E-money regulation in the EU
Electronic money (e-money) is broadly defined as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer.
The device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions.
According to European Central Bank (www.ecb.europa.eu) e-money products are generally differentiated between hardware-based and software-based, depending on the technology used to store the monetary value.
Hardware-based products mean that the purchasing power resides in a personal physical device, such as a chip card, with hardware-based security features and monetary values are typically transferred by means of device readers that do not need real-time network connectivity to a remote server.
Software-based products make use of specialized software that functions on common personal devices such as personal computers, tablets, smartphones, etc. To enable the transfer of monetary values, the personal device typically needs to establish an online connection with a remote server that controls the use of the purchasing power.
However, there are methods of mixing both hardware and software-based features.
Existing legal framework:
- Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (the Electronic Money Directive (the EMD)).
- Directive (EU) 2015/2366 on EU-wide payment services (PSD2).
the Electronic Money Directive
What should be understood under “Electronic money institution” and “Electronic money”?
Article 2(1) of the Directive defines an “electronic money institution” as a legal person that has been granted authorization to issue e-money. Article 2(2) of the Directive, “electronic money” means “ Credit institutions, as well as other financial and non-financial institutions, may issue e-money.
The main functions of EMD:
- To set out the rules on the business and supervision of electronic money (e-money) institutions in order to contribute to the emergence of a true single market for e-money services in the European Union (EU).
- To ensure consistency with the EU’s payment services directives (Directive 2007/64/EC, known as the PSD), thus contributing towards a single EU market for payments for the benefit of consumers, business, and the wider EU economy.
- To facilitate the emergence of new, innovative and secure e-money services.
- To provide market access to new companies;
- encourage effective competition among all market participants.
Generally speaking, the EMD modernizes EU rules on e-money, in particular bringing the prudential regime for e-money institutions into line with the requirements for payment institutions in the PSD.
The EMD introduces proportionate prudential requirements in order to ease market access for newcomers. This includes reducing the initial capital requirement to €350,000 and new rules on calculating own funds.
What institutions are covered by the EMD?
The institutions covered by the EMD include banks, e-money institutions, the European Central Bank and national central banks.
The activities which e-money institutions are permitted to carry out include providing payment services and granting credit related to these payments.
Key Terms of the EMD:
Electronic money – is the digital alternative to cash, which enables users to store funds on a device (card or phone) or through the internet and to make payment transactions (Article 2(2) of the EMD).
E-money institutions – are organizations that have been authorized to issue electronic money (Article 2(1) of the EMD).
From when does the EMD apply?
It applies from 30 October 2009. EU countries had to incorporate it into national law by 30 April 2011.
Important! In October 2015, the EU adopted a new directive on payment services known as PSD2. It repeals Directive 2007/64/EC (PSD) with effect from 13 January 2018. PSD2 aims to improve security, widen consumer choice and keep pace with innovation.