Brussels, 24 April 2007
BACKGROUND TO PAYMENT SERVICES DIRECTIVE (PSD)
1) Why has the Commission proposed this Directive?
2) Why do we need a Single Payment Market?
3) What are the potential savings from a Single Payments Market?
4) What are the main objectives of the Directive?
SINGLE EURO PAYMENTS AREA (SEPA)
5) What is the link between the Payment Services Directive and the Single Euro Payments Area (SEPA)?
6) Why is adoption of the Directive so important for SEPA?
7) What are the differences between the Payment Services Directive and SEPA?
SCOPE OF PAYMENT SERVICES DIRECTIVE
8) What is the scope of the Directive?
9) So, will the new Directive deal only with payments executed in euro?
10) What about payments made to recipients outside the EU or received from
payers outside the EU?
11) What mobile payment services are included?
12) What exactly can payment institutions do under the Directive?
BENEFITS FOR CONSUMERS
13) How do consumers benefit from increased competition?
14) What are the concrete benefits for consumers?
15) Will consumers be able to make cross-border direct debits?
16) Will faster payments mean extra costs?
AUTHORISATION RULES FOR PAYMENT INSTITUTIONS
17) What authorisation requirements are payment institutions required to fulfil?
18) What are the capital requirements for payment institutions and how do these compare with banks?
19) So are capital charges for payment institutions generally higher or lower than for banks?
20) Why do banks have generally higher capital charges for payment services?
21) Why are Member States allowed to waive some or all of the authorisation requirements for small payment institutions?
22) Are there restrictions on the waived payment institutions?
CREDIT GRANTING BY PAYMENT INSTITUTIONS
23) Why should payment institutions be allowed to grant credit?
24) What are the rules applying to payment institutions on credit duration?
25) Are there any other restrictions on credit granting by a payment institution?
PAYMENT EXECUTION TIME ("D+1" rule)
26) Why is it important that payments are made at the latest by the end of the next business day and when does this rule apply?
27) But does this mean that existing payments that are made the same day will now be made a day later?
28) What payment transactions must be made at the latest by the end of the next business day?
29) How long will other payments take?
SOME SPECIFIC CONSUMER PROTECTION ISSUES
30) What happens to payment monies with a payment institution if the other business activities carried out by a payment institution fall into difficulties?
31) Why do consumers enjoy less protection for certain low-value payments?
32) Can a consumer be sure that a payment will be received by the intended recipient?
The proposed Directive aims to establish the modern and harmonised legal framework necessary for the creation of an integrated payments market which would enable payments to be made more quickly and easily throughout the whole EU.
By removing the legal obstacles blocking the creation of a Single Payments Market, the Directive aims to introduce more competition in payment systems and facilitate the realisation of economies of scale. This will improve efficiency and reduce the cost of payment systems to the economy as a whole.
Although the Single Market has existed since 1992 and citizens and business have been able to buy and sell in cash using euros since 2002, the Internal Market for payment services remains hugely fragmented. Furthermore, electronic payments, which are an increasingly popular and efficient means of payment, cannot always be used across Member States.
For instance, direct debits, which are a common and cost-efficient service to pay for utilities (e.g. gas, water electricity bills) and other regular bills, cannot be used across borders, even though they represent a cheap, reliable and secure means of payment whose use reduces costs for business and their customers. Similarly most of the popular and more economical national direct debit cards do not operate across national borders.
A real Single Payment Market would therefore allow all citizens and businesses to make payments throughout the whole EU electronically, just as conveniently and rapidly as the most efficient national payment systems existing today. Furthermore, whatever the payment instrument used (e.g. card payments, credit transfers, e-payments and direct debits, etc.), the Directive provides users with the same level of protection and legal certainty, independent of the origin of the payment instrument. The Directive would therefore allow huge savings to be made to the current high cost of making payments.
Studies have estimated that the overall cost to society of the current payments system could be as much as 3% of GDP. Inefficient cash payments are the main cost driver and account for 60–70% of total costs.
Instead of using efficient electronic payment services, which costs only a few euro cents, the cost of a cash transaction ranges between 30 and 55 euro cents. Given that the EU currently handles 231 billion payments per year (representing a total value of EUR 52 trillion), the potential savings linked to use of efficient payment services are enormous and amount to billions of euros. Service providers are effectively blocked from competing and offering their services throughout the EU. Removal of these barriers could save the EU economy upwards of EUR 28 billion per year. Furthermore, very considerable savings can be generated for the overall economy if banks were to offer EU-wide payments related services, such as e-invoicing. A conservative estimate of these project savings would be EUR 50-100 billion per year for businesses.
The economic sectors that would gain most by switching to electronic payments are shops and merchants as well as the payments industry itself. However, the payments industry often cross-subsidises the high cost of cash operations by revenues from charging for existing electronic payments and bank account management fees.
The Directive has two main objectives:
The first objective is to generate more competition in payment markets by removing market entry barriers and guaranteeing fair market access. Currently, the diverging legal rules in 27 different Member States represent a significant impediment to new payment service providers (such as supermarkets, money remitters or, in some cases, telecom or IT providers), and effectively block them from competing and offering their services throughout the Internal Market.
The second objective is to provide a simplified and fully harmonised set of rules with regard to the information requirements and the rights and obligations linked to the provision and use of payment services. For technical reasons, payments providers in a payment system must respect standard rules covering, among others:
As the Directive introduces a harmonised set of rules for payment providers throughout the EU, it will therefore reduce legal compliance costs for payment service providers and foster competition between payment services, as well as allow payment service users to shop around on the basis of an informed choice.
The adoption of Regulation (EC) No. 2560/2001 stimulated an initiative by banks to achieve a Single Euro Payment Area (SEPA). The first steps in this initiative were the creation of a common decision making-body, the "European Payments Council" (EPC), and the adoption of a road-map with the aim of developing the necessary procedures, common rules and standards for EU-wide payments (covering credit transfers, direct debits, credit and debit card payments) in euros by 31st December 2010. These rulebooks and standards are now very nearly complete.
The EPC’s initiative and the Payment Services Directive are therefore complementary and the Payment Services Directive should be seen as providing the necessary legal platform on which the payments industry can build its activities to make the EU payments market as efficient and competitive as that within the most effective Member State. Consequently, given this partnership, the Commission will continue to work in close co-operation with payment market participants and other parties (including non-banks) on all these issues.
The Payments Services Directive provides the required legal foundation to make SEPA possible. The banking and payments industry are making substantial investments to ensure the realisation of SEPA. The timetable for SEPA is very tight: the first SEPA products should be available as from 1st January 2008 and by end 2010 a critical mass of users should have migrated or moved over from existing national payment instruments to the new SEPA products. Finally, while SEPA only covers euro payments, today these already represent about 70 percent of all payments in the EU and this percentage will increase in the future as more Member States adopt the euro.
For all these reasons, rapid adoption of the Directive is essential for the success of SEPA.
By removing the legal obstacles and setting-up a harmonised legal framework, this Directive should enable the EPC to complete this ambitious program by end-2010. Consequently, the Directive forms the cornerstone for building a true Single Payments Market (SPM). However, the important difference is that the Directive has a wider scope covering payments made in any EU currency and is not limited to euros only.
Nevertheless, once the Directive is adopted, the Commission will consider whether any further action (legislative or otherwise) is needed to ensure that industry delivers the SPM with all the expected economic gains.
The Directive focuses on electronic payments, which are more cost-efficient than cash and which also stimulate consumer spending and economic growth.
The new rules will apply to payments made in any EU currency, where both the payer’s payment service provider and the recipient’s payment service provider is located in the EU.
Finally, there are a number of activities (including cash and cheques) not falling under the Directive.
No. As stated above, the Directive will cover not just payments made in euros but also those made in another national currency used in the EU.
This is also a key difference with the Single Euro Payments Area (SEPA) initiative consisting of the delivery of common standards and services for euro payments.
For the moment, the Directive only covers payments where both the payer and the recipient payment service provider are located in the EU (the so-called "two-leg payment transactions") made in EU currencies.
However, after three years of operation a review of the Directive is foreseen. This will examine the possible need to expand the scope of the Directive to include payments where either the payer or the recipient is outside the EU (the so-called "one-leg payment transactions") as well as non-EU currencies.
Put simply, where a telecom operator makes a payment on behalf of a payment service user to a third party, the payment transaction will fall within the scope of the Directive when operator acts solely as an intermediary making the payment.
On the other hand, payments relating to the purchase of digital services such as ring tones, music or digital newspapers which are sent to a mobile phone (or some other digital device e.g. a computer) are not normally covered by this Directive.
The Directive broadly authorises three different types of payment institutions:
Additionally payment institutions may carry out payment related services e.g. foreign exchange services, safekeeping activities, operation of payment systems for their payment services.
Finally, payment institutions are allowed to carry out other business activities, e.g. retailing, telecoms.
A general increase in competition should benefit all users including consumers by lowering price and improving service performance as well as promoting more innovation and wider choice. In markets where payments are relatively slow and expensive improvements will be greater than in markets where they are already very fast and efficient. In the latter markets there will be much less scope for improvement.
The Payments Services Directive should increase competition in three main ways:
The Directive will bring major benefits for consumers, as follows:
Yes. Direct debits are an efficient way of paying regular bills but this service is not currently possible on a cross-border basis. One of the main advantages of the Directive will be to make such services possible.
However, the availability of direct debits will depend on when banks and other payment service providers first start to launch such products.
Payment institutions are required to fulfil a variety of qualitative and quantitative requirements.
Qualitative requirements include, but are not limited to, sound administrative, risk management and accounting procedures, proper internal control mechanisms, directors and managers that are of good repute and possess appropriate knowledge and experience, as well as shareholders that are suitable taking into account the need to ensure the sound and prudent management of a payment institution.
Quantitative capital requirements to ensure financial stability. These include initial and ongoing capital requirements appropriate to the low level of risk of payment institutions.
For both payment institutions and banks, the capital requirement is the higher of the initial and the ongoing capital requirement. The initial capital requirement is a fixed, flat amount whereas the ongoing capital requirement tends to increase with business volume. A simplified presentation of the capital requirements for payment institutions as compared to banks is given below:
EUR 20 000 money remitters
EUR 50 000 mobile payments
EUR 125 000 full-range payment service providers including any credit
EUR 5 000 000
The competent authorities of Member States may choose between one of three methods:
For Method B and C, a scaling factor is used to reduce the ongoing capital as follows:
0.5 money remitters
0.8 payment transactions carried out by mobile telecom operators
Additionally, depending on the quality of the payment institution's risk management, the competent authorities of the Member State may increase or reduce the ongoing capital requirement for all three methods by up to 20%.
Finally, where a payment institution grants credit in connection with a payment, national supervisory authorities must also be satisfied that the own funds of the payment institution are appropriate in view of the overall amount of credit provided.
The situation is more complicated. Under Basle II, sophisticated rules have been developed for banks to ensure financial stability and that depositors can be repaid on demand. Put simply, banks have ongoing capital charges calculated as the sum of three components:
It is not meaningful to make a full comparison because payment institutions and banks carry out different business activities and have very different risk profiles. However, if we consider payment services in isolation, then payment institutions have generally significantly lower capital charges. This can be seen from the following comparison:
For payment institutions the amount varies from EUR 20 000 to 125 000 whereas banks require EUR 5 000 000.
It is possible to make a rough comparison only for Methods A and C:
Banks hold deposits which they use for a variety of risk-taking activities, including providing credit, and can pose a systemic risk to the wider financial system. On the other hand, payments institutions cannot take deposits, cannot use monies in a payment account to finance its payment activities (including possible credit granting). Payment institutions are therefore subject to an extremely low level of risk which does not pose a systemic risk to the financial system (but even so payment institutions are still subject to oversight arrangements by the ECB and national central banks).
These are not just theoretical considerations. Payment institutions are already making payments in some Member States and in other parts of the world with no or minimal capital requirements and have done so successfully with very low levels of risk. However, these payment institutions will now be required to respect the capital requirements laid down in the Directive.
There are three main reasons:
In addition where a Member State makes use of this derogation, it must provide an annual report to the Commission indicating the number of natural and legal persons concerned and the total amount of payment transactions for each calendar year. Member States may also decide to limit the range of payments activities waived.
While the Payments Services Directive is not about regulating cross-border credit, there are some existing payment products, such as credit cards which are used for payments and which typically allow customers to repay over an extended period.
Consequently, payment institutions should be allowed to grant credit in accordance with the rules laid down by the Payments Services Directive.
Under the Directive, any credit provided by a payment institution has to be provided from the payment institution's own funds or monies that it has raised in capital markets, not from the funds received or held for the purpose of execution a payment transaction. National supervisory authorities must also be satisfied that the own funds of the payment institution are appropriate to the overall amount of credit provided.
There is no restriction on credit duration for national rules on credit cards. (National rules may provide for a credit duration period longer or shorter than 12 months.)
However, when a payment institution wishes to trade in a Member State other than the home Member State in which it is authorised, credit provided through a credit card must be repaid within a short period which must not exceed 12 months.
So if an authorised payment institution wishes to start marketing credit cards to users in other Member States, the maximum credit duration period is 12 months.
This situation must be clearly distinguished from the use of a national credit in other Member States. For example, if a user is entitled to a credit duration period exceeding 12 months for national payments, this extended credit period will also apply to payments carried out by the same user when using the credit card in other Member States.
Rapid payment is essential for a modern and properly functioning economy. Today, several countries already provide that national payments must be made by the end of the next business day (the so-called "D+1" rule) and some even make payments the same day. If some banks can already provide such rapid payments profitably, there is no good reason why other banks should not also be able to provide such rapid payment.
Moreover, if the new SEPA payment products are not at least as good as existing national payment instruments, users will not switch over from existing national payment instruments to the new SEPA products with the result that the success of SEPA could be jeopardised. For this reason, the ECB has also supported a maximum execution time of D+1.
However, the Commission recognises that banks need time to upgrade existing products and systems. Therefore, up to 1st January 2012, the Directive allows parties to agree on a maximum execution time of "D+3" for credit transfers. Furthermore, the Directive allows the parties to agree on an extra business day for paper-initiated payment transactions.
From 1st January 2012 the following credit transfers must be made at the latest by the end of the next business day:
Before 1st January 2012, a payer and his/her payment service provider may agree on a maximum period of 3 business days.
The normal supervision of the payment activities of a payment institution and the qualitative and quantitative requirements set out in the authorisation framework are designed to avoid problems with the payments activities of a payment institution. Although these rules do not in general apply to the other business activities of a payment institution, supervisors can require additional capital where these non-payment activities threaten the financial soundness of the payment activities.
However, the Directive also provides that where a payment institution engages in non-payment services business (e.g. retailing or telecom activities), funds received from payment service users (or from another payment service provider) shall be safeguarded in one of two ways.
Cost-effective, easy-to-use payment instruments cover a broad range of different payment methods, such as classical e-money (e.g., Proton in Belgium, ChipKnip in the Netherlands), mobile-payments and new payment solutions. Although new payment solutions are evolving rapidly, consumers seem to have confidence in using them. Consumers appreciate their simplicity and convenience and in exchange are willing to receive less information and enjoy less protection than would be the case if the same payment were made from a classical bank account.
Since such instruments are designed to be used mainly for the frequent purchase of low-priced goods and services, in the interest of simplicity and convenience, the Directive allows them to be used without being overburdened by excessive requirements (e.g. information on all transactions executed; reimbursement of pre-paid card if lost or stolen ).
However, there are limits: individual payment transactions must not exceed EUR 30 or there must be a spending limit of EUR 150 or the maximum amount of funds stored on the instrument must not exceed EUR 150 at any time.
For purely national payment transactions, Member States or their competent authorities may reduce or double the above amounts and for prepaid instruments the threshold may be increased up to EUR 500.
To maximise and simplify customer protection, the payer’s payment service provider is liable for the successful execution of a payment transaction on a so-called "end-to-end" basis (i.e. the payment service provider is responsible for ensuring payment from the sender's account to the recipient's account no matter what intermediaries or channels are used to make the payment).
However, where a payment is incorrectly carried out or not made at all, e.g. if the payer's bank can prove that the correct payment was received by the bank of the recipient, then the recipient's bank is liable and not the payer's bank.
 Special Recommendation VI of the FATF (Financial Action Task Force).
 In some situations (e.g. prepaid telecom instruments) only a small portion of the amount of the funds available are typically used in practice for future payment transactions. In such cases, Member States may decide to apply the safeguarding requirement only to the part of funds typically used to make payments falling under the Directive. An example may make this clear. On average say 90 % of funds on a prepaid telecom card are used for making telephone calls. These payments do not fall under the Directive. Only 10 % are used on average for making payments falling under the Directive, e.g. purchasing confectionaries or drinks, paying for a taxi. Then if such a user had a 600 EUR prepaid card, only 10% or 60 EUR would require safeguarding. Alternatively, in the interests of simplicity, Member States may waive these safeguarding requirements provided the total funds on the prepaid card do not exceed 600 EUR.