The Directive on Payment Services
Anders Mølgaard Pedersen, Payment Systems
INTRODUCTION
In the spring of 2007, the EU Ministers of Economic Affairs and Finance, the Ecofin Council, and the European Parliament reached agreement on a Directive on Payment Services. The Directive lays down rules for consumers' and enterprises' payments by other instruments than cash or cheques, i.e. " electronic payments". In addition, the Directive regulates the access to provide payment services and introduces a new type of financial enterprise in EU legislation in the form of payment institutions.
Today, the EU member states' legislation on payment services varies in a number of respects.[1] The overall purpose of the Directive is to remove these differences and establish the basis for an internal market for payments. Furthermore, the Directive is the legal foundation for the future Single Euro Payments Area, SEPA.[2] However, the Directive goes beyond SEPA as it also covers other currencies than the euro, including Danish kroner.
The Directive must be transposed into national law in the EU by 1 November 2009. In Denmark, this will require a number of amendments to payments legislation. For instance, new legislation is required in areas that are currently unregulated, e.g. value dates in connection with payments.[3] In addition, the existing Danish legislation must be adapted to the Directive. The implementation of the Directive will entail a considerable workload for the Danish authorities.
The Directive will affect Danish consumers and enterprises in connection with both national and cross-border payments. The Directive will require amendment of virtually all of the banks' customer agreements that enable payments. In several cases customer rights will be enhanced by the legislative amendments. As an illustration, the required execution time for credit transfers between two EU member states will be reduced from the present six days to just one day by 2012.[4]
The Directive will also provide the framework for enhanced competition among providers of payment services by making it easier for consumers and enterprises to compare the services on offer and switch between providers. Furthermore, the Directive will improve the access conditions for payment service providers from other EU member states. Intensified competition is expected to entail lower costs for the users of payment services, i.e. consumers and enterprises.
In the preparatory work, key issues for Denmark were that a few existing Danish rules, which are regarded as important, could be maintained. Moreover, the Directive should not include rules, which were disproportionately costly to payment service providers in non-euro area member states. There was particular focus on the Directive's provisions related to charges, liability for fraudulent use of payment instruments and payment execution time. The final Directive is not deemed to pose any distinct problems for Denmark in these areas.
BACKGROUND
There has been an increased focus, in recent years, at European level on the importance of smooth execution of payments for consumers and enterprises. A key issue has been the costs of cross-border payments, which have been found to be very high by e.g. the European Commission in several studies.[5] In some cases, the high costs could be a barrier to trade in goods and services between EU member states.
Other studies have revealed great differences between the EU member states as regards the average costs of payment services for consumers and enterprises. These costs can vary by a factor of up to eight from one EU member state to the next, and in some member states they account for as much as 2-3 per cent of GDP.[6] Consequently, the single market for payments in the EU is still a long way off, and some member states have the potential for substantial savings to society.
The relevant political initiatives so far include a 1997 directive on cross-border credit transfers in the EU.[7] This directive aimed at ensuring that cross-border credit transfers could be made more rapidly, reliably and cheaply in the future. Also in 1997, the Commission issued a recommendation concerning transactions by electronic payment instruments.[8] The primary purpose was to ensure certain rights for the holders of these payment instruments.
In 2001 these legal acts were accompanied by a regulation on cross-border payments in euro.[9] The regulation prohibits the banks from imposing higher charges for cross-border payments in euro than for corresponding national payments. The aim was to reduce customers' costs for cross-border payments. According to a recent study, the regulation has had the desired effect since the costs have been significantly reduced.[10]
The 2001 regulation was one of the factors that induced European banks to initiate the establishment of SEPA, the future Single Euro Payments Area for consumers and enterprises. SEPA will introduce new payment instruments for payments in euro throughout Europe. Banks in Europe, including Danish banks, will gradually begin to offer the new instruments to their customers from the beginning of 2008.
A precondition for SEPA was harmonisation of the national payments legislation of the EU member states. In December 2005, the Commission tabled a proposal for a directive on payment services. The proposal was then considered by a Council working group and the Economic Committee of the European Parliament. In the spring of 2007, the Ecofin Council and the European Parliament reached agreement on the directive text. The Directive is expected to be formally adopted later this year and is being translated into the various EU languages.
CONTENTS
The Payments Services Directive is divided into titles on (I) scope, (II) access to execute payment services as a payment institution, (III) information requirements, (IV) general contractual conditions, i.e. the rights and obligations of payment service providers and customers, and (V) other provisions.[11]
(I) Scope
The Directive is based on the principle of total harmonisation, which means that the EU member states must implement it in its exact form. However, the Directive does in several areas allow some national discretion in the implementation, but only in connection with national payment service providers and their execution of payment services in their own country.
The Directive regulates payment services between payment service providers and their customers, and includes provisions on the right to provide payment services. Such providers are essentially limited to credit institutions and electronic money (e-money) institutions as defined in the e-money directive[12], and the new payment institutions. No other enterprises may provide payment services in the EU according to the Payment Services Directive.[13]
Box 1 outlines the Directive's definition of payment services. In addition, the Directive lists a number of activities that, for various reasons, are outside its scope. These include payments by cash or cheque, transport of money, exchange of currency in cash, collection of funds for charitable purposes and cash-back transactions[14]. Furthermore, the Directive does not cover payments between payment service providers, such as transactions in the money market.
PAYMENT SERVICES UNDER THE DIRECTIVE |
Box 1 |
A payment service is defined in the Annex to the Payment Services Directive as one of the following seven activities: 1. Cash deposits. A service enabling cash to be placed on a payment account as well as all the operations required for operating a payment account. The Directive defines a payment account as an account used for execution of payment transactions. 2. Cash withdrawals. A service as in item 1, but enabling cash withdrawals from a payment account. 3. Execution of transfer of funds. A service enabling transfer of funds from one payment account to another, e.g. credit transfers where the payment is initiated by the payer, card payments or direct debit, i.e. a payment initiated by the payee under a mandate from the payer. 4. Execution of transfer of funds under a credit line. A service as in item 3, but with a credit line in favour of the payer. An example is transfer of funds in connection with credit card payments. 5. Issuing and/or acquiring payment instruments. A transfer to the customer of an instrument that can be used for payment execution (issue), or a service enabling placement on a payment account of funds received by the payee after execution of a payment via a payment instrument (acquisition). 6. Money remittance. A service enabling transfer, initiated by the payer, of cash funds to the payee without a payment account being created. 7. Execution of mobile payments, Internet payments, etc. A service enabling transfer of funds from payer to payee on the basis of a payment order placed via telecommunications or IT equipment where the equipment provider acts only as payment intermediary. |
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A notable exception from the Directive is payments using instruments with relatively limited use. These are payment instruments that can only be used at the issuer's premises or a relatively limited number of outlets. This provision is taken to mean that many existing payment cards, e.g. petrol cards, charge cards for department stores and retail chains or payment cards issued by transport companies, are outside the scope of the Directive.
Another key exception is payments for digital services via mobile telephones or the Internet where the provider is not merely the payment intermediary. Examples of such payments are purchases of ringing tones or news updates delivered to a mobile telephone. A characteristic feature of this type of payment is that the provider not only executes the payment, but also adds value to the supplied service by making the underlying medium available, i.e. this is not a pure payment service.
The Directive only regulates payments for which the payment service providers of both the payer and the payee are located in the EU. In addition, the payment must be in euro or another EU currency, e.g. Danish kroner. The Directive's provisions are mandatory as regards payment services for consumers, but may be deviated from for other customers, i.e. enterprises and public authorities.[15]
(II) Payment institutions
As mentioned, the Directive introduces a new type of financial enterprise, payment institutions, in EU legislation. They will be allowed to provide all payment services described in Box 1, but are subject to more restrictions on their other activities than e.g. credit institutions. A payment institution is granted a " European passport" , which authorises it to perform cross-border activities in other EU member states subject to an authorisation issued by the supervisory authority of its home member state.
Payment institutions may not receive deposits or issue electronic money. They are only allowed to grant credit in connection with payment execution, e.g. credit card payments. In practice, the new institutions will cover a broad range of enterprises, including issuers and acquirers of payment cards for general use, money remitters[16] and telecommunications companies that offer mobile payments.
As with credit institutions and e-money institutions, payment institutions are subject to capital requirements. The Directive lays down requirements concerning both the initial capital and ongoing capital of the payment institutions where the latter requirement depends on the business volume, cf. Box 2. The capital requirements for payment institutions are relatively modest compared to the requirements applying to credit and e-money institutions. This reflects differences in customer risk.[17]
CAPITAL REQUIREMENTS FOR PAYMENT INSTITUTIONS |
Box 2 |
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The Payment Services Directive imposes capital requirements on payment institutions. The Directive makes a distinction between initial and ongoing capital requirements. The latter capital depends on the institution's business volume. The institution's own funds must never fall below the larger of the two amounts. The initial capital requirement depends on the intended activities of the payment institution. If the institution intends to provide money remittance only, the requirement is an initial capital of at least 20,000 euro. If the institution intends to execute mobile payments, the requirement is an initial capital of at least 50,000 euro. If the institution intends to provide one or more other payment services, the requirement is at least 125,000 euro. The national supervisory authority may choose one of the following three methods for calculation of the ongoing capital requirement:
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Besides the capital requirements, the payment institutions are required to have implemented measures to ensure that the customers can get their funds back in the event of insolvency of the institution. The measures could be e.g. formal segregation of funds received from customers into special bank accounts, or a bank guarantee for customer claims. This requirement for ringfencing of customer funds applies solely to institutions that conduct other activities besides payment services.[18]
The Directive allows the EU member states to waive the above requirements for small payment service providers, provided that their monthly executed payments do not exceed 3 million euro. An enterprise subject to a waiver must not provide payment services in other member states. This provision will ensure that small payment service providers choose to register with the national supervisory authority, which is important to combat money laundering and financing of terrorism.
(III) Information requirements
The Directive also lays down rules regarding information from payment service providers to their customers about the payment services. A central aim is to make it easier for customers to compare the services on offer, enhancing competition among the payment service providers. The information requirements apply to all types of payment service providers, i.e. payment institutions as well as credit and e-money institutions.
The Directive distinguishes between information related to contracts for single payments, e.g. a money remittance transaction, and framework contracts for a series of payments. A framework contract will normally be concluded where a customer uses an account or a payment instrument for the payment. Furthermore, the Directive distinguishes between information requirements prior to conclusion of a contract and after execution of a payment. Information on payments may be collected and given to the customer on a monthly basis.
Payment instruments for low-value payments are subject to information requirements, which are less stringent for the payment service provider.[19] These rules are aimed particularly at new payment instruments, e.g. certain e-money products. For the providers of these instruments, meeting the general information requirements will often entail relatively high costs. In addition, the use of these instruments is usually associated with only limited risk for the customer.
(IV) General contractual conditions
The key provisions of the Directive relate to the general terms and conditions for contracts between the payment intermediary and the customer. Box 3 reviews a number of provisions that attract particular attention in Denmark. These provisions concern the Directive's rules on charges, liability for fraudulent use and payment execution time. The final Directive is expected to enable Denmark to maintain the existing Danish rules on charges for Dankort payments and liability in the event of fraudulent use of e.g. payment cards.
In addition, the Directive lays down rules on value dates, according to which the payment service provider of the payer may cease to add interest at the earliest on the date when the payment is withdrawn from the customer account. Furthermore, the payment service provider of the payee should add interest as from the date when that payment service provider receives the amount. Together with the rules on execution time, this will limit payment service providers' potential interest revenue related to payments. The aim is to encourage the payment service providers to rely more on other sources of income, e.g. charges, that are more visible to the customers.
As mentioned, value dates are not regulated by current Danish legislation. Instead, value dates are agreed freely between the payment service providers and their customers. The value rules of the Directive are, in some respects, more favourable for the customers than current Danish market practices. Cases in point are cash deposits from consumers, and payments from abroad, which in future accrue interest as from the date of a payment service provider's receipt of the funds.
GENERAL CONTRACTUAL CONDITIONS IN THE PAYMENT SERVICES DIRECTIVE |
Box 3 |
Charges Another provision on charges stipulates that the payment intermediary must not prevent the payee, i.e. a retailer, from imposing charges on the payer for using a certain instrument. Consequently, card enterprises must not prohibit retailers from passing on charges for acquiring card payments, i.e. the use of " no surcharge" rules is not allowed. However, the EU member states may prohibit passing on charges if this is found to impede the use of efficient instruments. The aim of the second provision on charges is to enhance the transparency of the acquisition charges imposed by the card enterprises. On several occasions, the European Commission has stated that it finds the banks' acquisition charges on certain types of card payments too high.2 If the retailers are allowed to pass these charges on to their customers, the customers will choose the payment cards with the lowest charges. This will exert downward pressure on the charges. In Denmark these provisions are found to be compatible with the financing model for the Dankort, as agreed in 2005.3 According to the initial recitals in the Directive, the payee may be charged by their payment service providers in the form of a fixed subscription payment as is the case for the Dankort scheme. Furthermore, the Dankort is found to be an efficient instrument, which will make it possible to maintain the regulatory prohibition of passing on charges on Dankort payments in physical trade.4 Liability for fraudulent use The liability rules in the Directive can be outlined as follows:
These rules were a key issue to Denmark in the work with the Directive. For some time, there was concern that the rules could lower the level of protection that Danish customers enjoy today. According to the Danish Act on Certain Means of Payment, the customer shall bear the own risk on fraudulent use only if the PIN code has been used. In addition, Danish legislation includes a ceiling of kr. 8,000 for the customer's loss. Item 3 above is found to enable Denmark to maintain these rules. Execution time The Directive's rules on execution time apply to pure euro-denominated payments and national payments in other EU currencies, e.g. krone-denominated payments in Denmark. The Directive also regulates payments with one currency exchange between euro and another EU currency if the exchange takes place in the relevant non-euro area member state. A credit transfer in euro from a krone account in Denmark to a euro account in Gemany will thus be covered by the rules, whereas a corresponding transfer in Danish kroner will not. According to the Directive, a credit transfer of this type must be executed by the end of the following day at the latest.5 Until 1 Januar 2012 the payment service provider and the customer may agree on three days instead. As regards paper-based payments, e.g. payments using giro slips, the parties may agree to extend the execution time by one day.6 Furthermore, the Directive lays down rules for the value dating of pure cash deposits, i.e. cash deposits denominated in the same currency as the account, with the payment service provider holding the account. Such deposits from consumers should be booked to the customer's account on the date of the cash deposit, while deposits from enterprises, etc. must be booked no later than the following day. The rules on execution time were also given a certain amount of attention by the Danish authorities. The original directive proposal tabled by the Commission indicated that these rules should apply to payments in all EU currencies. However, compliance with this requirement for cross-border transfers in other EU currencies than euro would impose very high costs on the payment service providers in the absence of an SEPA-like infrastructure. Consequently, the rules on execution time were limited to the above payments. |
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| 1 Alternatives are the OUR principle, i.e. the payer bears all the costs, or the BEN principle, i.e. the payee bears all the costs. 2 Cf. e.g. the European Commission, Communication From the Commission, Sector Inquiry under Art 17 of Regulation 1/2003 on retail banking (Final Report), January 2007. 3 The agreed financing model for the Dankort is described in Danmarks Nationalbank, Payment Systems in Denmark, 2005, Chapter 7. 4 This means a transaction where both the purchaser and the vendor are physically present, as opposed to e.g. e-commerce. 5 The rules for SEPA credit transfers stipulate an execution time of three days. This will have to be changed to one day as a consequence of the Directive. 6 As regards debit payments, i.e. card payments and direct debit, the Directive allows the payment intermediary and the customer to negotiate the maximum execution time. |
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Among other general contractual conditions, the Directive lays down rules for the amendment and termination of framework contracts and a payment service provider's access to suspend the use of a payment instrument. In addition, the Directive regulates the payer's right to claim refunds and to cancel a payment order, as well as the liability for correct execution of payments. Several of these areas require harmonisation of legislation to support, in particular, the payment instruments in SEPA.
(V) Other provisions
The Directive enables the European Commission to adjust a number of provisions to take account of the technological advances and ensure uniform application. The Commission may, among other things, adapt the definition of activities that are considered to be payment services, cf. Box 1. In order to do so, the Commission must consult a Payments Committee composed of representatives of the EU member states.
The Payments Services Directive must be transposed into national law by 1 November 2009. It will replace the directive on cross-border credit transfer of 1997 and the 1997 recommendation on electronic means of payment. The 2001 regulation on cross-border payments in euro continues to be in force.
IMPLEMENTATION IN DENMARK
The Payment Services Directive will require a number of amendments to Danish payments legislation. The Directive will affect some Danish Acts, notably the Act on Certain Means of Payment. The implementation of the Directive will entail considerable work for the Danish authorities, and the following should only be regarded as preliminary reflections.
A number of payment instruments that are currently regulated by the Act on Certain Means of Payment are outside the scope of the Directive. These include instruments that can only be used at the issuer's premises. It remains to be seen how these payment instruments are to be regulated in the future. If the Act on Certain Means of Payment is to apply, perhaps with a few amendments, payment instruments will thus be regulated by two sets of legislation according to whether they fall within the scope of the Directive.
The Directive also regulates payment services that are normally executed without a payment instrument. An example is a single payment such as a money remittance transaction, cf. Box 1. This type of payment service is not covered by the Act on Certain Means of Payment in Denmark, and is only to a limited extent regulated by other legislation. The implementation of the Directive will thus require regulation of a new area.
New Danish legislation is also required to regulate the access to provide payment services as a payment institution. Similar access for other types of institution is regulated overall by the Financial Business Act. Preliminary analyses show that only very few enterprises in Denmark will have to apply for authorisation as payment institutions, although this will depend on the exact interpretation of the provisions defining the scope of the Directive, cf. above.
The Directive also lays down rules for a number of other areas that are not currently regulated in Denmark. These areas include value dates, as well as the payer's right to claim refunds or cancel a payment order and the payment service provider's access to suspend the use of a means of payment. Execution time for national payments is yet another example of an area requiring new legislation.
The existing Danish legislation needs to be adapted to the Directive in several other areas. An example is the rules on information requirements, which are considerably more detailed in the Directive than in the Danish Act on Certain Means of Payment. Presumably, there will be little difference in practice between the information currently given by e.g. Danish banks to their customers and the Directive's information requirements.
As mentioned, the EU member states have some national discretion in the implementation of certain areas of the Directive. This applies to a number of provisions on the access to provide payment services and the general contractual conditions. These decisions typically reflect various trade-offs and will in many cases require a political decision.
[1] Cf. e.g. the European Commission, Comparative tables on national rules, 25 September 2003, available at http://ec.europa.eu/internal_market/payments/framework_index_en.htm.
[2] The SEPA project is described in more detail in Elin Amundsen, SEPA – Single Euro Payments Area, Danmarks Nationalbank, Monetary Review, 1st Quarter 2007.
[3] I.e. when the bank of the payer/payee ceases/begins to add interest when a payment is executed.
[4] See the definition of credit transfers in Box 1. The execution time for such transfers between two EU member states is currently regulated by the Danish Act on Cross-Border Credit Transfers of 15 April 1999. As regards cross-border payments, the Directive provisions on execution time apply solely to transfers in euro, cf. Box 3.
[5] Cf. e.g. the European Commission's press release of 20 September 2001, Cross-border payments: New Commission study confirms high charges, and the appurtenant report from Retail Banking Research.
[6] Cf. the European Commission, Working Document to the Proposal for a Directive on Payment Services in the Internal Market, Impact Assessment, SEC(2005)1535, December 2005.
[7] Directive 97/5/EC of the European Parliament and of the Council of 27 January 1997 on cross-border credit transfers.
[8] Commission Recommendation 97/489/EC of 30 July 1997 concerning transactions by electronic payment instruments and in particular the relationship between issuer and holder. A recommendation from the European Commission is not binding on the EU member states, as opposed to a directive or a regulation.
[9] Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December 2001 on cross-border payments in euro.
[10] Cf. the European Commission's press release of 11 January 2007, Cross-border payments now significantly cheaper, and the report, Staff Working Document on the Impact of Regulation (EC) No 2560/2001 on bank charges for national payments, SEC(1783)2006, of 18 December 2006.
[11] The text of the Directive is available via the European Commission's website, http://ec.europa.eu/internal_market/payments/framework_index_en. htm, Amendments by the European Parliament.
[12] Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit of and prudential supervision of the business of electronic money institutions. This directive introduced a new type of institution in EU legislation, i.e. electronic money institutions. Electronic money can be defined in brief as prepaid funds stored on an electronic device and acknowledged as a means of payment by others than the issuer.
[13] Except central banks and post office giro institutions. The latter do not exist in Denmark.
[14] A cash-back transaction is payment of cash by a retail outlet to a customer who, by means of a payment card, withdraws more money than required for the purchase. The original card payment will normally be covered by the provisions of the Directive.
[15] The underlying assumption is that enterprises and public authorities are better equipped than consumers to negotiate agreements with their payment intermediaries that will put them in a more favourable position than the rules of the Directive.
[16] Western Union and Moneygram are examples of money remitters.
[17] For example, electronic money institutions are required to have an initial capital of at least 1 million euro. In addition, the own funds of the institutions must continually exceed 1 million euro or 2 per cent of their outstanding e-money, whichever is higher.
[18] In addition, the EU member states can decide that the requirement is not applicable to individual claims of less than 600 euro.
[19] It must not be possible to use these instruments for single payments exceeding 30 euro, or they must not contain a stored value exceeding 150 euro. In connection with purely national payments, the EU member states may choose to reduce these limits or raise them to 60 euro and 500 euro, respectively.
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