New Kids on the Block

New Kids on the Block

An introduction to payment institutions

30 September 09

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Payment institutions in the context of the PSD and other financial legislation

Payment Institutions (PIs) are defined by the PSD Article 4 (4) as follows: "'payment institution' means a legal person that has been granted authorisation in accordance with Article 10 to provide and execute payment services throughout the Community". Whilst the definition alone does not provide sufficient background information on what such institutions actually are, the PSD goes on to describe such institutions in some detail as part of Title II of the original Directive text, which defines a comprehensive supervisory regime for payment institutions.

In order to put PIs into the general context of the PSD - the latter clearly aimed at regulating the provision of payment services and not payment providers per se - the global requirement defined by the Financial Action Task Force (FATF) Special Recommendation VI on "Alternative Remittance" also needs to be considered. This recommendation states that: "Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions." Recital 15 of the PSD text makes a clear reference to this requirement.

Furthermore, the existence of PIs is also in line with one of the 's other regulatory objectives - namely that of enhancing competition in the payments industry, allowing for more consumer choice and the continued decrease in transaction pricing for this client segment via increased supply of harmonised payment services across the Single Market.

The licensing regime

Any person or business can decide to apply for a licence under the PSD which permits the provision of payment services as a payment institution. While natural persons are limited to provide payment services at the domestic level, legal persons (businesses) can obtain a European passport and thus offer payment services across the Single Market. A number of existing businesses will have to be regulated as a PI due to their present core business activity (for example, money remitters). In addition, the PSD allows for the possibility to introduce payment services as an additional service to an existing core business allowing them to become a "hybrid payment institution". Potential candidate examples include mobile phone companies and supermarkets.

The payment services license, as defined in the supervisory regime for PIs, is to be issued by the appointed "competent authority" of each Member State if a number of criteria are fulfilled by the applicant. These criteria include the provision of a minimum of initial capital (ranging from 20.000 to 125.000 EUR depending on which services described in the Annex the PI intends to provide) as well as to ensure ongoing capital is provided according to several calculation methods set out in Article 8. The principle of correlation between size of payment service operations / volumes and ongoing capital requirements is being followed here.

Finally, when it comes to the type of actor that can or should apply for a PI license, the PSD, in line with the aforementioned Special Recommendation VI of the FATF, requires legal as well as natural persons to get authorised or at least registered with the relevant competent authority.

The supervisory standards

At a general level, PIs are not subject to the same supervisory and regulatory requirements as credit institutions or E-money institutions (EMIs). Therefore the PSD Title II defines a separate supervisory regime for these new entities. The supervisory standards applicable to PIs reflect the fact that deposit taking by PIs is clearly prohibited; as is the issuance of E-money (see Recital 10). PIs are, however, subject to Anti-Money-Laundering legislation in the same way as banks and EMIs.

Payment activities possibly to be performed by payment institutions

According to Article 16 of the PSD, PIs are permitted to execute the following payment activities as listed in the Annex:

  1. Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account.
  2. Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account.
  3. Execution of payment transactions, including transfers of funds on a payment account with the user's payment service provider or with another payment service provider:
    • execution of direct debits, including one-off direct debits,
    • execution of payment transactions through a payment card or a similar device,
    • execution of credit transfers, including standing orders.
  4. Execution of payment transactions where the funds are covered by a credit line for a payment service user:
    • execution of direct debits, including one-off direct debits,
    • execution of payment transactions through a payment card or a similar device,
    • execution of credit transfers, including standing orders.
  5. Issuing and/or acquiring of payment instruments.
  6. Money remittance.
  7. Execution of payment transactions where the consent of the payer to execute a payment transaction is given by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting only as an intermediary between the payment service user and the supplier of the goods and services.

Article 16 also entitles PIs to engage in the following activities:

a) The provision of operational and closely related ancillary services such as ensuring the execution of payment transactions, foreign exchange services, safekeeping activities, and the storage and processing of data;
b) The operation of payment systems, without prejudice to Article 28;
c) Business activities other than the provision of payment services, having regard to applicable Community and national law.

As part of the card-related payment services described in points 4, 5 and 7 in the Annex, the PSD allows PIs to grant credit for a maximum period of 12 months if this credit is closely linked to a payment service provided. In all cases, customer funds have to be segregated from the PI's own funds and cannot be used to grant credit to another user. In addition, it is clarified that the Consumer Credit Directive is not being overruled by PSD provisions in respect of PI's permission to grant credit.

Access to open payment systems

PIs have access to open payment systems - such as the Schemes, for example - on a non-discriminatory basis. Therefore, no banking licence requirement can be stipulated by those systems as a condition for participation in the system any longer. The as the Scheme Manager will shortly publish updated adherence documentation detailing the adherence process of non-banks including PIs that wish to apply for participation in the Schemes.

Ruth Wandhöfer chairs the PSD Expert Group and is a member of the Plenary.

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