Description of the Sector
Payment systems and services provide the means by which funds are transferred electronically between payers and payees – as such they are a vital element of the domestic and international economic system.Payment systems are the plumbing of the financial system. Each one consists of a set of rules and procedures that govern the transfer of funds between the financial institutions that participate in that payment system.
Payment Service Providers (PSPs) are firms which carry out a payment service, such as allowing two parties to make a payment transaction, or providing a user with aggregated information about their accounts. PSPs can include banks (credit institutions), e-money institutions, payment institutions, and payment initiation serviceproviders.
The current EU regulatory regime
Payment services are subject to an over-arching regime of EU regulation which sets out the right of payers/payees and the obligations on firms providing these services, for both domestic and cross-border activities.
The key pieces of EU legislation affecting payment services include:
• The second Payment Services Directive (PSDII) – sets out obligations for firms providing payment services (such as minimum processing times) andrights for firms and consumers making payments.
• The second E-money Directive (EMDII) – sets out rights and obligations for firms and consumers for the provision and issuance of e-money.
• SEPA Regulation and Cross-border Payments Regulation – created the Single Euro Payments Area: common rules for payments in Euros.
• Interchange Fee Regulation – caps interchange fees paid by a consumer’s bank to a merchant’s (acquiring) bank/ processing firm for most retail debit and credit card transactions.
• The fourth Anti-Money Laundering Directive (AMLDIV) – sets out obligations for firms to carry out due diligence measures in relation to theircustomers
The majority of UK payment services are governed by PSDII, including money transfer and remittance activities, merchant acquiring and corporate payments. Credit institutions (banks and building societies) authorised under the fourth Capital Requirements Directive (CRDIV) and e-money institutions, authorised under EMDII, may provide payment services under their existing authorisations, but must complywith PSDII’s conduct requirements.
Firms that are not authorised under CRDIV and EMDII must be authorised under PSDII as a payment institution, unless they are small enough to qualify for an exemption. There is a passport for authorised payment institutions; but there is no equivalence regime for third country firms.
The SEPA Regulation, which sets out the rules for credit transfers and direct debits in Euros between payment service providers based within its geographical scope, also governs many euro-denominated payments. The SEPA Regulation effectively allows banks that meet the rules to send low-cost euro payments to other SEPA participants, through European payments systems (such as EBA [Euro Banking Association] Clearing’s STEP2). SEPA is governed by the European Payments Council (EPC), which, while an independent trade body, works closely with the European Commission and the European Central Bank (ECB).
Card schemes’ activities are not regulated under PSDII and are not subject to an authorisation regime, so passporting is not of direct relevance to them. However, the activities of any firms issuing payment instruments (e.g. the bank issuing credit or debit cards) or merchant acquirers acquiring transactions within that card scheme areregulated under PSDII.
Inter-bank payment systems (activity 5 above) underpinning the majority of payment services are not subject to an over-arching regulatory regime; there are not, for example, pan-European ‘authorisation’ requirements. However, the Settlement Finality Directive (SFD) does allow for the smooth functioning of these systems by limiting issues that would arise if a participant in a designated SFD system, such as a payment system, were to become insolvent.
Consumer and competition law is particularly relevant to this sector. Competition cases and decisions by the European Commission and the Court of Justice of the EU have had a particular influence on the formation of the Interchange Fee Regulation, which sets a cap on the level of interchange fees (paid to the card issuer as a cut of each transaction) and which was designed to address market failures in this subsector.