PSD3/PSR are on the way, what changes for e-money?

With a likely final text for PSD3/PSR available, we can start assessing the most important changes in this first update to the payment services framework since PSD2 was adopted in 2015. 

1. Integrating the e-money framework into PSD3/PSR 

The proposed PSD3/PSR already made it clear that the e-money framework – set by the Second E-Money Directive (EMD2) – would be integrated into the payment services framework. Given the close alignment and overlap between these frameworks, this integration was bound to come one day. The most obvious result is that issuing e-money will now be subject to a license as payment institution. In terms of definition, the element of e-money being “represented by a claim on the issuer” has been removed. This element was always superfluous, since this is already covered by the redeemability requirement. 

Important to note is that the activity of e-money issuer will be restricted. Under EMD2, e-money institutions could issue e-money and provide certain payment services. Under PSD3/PSR, the license for e-money issuing will include only that particular activity. Should the applicant want to provide other payment services, a broader license must be sought. As a result of this restriction, the initial capital requirement for providing only e-money issuing will be lowered to EUR 250,000. Those that want to offer payment services as well will have to combine this amount with the minimum amount required for the payment services they wish to offer. Payment institutions issuing e-money will be subject to a separate calculation method for the own funds. 

PSD3/PSR maintains that e-money issuers can use distributors. However, it is still not allowed for an agent to issue e-money on behalf of an e-money issuer. The principle of issuance and redemption of e-money at par value is maintained as well. Principles on redemption fees are maintained. No interest may be granted on e-money still. It is also still not permitted to grant credit using funds which have been received from payment services users in exchange for electronic money.

An exemption from this framework is still possible for smaller issuers, “where the total business activities generate an average amount of outstanding electronic money that does not exceed a limit set by the Member State but that, in any event, does not exceed EUR 5 million”. Derogations from certain requirements are also still possible for low-value transactions, being individual payment transactions not exceeding EUR 50 or instruments that either have a spending limit that does not exceed EUR 300, or store funds which do not exceed EUR 300. The spending and storing limits for prepaid payment instruments may not exceed EUR 500. 

The principle of liability for unauthorised transactions can apply to e-money transactions as well, except where the payer’s PSP does not have the ability to freeze the payment account on which the electronic money is stored or block the payment instrument. Member States may limit that derogation to payment accounts on which the electronic money is stored or to payment instruments of a certain value. 

Concluding, it seems that the requirements for e-money issuers have been largely kept intact. The main difference is that pure e-money issuing will be subject to lower initial capital requirements. Nevertheless, since most e-money issuers also provide certain payment services, this will affect few service providers in practice. 

However, from a practical point, all licensed e-money institutions do need to have their license converted into a PSD3/PSR license within 27 months after the date of entry into force of the new framework. This will not be a full license application, but rather updating the information previously provided with new information required under PSD3/PSR. This new information concerns, inter alea, demonstrating DORA compliance and having an orderly wind-up plan. 

2. Updating the exemptions 

The list of exemptions to the payment services framework has been updated substantially. 

The exemption for commercial agents now adds another element. Apart from the commercial agent being authorized via an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of only the payer or only the payee – but not both of them – this agreement must also give the commercial agent a real scope to negotiate with the payer or payee or conclude the sale or purchase of goods or services. It is not clarified what would constitute a ‘real scope’ to negotiate, but recital 11 does make it clear that the legislator is looking at e-commerce platforms – which indeed often do not leave their users any real autonomy to set their conditions. Additionally, the EBA is called upon to provide further guidance on this – which may also include setting up a repository of use cases. Expect more to come on this point. 

The limited networks exemption is clarified that it could also include e-money-based instruments. It is also clarified that the premises of the issuer can include physical premises or online stores. Additionally, the limitation only extends to a single limited network. For the limited range of goods and services, it is added that this includes instruments restricted to be used in transactions between payment service users who are not consumers – meaning it can also apply to B2B-only instruments. For instruments within a Member State for specific social or tax purposes, it is added that this only applies to instruments which cannot be converted into cash. 

The exemption for cash-based transactions without intermediary will be extended to e-money token transactions without intermediary between self-hosted addresses. A new exemption is included for “payments transactions carried out by a crypto-asset service provider intermediating between a buyer and a seller where electronic money tokens are exchanged for other electronic money tokens or for crypto-assets, as well as the exchange of electronic money tokens for funds, including electronic money tokens, or cryptoassets carried out by a crypto-asset service provider acting in its own name as buyer or seller of those electronic money tokens”, and “payment transactions carried out between crypto-asset service providers or their branches for their own account”. 

The maximum amounts for the telecom exemption have been updated to EUR 60 per transaction and a total of EUR 360 per month. 

The exemption for ATM deployers has been removed. ATM deployers will now have to be registered and be subject to requirements on fees transparency in situations where such ATM deployers levy charges for cash withdrawals. However, a new exemption has been included for retail stores that provide cash upon explicit request by the user but independently of the execution of any payment transaction and without any obligation to make a purchase of goods and services. 

The exemption for technical service providers has also been removed. They will now be liable for direct financial damage caused to the payee, the PSP of the payee or of the payer for, and proportionate to, their failure, within the remit of their contractual relationship. This liability is limited to the amount of the transaction in question to provide the services that are necessary to enable the application of strong customer authentication. Moreover, they cannot enter into possession of the funds. 

3. Integrating e-money tokens 

MiCAR already provided that e-money tokens should be considered as e-money. As a result, PSD3/PSR integrates e-money tokens into its framework. E-money tokens will also be considered as funds. 

In terms of license, the issuing of e-money tokens itself should only be subject to a MiCAR license. However, transfer services under MiCAR could be considered as execution of payment transactions, and thus trigger the need for an additional license under PSD3/PSR. For safeguarding, it is provided that the safeguarding obligation of article 54 MiCAR applies, and not the one from PSD3/PSR. 

Transactions with e-money tokens will not be subject to open banking requirements and payee verification. Also exempted are “payment transactions carried out by a crypto-asset service provider intermediating between a buyer and a seller where electronic money tokens are exchanged for other electronic money tokens or for crypto-assets, as well as the exchange of electronic money tokens for funds, including electronic money tokens, or cryptoassets carried out by a crypto-asset service provider acting in its own name as buyer or seller of those electronic money tokens”. 

It is also clarified that if a PSP is not able, due to circumstances that are not attributable to itself, to comply with certain information obligations concerning payment transactions with electronic money tokens settled on a distributed ledger, the PSP must provide the required information by way of a reasoned estimation, as soon as possible, and in any case prior to the payer authorising the transaction. Specific obligations for account servicing payment service providers regarding payment initiation services and account information services also will not not apply to payment transactions with electronic money tokens. Neither do the principles on the payee’s unique identifier and corresponding liability for incorrect application of the matching verification service apply. 

Last, a temporary derogation from PSD2 is foreseen until PSD3/PSR become applicable for a number of crypto-asset services that do not fall under the scope of PSD3/PSR. This concerns: 

- payment transactions made exclusively in electronic money tokens directly from the payer to the payee, without any intermediary intervention; 

- payments transactions carried out by a crypto-asset service provider intermediating between a buyer and a seller where electronic money tokens are exchanged for other electronic money tokens or for crypto-assets, as well as the exchange of electronic money tokens for funds, including electronic money tokens, or crypto-assets carried out by a crypto-asset service provider acting in its own name as buyer or seller of those electronic money tokens; and 

- payment transactions carried out between crypto-asset service providers or their branches for their own account.

The provisions in PSD3/PSR regarding e-money tokens are largely in line with the EBA’s recommendations for a future alignment between the payment services framework and MiCAR. This is a much-needed evolution, as it has become abundantly clear that the interplay between MiCAR and the payment services framework is not working out well in practice. Also the proposed temporary derogations from PSD2 could help to tide the market over until PSD3/PSR become applicable. This avoids many service providers having to commit to additional requirements now that will no longer be required later. 

For any questions on how PSD3/PSR will affect your business, please contact niels.vandezande@timelex.eu.