Viewpoint: Balancing Digital Money, Counter-Terrorism and the Future of E-Money in Europe
by Monica Monaco, TrustEuAffairs
At the same time that EU regulators are keen to encourage the digitalization of payments, e-money—particularly pre-printed prepaid cards sold at retail—may face some regulatory headwinds, following the Nov. 13 terrorist attacks in Paris, prior to which prepaid cards were used by the terrorists, according to French officials. While some European member states are calling for swift action, others are concerned that too much regulation would stifle prepaid card distribution and innovation. In the meantime, the long-awaited report on the implementation and impact of the Second E-Money Directive (2EMD) may also provide insight into future e-money regulation and clarify outstanding points of confusion.
Before we get into what may be ahead for prepaid, it’s important to understand EU priorities around payments. On Dec. 10, 2015, the European Commission published a Green Paper (GP) on retail financial services, which is out for consultation until March 18. The aim of the consultation paper is “to identify the specific barriers that consumers and firms face in making full use of the Single [European] Market and ways in which those barriers could be overcome, including by making best use of new technology, subject to appropriate safeguards.”
|Redeemability of E-Money
One of the positives that may come out of the 2EMD report is some clarity and uniformity around how long e-money may be redeemed. In general, the redeemability timeline is left to the member states under Article 11 of 2EMD. Consequently, the timeline for a consumer to be able to redeem the unspent value on a prepaid card can be anywhere from six to 30 years, with one member state even allowing the unspent value on a prepaid card to be claimed without restriction forever. For the industry, this means that EU cross-border programs are very difficult to operate. Furthermore, the same article doesn’t establish who would own the unclaimed prepaid funds at the end of the redeemability period, leaving member states to determine independently whether the non-redeemed funds available for each prepaid card shall be the property of the prepaid issuer or of the member state itself.
The digitalization of payments is mentioned in the GP in terms of mobile and instant payments, as well as electronic signature and identity verification. The GP explains that the eIDAS Regulation—the regulation on electronic identification and trust services for electronic transactions—will provide a solution for cross-border use of e-identification as well as of electronic trust services, such as electronic signatures and Website authentication, enabling easy remote identification of customers, and strong authentication of parties to payment transactions under the revised Payment Services Directive. The questionnaire accompanying the GP asks whether further action is necessary to promote the uptake and use of e-ID and e-signatures in retail financial services, including security standards; this seems to hint at possible future regulation from the European Commission in this area.
Furthermore, the GP questions the dynamic currency conversion services offered to consumers when they pay via a payment card in member states with a different currency from their home member state. The GP explains that consumers aren’t always aware of the currency conversion rate that will be applied to a transaction executed abroad, for example, for cash withdrawals or purchases with payment cards. In addition, when merchants offer dynamic currency conversion, the merchant rates aren’t systematically better for consumers and are difficult to compare with the rates offered by the consumer’s bank, as the precise rates offered by the banks are not available to consumers at the time of the transaction. This part of the GP also hints at possible future regulation, as the related questions ask whether any further actions are needed to ensure that consumers know what currency conversion fees they’re being charged when they make cross-border transactions.
Once the consultation closes, the European Commission plans to publish an Action Plan on Retail Financial Services around summer 2016. So the European regulator is in favor of the digitalization of payments, but what do they think about prepaid?
What’s ahead for Prepaid?
The European Commission was due, according to Article 17 of 2EMD, to present a report on the implementation and impact of the directive by Nov. 1, 2012. This report still hasn’t been presented because certain member states were late transposing the directive into local law.
It appears the European Commission is finally set to publish its 2EMD report in the first quarter of 2016. The report may include recommendations about the 2EMD rather than a draft proposal for a new 3rd E-Money Directive, as important concepts in the 2EMD—like those of limited networks, supervision of e-money institutions and the definition of home/host countries—recently have been clarified via the PSD2.
In the meantime, on Nov. 20, the European Council urged the European Commission to take actions to counter terrorism in various areas, including prepaid products. The European Commission may need to review—directly or indirectly—the 2EMD, particularly its provisions around anti-money laundering and the traceability aspects of prepaid cards, which are under scrutiny, following the terrorist attacks in Paris. This may lead to a review of the 4th Anti-Money Laundering Directive, only approved last summer. Notably, the focus could be on the distribution of pre-printed prepaid cards, which are sold at retail. Current EU law permits prepaid cardholders to load up to €2,500 (US$2,663) to a reloadable card over one year without undergoing KYC. Single-use cards can be loaded up to €250 (US$266) anonymously. Because these cards are sold across Europe, and in non-European countries, it can be difficult to trace their distribution. Will distribution points of such prepaid cards be subject to new compliance requirements? It’s too early to know. For the time being, the discussions around counter-terrorism and prepaid cards are at a very early, technical stage. That said, most of the discussions are highly political and there is a sense of urgency to act, especially from France.
Member states have very different positions about how to proceed. While some member states are calling for increased regulation at the council level for e-money and prepaid cards in relation to transaction anonymity, suggesting an automatic ID check regardless of the amount loaded, with copies of documents maintained in a central register, other member states propose that loading and reloading of e-money instruments should be limited and transactions carried out should be tracked from issuing to the moment in which the money is used or the card reloaded. Finally, other member states think that any form of regulation of prepaid card distributors will end up disrupting the market, stifling innovation and making the legal framework for the distributors too cumbersome.
Although the proposals vary widely from doing nothing to requiring KYC for all cards and loads at the POS, it’s expected that some form of agreement on the approach to prepaid will be reached early this year. At the Economic and Financial Affairs Council meeting of the Council of the European Union, which took place on Jan. 15 in Brussels, it was announced that the European Commission will publish an Action Plan in February on combating the financing of terrorism, which will address both virtual currencies and prepaid.
Do prepaid instruments still have a future in Europe? Likely so, but their future is likely to be a much more regulated one.
Based in Brussels for the past 13 years, Monica Monaco created TrustEUAffairs in September 2013 to advise clients on relevant EU legislative initiatives. Monica focuses on payment systems and new payments solutions, such as real time, mobile payments and contactless. She was senior manager for EU relations and regulatory affairs in the legal department of Visa Europe for more than 10 years. Monica can be reached at [email protected].
Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC (OJ L 257, 28.8.2014, p. 73)