European legislation & Payment Systems Statistics Ayse Zoodsma-Sungur

De Nederlandsche Bank European legislation & Payment Systems Statistics Ayse Zoodsma-Sungur 4th Macedonian Financial Sector Conference on Payments and Securities settlement Systems Ohrid 21 June 2011

Agenda • Background to the PSD • Types of PSP’s • Scope of the PSD • Application Process • PSD Conduct of Business Rules • Crediting and Value Dating • E-Money Directive

Background to the Payment Services Directive (PSD) • Legislative proposal for PSD adopted on 1 December 2005 with political agreement reached in April 2007. The PSD was finally adopted on 13 November 2007. • In NL PSD is implemented into national law by 1 November 2009 and in most countries

Background to the Payment Services Directive (PSD)2 In the Payment Services Directive stated intent: • remove legal barriers to creation of SEPA; • SEPA will remove differences between domestic and cross-border payments.

Background to the Payment Services Directive (PSD) 3 PSD has three main objectives: • enhance competition; • increase market transparency; and • standardise rights and obligations of providers and users

Types of Payment Service Providers Directive set out different types of payment service provider: • credit institutions, e-money institutions, payment institutions, the ECB and other central banks, government departments and local authorities • Impact of the PSD will vary depending on the type of payment service provider

Types of Payment Service Providers 2 • Prohibition on the provision of payment services by persons other than payment service providers

Scope of the PSD • Territorial Limits – Conduct of business rules (i.e. information requirements and provider and user rights and obligations only apply where both the payer provider and payee provider are located in the EEA. • Currency Limits – Conduct of business rules only apply where the payment services are carried out either in Euro or in the currency of an EEA State that has not adopted the Euro

Scope of the PSD 2 The Regulations only apply to the payment services listed below 5 main categories: • Services enabling cash deposits and withdrawals from a payment account; • Execution of payment transactions; • Issuing and acquiring of payment instruments;

Scope of the PSD 3 • Money remittance services; • Execution of payment transactions where consent to execute a payment transaction is given by means of an IT device and payment is made to the operator acting only as an intermediary between the user and supplier of the goods and services.

Activities that are not in the Scope of the PSD 4 Certain activities do not constitute payment services, these in summary include: • cash transactions without an intermediary or payment transactions through a commercial agent • money exchange business consisting of cash to cash operations where funds not held on a payment account • payment transactions based on paper based cheques, vouchers; traveller's cheques etc.

Activities that not in the scope of the PSD 5 • services provided by technical service providers, which support the provision of payment services, without them entering into possession of the funds • services based on instruments that can be used to acquire goods or services only in the issuers premises or through a limited network of providers or for a limited range of goods or services

Activities which do not constitute Payment Services 3 • payment transactions carried out between payment service providers, or their agents or branches for their own account • execution of payment transactions executed by means of an IT device where goods or services are delivered to and used through an IT device provided the operator does not only act as an intermediary between the user and supplier of the goods and services

Activities that are not in the scope of the PSD 5 • payment transactions within a payment or securities settlement system or relating to securities, including dividends, income or other distributions • payment transactions between group companies • services by providers to withdraw cash by means of an ATM acting on behalf of a card issuer

Scope of the PSD Business Activity Restrictions The Regulations specify the business activities that payment institutions may be involved in. They may also provide operational and related ancillary services such as: • ensuring payment transaction execution; • foreign exchange services; • storage of data; and

Scope of the PSD Business Activity Restrictions 2 • May undertake non-payment service activities but cannot issue e-money or accept deposits. • May grant credit subject to certain conditions. • safe-keeping activities.

Application Process –How to obtain authorisation and Registration Payment service providers, who are neither banks nor e-money issuers and not otherwise excluded under the negative scope provisions, must be either: • authorised as a payment institution; or • registered as a small payment institution subject to the qualification criteria

Application Process –How to obtain authorisation and Registration 2 • Agents of authorised payment institutions and small payment institutions in the country, and agents of authorised payment institutions in the EEA, must register with the NCB

Conduct of Business Rules – Information Requirements Part 5 of the Regulations sets out certain information requirements that apply to all payment service providers providing payment services. • In applying the information requirements the Regulations make a distinction between:

Conduct of Business Rules – Information Requirements 2 • a payment transaction which is part of a series of successive payment transactions which is to be covered by a payment service agreement referred to as a "framework contract" • a payment transaction which is a single payment transaction

Conduct of Business Rules – Information Requirements 2 • In each case the Regulations set out information to be provided before the contract is entered into, at the time the payment order is made and after execution of the transaction • Providers can agree a “corporate opt-out” where the customer is not a consumer, a micro enterprise, or a charity with an annual income of less than £1 million

Framework Contracts – Prior Information • Before the contract is concluded (or immediately after the execution of the transaction if concluded at a distance where it is not practicable to do so) the provider must make available certain specified information in Schedule 4 (Regulation 40) • Where the contract is also a regulated agreement under the certain exemptions apply to Regulation 40 (Regulation 34)

Framework Contracts – Prior Information 2 • Any information provided or made available under Part 5 must be provided or made available in an easily accessible manner (e.g. on paper, by e-mail or text) in English or another agreed language and in a clear and comprehensible form (Regulation 47(1))

Rights and obligations Information requirements - single payment transactions Information to the payer priorafter receipt Transaction Identifier, payee Amount of the payment Charges payable exchange rate used Date of receipt order Information needed Execution time Charges Reference exchange rate Information to the payee Reference, payer Amount Charges Exchange rate Credit value date

Rights and obligations Obligations for the user Act according to the contract Reasonable safety measures Direct notification of loss/theft And more..

Crediting and Value Dating • The payer’s provider must ensure that the amount of the payment transaction is credited to the payee’s provider’s account by the end of the business day following the time of receipt of the payment order (D+1) (Regulation 70) • Until 1 January 2012 the payer and the payer’s provider may agree a D+3 standard

Crediting and Value Dating 3 • The credit value date for the payee’s payment account must be no later than the business day on which the amount of the payment transaction is credited to the account of the payee’s payment service provider (Regulation 73(1))

PSD summing up PSD provides harmonisation of: • Market access: besides credit institutions and electronic money institutions also payment institutions • Rights and obligations • Implementation in national legislation

Payment Trends in the EU • Number of transactions per type of payment instrument (billions) Source ECB

E-Money • Definition of E-money • Main Areas of E-money Box 1, Box 2

Definition of E-money • E-money can be defined as any amount of monetary value represented by a claim issued on a • prepaid basis, stored in an electronic medium (for example, a card or computer) and accepted

Definition of E-money 2 • as a means of payment by undertakings other than the issuer, predominantly for small-value • transactions (for example, the settlement of modest transactions over the Internet and of parking or telephone charges and payment for public transport services)

Definition of E-money 2 Now a short definition of e-money: Electronic money is monetary value as represented by a claim on the issuer which is: • Stored on an electronic device • Issued on receipt of funds • Accepted as a means of payment by persons other than the issuer

Box 1 - Main areas of e-money E-money in a virtual environment The most successful schemes still fall essentially into the category of pre-funded, • personalised online payment schemes, involving the transfer of funds stored in an online account (excluding traditional bank deposits). Accounts are typically accessible via Internet browser,

Box 1 - Main areas of e-money 2 e-mail and/or, in some cases, via mobile phone text messaging (SMS). Examples pre-funded personalised online payment schemes include • Paypal, Digicash and Moneybookers etc.

Box 1 Main areas of e-money 3 E-money in a standard retail environment • Two main categories exist according to the storage device used: • Card-based e-money (‘electronic purses’) which relies on a device containing • hardware-based security features (typically in the form of a microprocessor chip embedded

Box 1 Main areas of E-money 4 in the plastic card). The card is used for authentication rather than account information. • Aside from conventional e-purses, smartcards for public transport are the second most widely used

Box 1 Main areas of e-money 5 • Software-basede-money (sometimes referred to as ‘digital cash’ or ‘network money’) which employs specialised software on a personal computer, typically allowing electronic value to be transferred via telecommunication networks and the Internet. • The value held by a customer is stored centrally on a server under the control of the issuer and customers access their purses remotely.

Box 2. Categories of smartcards • Single-purpose card:usually in the form of a magnetic stripe card to record the amount of funds stored therein. It is designed to facilitate only one type of transaction, for example, telephone calls, public transportation, parking facilities, etc. A distinguishing feature is that the issuer and the service provider are usually the same entity.

Box 2. Categories of smartcards 3 • Closed-system or limited-purpose card: generally used at a small number of points of sale within a well-identified location, such as a university campus or a football stadium. • Multipurpose card: can perform a variety of functions with several vendors.

Box 2. Categories of smartcards 4 According to the technology they incorporate • Contact card: a microprocessor chip is embedded in the card and the card must be inserted into a smartcard reader which physically comes into contact with the chip’s pad to transmit/receive data. • Contactless smartcard: the card must pass close to a smartcard reader to register a transaction so that the embedded antenna in the card can communicate with a receiving antenna in the reader.

Box 2. Categories of smartcards 5 • Hybrid card: is one that has both contact and contactless capabilities, often used for transport applications. The contact mode is used to load the card with value and the contactless mode is used to reduce the value as services are consumed. • Proximity card:communicates through an antenna similar to contactless smartcards except that it is a read-only device; no information can be written in the chip’s memory.

E-money Regulatory Objectives • Market Confidence • Public Awareness • Consumer Protection • Reduction of Financial Crime • Facilitating innovation

The status of the new directive • It is maximum harmonising – not minimum harmonising • Applies many provisions of the Payment Services Directive (PSD), mutatis mutandis • ELMIs are now defined as financial institutions

Authorisation and Registration • Authorisation of ELMIs and registration of small issuers: 2EMD applies Article 5 of PSD • Optional exemptions from prudential rules under consideration for small issuers • Exemptions for limited scope schemes • Passporting for ELMIs follows Art 25 PSD • No passports for small issuers

Prudential Changes • Initial Capital for ELMIs reduces from €1 million to €350,000 • Investment rules have been replaced by safeguarding • The new EMD safeguarding rules are subtly different from those of PSD • ELMIs can now carry out mixed business

Final Remark • Review of 2EMD is envisaged by November 2012 in line with PSD review

Questions?

European legislation & Payment Systems Statistics Ayse Zoodsma-Sungur