombudsman Service has noted a steady stream of complaints in relation to electronic money because consumers do not always understand the currency.  

The EMRs do contain some provisions protecting consumers. All electronic money issuers must redeem the full value of any unused e-money if the consumer asks for it, and cannot place a time limit on that redemption. Electronic money issuers may charge a fee for giving back the money in certain circumstances, but only if it is clear in the contract and the fee is proportionate and only covers the actual costs incurred by the issuer.  

Nevertheless, for consumer clarity, and in order to stay on the right side of the law, EMIs should ensure that they comply not just with the EMRs, but with a variety of additional legislation, including:  

• The Consumer Credit Act 1974
• The Unfair Terms in Consumer Contracts Regulations 1999
• The Consumer Protection from Unfair Trading Regulations 2008
• Regulation 924/2009 on cross-border payments
• Regulation 1781/2006 on information on the payer accompanying transfers of funds
• The Distance Marketing Regulations
• The E-Commerce Regulations