Viewpoint: The EC Payments Package: Will It Create a More Integrated and Efficient European Payments Market? (October 2013)

By Monica Monaco, Trust EU Affairs

The European payments industry now is looking at the European Parliament with some concern. On Nov. 4 and 5, the “Payments Package” will be discussed for the very first time in the European Parliament, more precisely in the Economic and Monetary Affairs (ECON) Committee, after having been published by the European Commission on July 24.

The Political Scenario

The ECON Committee is responsible for drafting two reports on the Payments Package, which is comprised of the Payment Services Directive revision PSD2 and the regulation on interchange fees for card-based payment transactions (MIF Regulation).

The schedule announced by the ECON Committee is very tight:

• Nov. 20, 2013: Report expected to be drafted
• Jan. 9, 2014: Deadline for amendments to the draft report
• Feb. 20, 2014: Vote expected to take place in the ECON Committee

The aim, of course, is to bring the Payments Package to vote in one of the two European Parliament Plenary sessions scheduled in April 2014, before the European Parliament closes for a couple of months for the European elections.

The reason behind such haste—normally the process of drafting a report, collecting amendments, considering the amendments and then proceeding to vote at committee level would be longer—is to produce PSD2 and MIF Regulation final versions as quickly as possible and, in any case, before the newly elected Members of the European Parliament (MEPs) can have a fresh look at the proposal in July 2014 or even before a newly appointed European Commission (EC) can decide to change the approach to the payments sector in 2015.

It is difficult to understand what is driving such haste in the European Parliament as, at council level, the Lithuanian presidency is expected to have only one or two meetings before the end of 2013 on the Payments Package; in consideration of the diversity in opinions between the 28 member states and of the high number of technical issues at stake, it appears unlikely that the council would quickly reach some form of compromise on how the current text should be modified.

Before the negotiations start, the Rapporteurs—the Members of the European Parliament responsible for the drafting of the reports—have been appointed; both the report on the PSD2 and the report on the Interchange Fees Regulation have been given to the European People’s Party (EPP) Group. The same happened on the PSD1, when the appointed Rapporteur was the current EPP Group Coordinator, Jean Paul Gauzes. The Rapporteurs are Pablo Zalba Bidegain (Spain, EPP) for the MIF Regulation and Diogo Feio (Portugal, EPP) for the PSD2. All other political groups in the Parliament are now nominating Shadow Rapporteurs, and one of the main challenges in the negotiations may be that Sophie in’t Veld (Netherlands, ALDE) has been nominated Shadow Rapporteur for the Alliance of Liberals and Democrats for Europe (ALDE) on both the PSD2 and the MIF Regulation.

Historically, in’t Veld MEP has been quite pro-merchant in her approach and very opposed to interchange as a concept. This makes the situation challenging for the financial services sector.

The Payments Package Content and Potential Impact on Prepaid

The Payments Package includes many relevant changes. There are changes in the scope of the PSD2, changes in the “conduct of business” regime, including on aspects such as security, liability, access to third-party payment service providers and complaints handling. Furthermore, there are several changes to the agent, passporting and safeguarding requirements.

As far as the MIF Regulation is concerned, we see the introduction of caps on domestic and cross-border interchange fees, both multilateral and bilateral. Furthermore, the text proposes the removal of certain card scheme rules, such as the territorial restrictions in relation to licensing and the honor-all-cards rule, while proposing co-badging and separating scheme and processing entities. Finally, the text asks for increased transparency on levels of interchange fees.

Impact on Prepaid

I would like to concentrate on the provisions that at first look appear to have a potential impact on prepaid products.

First, the limited network exemption article in the draft PSD2 now covers “services based on specific instruments that are designed to address precise needs that can be used only in a limited way, because they allow the specific instrument holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under direct commercial agreement with a professional issuer or because they can be used only to acquire a limited range of goods or services” (article 3(k)). It is interesting that a requirement to “address precise needs,” not present in the PSD1, would significantly narrow the existing exemption. This would mean that it could be difficult to have covered, under such an exemption, products such as prepaid cards or multi-purpose gift cards.

As the second E-Money Directive (2EMD) incorporates the “limited network” as a cross-reference to PSD1, the changes to those exemptions under PSD2 are likely to be applied to the e-money regime. This may mean that, in practice, prepaid products that are currently exempted may become regulated e-money following implementation of PSD2, which would imply that the providers in question may need to become authorized as electronic money institutions.

Second, as far as security and reporting requirements are concerned, there are additions in the PSD2 to the information that applicants will need to provide to become a Payment Institution. This means they will need to put together a security policy document and a detailed risk assessment in relation to their payment services and a description of security control and mitigation measures taken to adequately protect customers against risks such as fraud and illegal use of data (article 5). These changes will be incorporated by cross reference in the 2EMD and will consequently apply to entities applying to become an Electronic Money Institution (EMI).

The MIF Regulation also refers to prepaid products in article 2 where “a debit card transaction means a card payment transaction included with prepaid cards linked to a current or deposit access account to which a transaction is debited in less than or 48 hours after the transaction has been authorized/initiated.” We note in this respect that the notion of “debited immediately” is here replaced by a 48-hour delay; this creates a sub-category of debit, which is not immediate but takes place within 48 hours. Furthermore, the credit card transaction definition does not include the “credit limit” element that we find, for example, in the European Central Bank definition of credit cards or in the Consumer Credit Directive (CCD) but only refers to the 48-hour delay element.

A More Integrated and Efficient European Payments Market?

As said, the proposed timing for adoption of the Payments Package by April 2014 is ambitious. If such a schedule is kept, the payments industry will be left with very little time to make its voice heard. Personally, I believe 2015 is a more realistic option for a final Payments Package.

Once the Payments Package is final, the 28 European member states will have two years to implement the PSD2, while the MIF Regulation will take effect immediately. In this regard, it is important to note that the proposals for capping interchange contained in the MIF Regulation would not come into effect for a period of two months for cross-border transactions and for two years for the domestic transactions, leaving, in the European Regulator’s mind, enough time for the payments industry to adapt to the new rules.

It is difficult to say whether such time would be enough, if we take into consideration the scale of changes the Payments Package implies for the business sector.

My recommendation to the payment industry is to get its voice heard in Brussels as soon as possible and raise all the potential issues in the draft text to help the European Parliament, as well as the 28 member states in the council, to deliver a clear and effective piece of legislation. Clear and effective legislation could result in a beneficial change for business. An unclear and ineffective one would result in another obstacle to a “further integrated and efficient European payments market,” which the commission has set as the first objective the Payments Package should achieve.

Based in Brussels for the past 11 years, Monica Monaco created Trust EU Affairs in September 2013 to advise clients on relevant EU legislative initiatives. Monica focuses on payment systems, consumer credit and new payments products (such as e-money and contactless), e-commerce, and financial education. She was a senior manager for EU Relations and Regulatory Affairs in the legal department of Visa Europe for more than 10 years. Monica can be reached at [email protected].