FAQ on EC's Proposed Revisions to E-Money Directive
October 14, 2008 // Published as a news service by IHS
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This document answers frequently asked questions about the Oct. 13 proposal by the European Commission (EC) to revise current rules governing the issuance of electronic money in the European Union (EU).
What is e-money? Is it really used?
Electronic money is the electronic alternative to cash, which enables users to store funds on a device (card or phone) or through the Internet and to make payment transactions.
Examples include electronic purses, such as Proton in Belgium and Chipknip in the Netherlands, and web-based services such as PayPal.
Why has the EC proposed the review of the current rules?
An evaluation of how the existing Electronic Money Directive[1] has been applied shows that some of its provisions have hindered the take-up of the electronic money market, hampering technological innovation.
Figures on the limited number of fully licensed electronic money institutions (20 electronic money institutions and 127 entities operating under a waiver), or on the low volume of electronic money issued (currently the total amount of electronic money in the EU amounts to €1 billion in comparison with more than €600 billion of cash), demonstrate that electronic money has not yet really taken off in most of the EU member states.
The adoption of the Payment Services Directive, 2007/64/CE, will create a modern and coherent legal framework for payment. Therefore, the EU believes it is urgent to put in place the right framework to promote the emergence of a true Single Market for electronic money services in the EU.
What is the expected impact of the new measures on the payments market?
The new rules will facilitate market entrance for small providers and therefore create the right market conditions to foster innovation and competition. Estimates show that this industry could reach a volume up to €10 billion by 2012.
What are the objectives of the proposal?
Overall, the proposal will contribute to an efficient and effective internal market for payment services in the EU. The proposal has the following objectives:
- To enable innovation and the design of new and secure electronic money services, creating tangible benefits for consumers, businesses and the wider European economy.
- To provide market access to new players and foster real and effective competition between all market participants.
- To modernize the provisions of the Electronic Money Directive, ensuring consistency with the Payment Services Directive (see IP/07/1914).
Does the proposal address the issues identified in the review report published in 2006?
Yes, the proposal addresses the main recommendations of the review report, which included:
- The need to clarify scope and definition expressed by a wide variety of stakeholders, as the existing provisions did not contribute to legal certainty.
- The recommendation to update the core requirements of the directive. These include reviewing the requirements for redemption of funds, updating the threshold for initial and ongoing capital to remove barriers for small entities to enter the market, and reviewing existing investment limitations.
- The request to modify the waivers regime in relation to the relaxation of entry requirements for electronic money institutions, ensuring consistency with the waivers regime for payment institutions under the Payment Services Directive.
- The suggestion to adopt the anti-money laundering rules in the relevant European Community legislation.
- The request to wait for the adoption of the Payment Services Directive in order to ensure consistency with this new directive, which will become effective November 2009.
The main conclusions of the review report can be found at http://ec.europa.eu/internal_market/bank/docs/e-money/working-document_en.pdf.
The evaluation report itself is available at http://ec.europa.eu/internal_market/bank/docs/e-money/evaluation_en.pdf.
What are the main changes introduced by the proposal?
The proposal includes a technologically neutral and simpler definition of "electronic money" to ensure legal certainty. The new definition covers all situations where the payment service provider (an e-money institution or credit institution) issues a prepaid stored value in exchange for funds. For example, a multipurpose prepaid mobile payment solution could fall under the new rules.
The proposal includes a new prudential regime, ensuring greater consistency between prudential requirements of electronic money institutions and payment institutions under the Payment Services Directive (see IP/07/1914). The main elements of the new prudential rules are following:
- An initial capital of €125,000, enabling market entrance for smaller players.
- A new formula to determine ongoing capital in addition to the three methods already proposed by the Payment Services Directive.
- Safeguarding requirements for electronic money institutions in line with safeguarding requirements for payment institutions under the Payment Services Directive.
- An updated waiver regime, according to which small entities can obtain derogation for some of the authorization requirements, is aligned with that of payment institutions under the Payments Services Directive.
- Anti-money laundering rules are updated, ensuring consistency with the thresholds of the Payment Services Directive.
The proposal clarifies the application of redemption requirements, with special reference to their application to mobile telecommunications. Consumers would have the right to claim back their electronic money at any moment, under conditions laid down by the new rules. The new rules ensure a high level of consumer protection, while making compliance easier for business.
Is this in line with the "Better Regulation" approach?
The new proposal is in line with the EU's approach for "Better Regulation." The overall legal framework will be significantly improved, ensuring consistency with the Payment Services Directive.
In addition, small enterprises will find it easier to comply with the requirements, thereby lowering administrative burden. The proposal relaxes initial capital requirements, ensuring easier market access. It also extends the activities of electronic money institutions and improves the rules for redemption of funds.
Has an impact assessment showing costs and benefits of the new provision been made? Is it available?
Yes, a comprehensive impact assessment has been made and can be seen at http://europa.eu.int/comm/internal_market/payments/.
It shows, in particular, that the existing market has developed more slowly than expected. One of the reasons for the slow uptake was the legal framework, which did not sufficiently contribute to legal certainty, imposed too stringent requirements for business, and hampered market access and innovation.
The report concluded that an improvement of the legal framework could have a positive impact on the market. The new initial capital requirements, which are lowered to €125,000, remove an entry barrier for small entities and will accelerate market entry of small and innovative players.
In addition, the activity of issuance of electronic money will be compatible with other business activities, just as for payment institutions under the Payment Services Directive, enabling mobile operators and retailers to enter the market.
In addition, the new rules for redemption ensure a high level of consumer protection, aiming to maintain confidence in these new products, while facilitating compliance for businesses with the new rules. Overall, this is expected to increase the number of market players with up to 125 to 300 new players, contributing to innovation and effective competition and resulting in further uptake of electronic money in the EU.
[1] SEC(2006) 1049, Commission Staff Working Document on the Review of the E-Money Directive (2000/46/EC).
Source: European Commission.