The Payment Services Directive (the “PSD”) changes the regulatory status of credit card issuance and gives credit card companies more choice about how to organise themselves. From November 2009 UK credit card companies can choose to remain as credit institutions or provide credit cards as one of the new “payment institutions” authorised under the PSD.
The current position
In the UK, credit card issuers are banks or building societies and have permission to accept deposits. Many banks and building societies were set up before they entered the credit card market. But even specialist credit card issuers have become banks with permission to accept deposits. Two of the main reasons for this are:
- the main card schemes in Europe require issuers to have a deposit-taking permission; and
- the prevailing view that overpayments on credit cards count as deposits.
The PSD restricts any person that does not fall within one of the categories set out in the PSD from providing “payment services”. The types of person allowed to provide payment services include credit institutions (in the UK, banks and building societies), e-money institutions and a new category: payment institutions authorised under the PSD. Providers of payment services that are not credit institutions or e-money issuers were not previously subject to an EU authorisation regime.
The PSD creates a new authorisation regime for payment institutions and sets prudential requirements they must meet. The PSD also contains a new conduct of business regime that governs providing payment services. These rules apply to payment institutions as well as credit institutions and e-money institutions. A payment service would include issuing credit cards.
Importantly, the PSD also sets new rules about access to payment systems. Article 28 of the PSD requires the rules on access to payment systems to be objective, non-discriminatory and proportionate and that those rules must not inhibit access more than is necessary to safeguard against specific risks. Payment systems must not impose any rules that discriminate between the different categories of person the PSD allows to provide payment services or set restrictions based on the institutional status of the payment service provider. We expect the four-party card schemes will be payment systems under Article 28.
The UK will implement the PSD through the Payment Service Regulations (the “Regulations”). HM Treasury has published a draft of these. As well as implementing the PSD, the Regulations will also amend the Regulated Activities Order (the “RAO”), the order that defines the scope of regulated activities in the UK, to add new exclusions from the deposit-taking activity. A new Regulation 9AB of the RAO will provide that:
“Any funds received by an authorised payment institution... or an EEA authorised payment institution from a payment service user for use in connection with the provision of payment services is not a deposit…”
An authorised payment institution includes a “payment institution” authorised under the Regulations but does not include a credit institution or e-money institution.
Following this change, if a customer overpays on a credit card issued by a payment institution this overpayment will not be a deposit under the RAO.
Article 28 of the PSD is likely to cause the card schemes to drop rules that mean credit card issuers must have a deposit-taking permission and open-up scheme membership to authorised payment institutions. In the UK, the changes to the RAO will mean that overpayments on credit card accounts (other than those operated by credit institutions) will no longer count as deposits. Two of the main reasons credit card issuers have had to organise themselves as banks will go away.
Credit card issuers may want to revisit their regulatory status and consider whether they should convert to payment institution status. Payment institutions face a much simpler set of prudential requirements than credit institutions. In considering this, credit card issuers may want to consider:
- whether they accept deposits other than through accepting overpayments on credit cards;
- how other countries where they maintain credit card accounts treat overpayments;
- passport rights;
- the prudential requirements for payment institutions when compared to credit institutions; and
- the implications for their strategy, reputation and funding if they change status.
While many credit card issuers will decide to stay as they are, some might choose to give up their deposit-taking permission and become an authorised payment institution instead.