Electronic money or e-money has been subject to regulation in the EU since April 2002 when the first Electronic Money Directive 2000/46/EC (“EMD1”) established the regulatory framework. However, there have been difficulties ever since in interpreting and applying in practice the definition of e-money. The second Electronic Money Directive 2009/110/EC (“EMD2”) which repealed EMD1 and has applied since April 2011 has addressed some of the difficulties. However, some of the fundamental issues with the e-money definition remain, which have been put into sharper focus in today’s digital economy. For example, according to the Bank of England, 96% of all “money” in the UK is held in electronic form.1 However, not all that money in electronic form is “electronic money” for the purposes of EMD2.
EMD2 defines e-money as follows:
“electronic money” shall mean electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in [the Payment Services Directive (EU) 2015/2366], and which is accepted by a natural or legal person other than the electronic money issuer.
The European Commission (the “Commission”), the European Central Bank (“ECB”) and the UK Financial Conduct Authority (“FCA”) all make it clear in various discussions and guidance that this definition covers both card-based products and account/server-based products.
If one looks at money deposited in a conventional bank current account that has online banking/payment functionality, that money seem to fall squarely within the definition:
- The money seems to be value electronically stored.
What “electronically (or magnetically) stored” may mean, has never been satisfactorily clarified. While it is relatively clear when being applied to physical devices (e.g. a pre-paid plastic card), difficulties arise when it comes to account or server-based products.
One argument is that (contrasted with a typical pre-paid card) the value in a bank current account is not electronically “stored” in the sense that the value is not electronically loaded onto/into that specific account. Rather, the value is being held centrally somewhere by the bank with just a book-keeping entry to show the balance standing to the credit of the current account. However, that argument seems to be able to be applied to almost any account-based e-money products.
- The customer has a claim on the issuer (i.e. the account bank) for that monetary value.
- The value is issued on receipt of funds.
There is no specific guidance on what “issue” means for these purposes. The FCA in its guidance uses “originate” and “create” to describe “issue”, which does not seem to offer any helpful insight. The ECB in its 1998 Report (see further below) explained that “Issuing means receiving funds in exchange for value distributed in the system and being obliged to pay or redeem the customer’s transactions and unused funds”. On that basis, this element in the definition is met by a conventional current account.
- The value is issued for the purpose of making payment transactions.
It is difficult to imagine what other purposes a current account (e.g. as opposed to a savings account) may be opened for, if not for payment transactions. Note that “payment transaction” is defined in the Payment Services Directive (EU) 2015/2366 (“PSD2”), rather broadly, to mean essentially any act of placing, transferring or withdrawing funds.
- The value is accepted by third parties other than the account bank, given the online banking/payment functionality.
This is particularly so in the context of the new “payment initiation service” under PSD2 which enables account-to-account direct payments without involving the use of any card.
Therefore, all the elements of the e-money definition are met. Given the prevalence of online banking/payment today (which is expected to grow even further with the “open banking” initiative under PSD2), it would in turn mean that all UK banks that offer online current accounts could be automatically engaging in issuing e-money. However, such a conclusion seems instinctively wrong, not least because the example above does not seem to give rise to any monetary policy concern which is essentially the main reason for the e-money regime (see further discussion below). Further, it should be noted that banks in the UK that wish to issue e-money must be separately authorised to do so and not all UK banks have such permission.
The FCA guidance on the distinction between e-money and deposit provides some helpful clarifications, stating: “a deposit involves the creation of a debtor-creditor relationship under which the person who accepts the deposit stores value for eventual return. Electronic money, in contrast, involves the purchase of a means of payment”. However, this seems to be directed more at comparison with money deposited in e.g. a typical savings account and therefore its usefulness seems limited when being applied to the example discussed above.
So what seems to be the problem with the e-money definition?
To better explore the problem, it is necessary to go back in time briefly.
EMD1 followed a Report On Electronic Money by the ECB in August 1998 (the “1998 Report”). The target of the 1998 Report appears to be certain pre-paid products on the then market that represented “real purchasing power” and functioned as an “alternative to banknotes or coins”.
The 1998 Report did not name any specific products it analysed. However, when the Commission published its review of EMD1 (SEC 2008/2573) (the “Commission Review”), it named a few examples such as Proton and Mondex (both pre-paid cards) as among the products that were intended by EMD1. It appears that these products have since ceased to exist. From limited information available (the Commission also briefly analysed some of these products), these products seemed to function like a form of substitution money in the sense that the card stored the value on itself and the value could then be spent directly without the transactions having to be routed to the issuer for authorisation.
The 1998 Report and the Commission Review both contrasted products that were seen as e-money with products that merely provided “access” to money. Those “access” products (e.g. a typical debit card) would allow a customer to access money held elsewhere but not on the instrument itself and transactions via the instrument would have to be routed to the issuer for authentication.
This distinction appeared to be maintained in a working paper published by the ECB in 2008 (Electronic Money Institutions - Current Trends, Regulatory Issues and Future Prospects) (the “2008 Paper”) which analysed EMD1. The Bank for International Settlements in its Survey of Electronic Money Developments (No 38, 24 May 2000) also made the same distinction.
The e-money definition first formulated by the Commission in its 1998 proposal for EMD1 seems also to be in line with this important distinction. This initial definition provided:
“electronic money” shall mean monetary value which is (i) stored electronically on an electronic device such as a chip card or a computer memory; (ii) accepted as means of payment by undertakings other than the issuing institution; (iii) generated in order to be put at the disposal of users to serve as an electronic surrogate for coins and banknotes; and (iv) generated for the purpose of effecting electronic transfers of limited value payments.
However, the ECB in its opinion (1999/C 189/07) on the Commission proposal opined that this proposed definition was too technical and “difficult to translate into legal terms”. The ECB’s revised definition was carried into EMD1, which is essentially the same (with certain clarificatory changes) as the EMD2 e-money definition quoted above.
It seems that, perhaps in an attempt to be technologically neutral, the ECB wording of the definition significantly blurred the fundamental line between products that functioned like cash (which is the intended target of regulation) and products that merely offer a means to access money held elsewhere (which should be outside of the e-money regime).
That line goes into the nature of e-money: is it “money” or is it a “service”?
The e-money regulatory framework seems to be intended to target products that are “money”. The primary case for regulation made in the 1998 Report was that such products would impact on the monetary stability (i.e. issuance of such “money” at a discount would increase the total money supply); the word “issuing” implies that as well. E-money institutions under EMD1 were also treated as “credit institutions” (i.e. they were effectively seen as issuing ‘bank money’). However, if the primary concern relates to national monetary policy, then the regime does not seem to be able to address the situation where overseas firms issue e-money e.g. in pound sterling/euro. That presumably affects the UK/EU money supply but those firms are not currently subject to UK/EU regulation. Conversely, where UK firms issue e-money in e.g. USD only, that does not seem to impact on the UK’s monetary aggregate but such firms are subject to UK authorisation.
Further, the “safeguarding” requirements introduced to the e-money regime by EMD2 also seem inconsistent with e-money being “money”: if the customers were already issued “money” of the same value when they exchanged funds for e-money, why would the e-money institution still have to safeguard those funds received? Rather, the safeguarding requirements are perfectly in line with e-money being a “service”. The safeguarding requirements for e-money institutions were borrowed from PSD1 2007/64/EC (and updated following PSD2) which regulate (payment) “services”. (The previous investment rules under EMD1 merely required e-money institutions to hold investments that at least matched their outstanding e-money liabilities.) When integrating the relevant provisions from PSD1, EMD2 seems to have failed to take into account that the two regulatory regimes are very different in nature (albeit they both relate to payment): one is intended to regulated “money”; the other “services” enabling the use of money.
Article 17 of EMD2 requires the Commission to review its implementation and “where appropriate” propose its revision by 1 November 2012. The Commission issued the required report (COM 2018/041 final) in January 2018 which did not propose any substantive next steps but stated that further analysis was needed for a future revision of EMD2 and its merger with PSD2. No mention of electronic money is made in the Commission’s 2020 Work Programme. Therefore, it may become more of a UK domestic issue (subject to the ongoing Brexit negotiations) as regards how the e-money regulatory regime should be improved.
That improvement may be needed sooner rather than later to address the apparent confusions on the current market. As noted in the example above, all UK banks that offer online current accounts may on a literal reading potentially be issuing e-money (as currently defined), particularly given the new “payment initiation service”. Issuing e-money without the specific permission to do so is a criminal offence. Conversely, there appear to be firms that are authorised as electronic money institutions but whose products are described to function like (with some even advertised as) a “current account” or “debit card”. There are also firms that consider any instrument linked to an account to be e-money.
Whatever form such regulatory improvement may take (whether specific guidance or a complete overhaul), it is imperative that the fundamental nature of e-money products be carefully analysed and determined (be it “money” or “service”) and that the new, improved regulatory approach be designed consistently with that nature.