European Commission confirms narrower scope of e-money acceptance under EMD2

What was the question?

The question was:

• whether the wording “accepted by a natural or legal person other than the electronic money issuer” in the definition of e-money in Article 2(2) of EMD2 implies that a third party payee must become the holder of the e-money and thus that there must be a direct contractual arrangement between the e-money issuer and all payees (obligating the payees to accept the issued e-money as a means of payment and granting the payees a right of redemption of the e-money); or
• whether the criterion that a third party must “accept the electronically stored monetary value” could be considered to be met where a third party payee accepts a customer’s payment with a card that is backed by the customer’s e-money, regardless of the fact that the payee will not become a holder of the issued e-money.

How did the European Commission respond?

The Commission referred with approval to the Court of Justice of the European Union’s (ECJ) findings in Case C-661/22 that:

• e-money is a monetary asset separate from the funds received by the e-money issuer on its redemption;
• the creation of that separate monetary asset requires not only the reception of funds by the issuer, but also the consent of the user for the issuance of e-money, represented by a contractual agreement between the user and the issuer; and
• there is no issuance of e-money in cases where there is no conversion of funds received into ‘electronically, including magnetically, stored money which could be used by a network of customers who would accept it voluntarily’.

Given the above, the Commission stated that:

• the acceptance of e-money by someone other than the e-money issuer – in accordance with the definition of e-money in Article 2(2) of EMD2 - requires the transferability and voluntary acceptance of e-money as a separate monetary asset; and
• the mere reception by the payee of funds (‘scriptural money’) resulting from the redemption of that e-money does not meet the acceptance criterion.

The Commission further reasoned that Recital 18 of EMD2 provides that “electronic money needs to be redeemable to preserve the confidence of the electronic money holder”, thereby classifying redeemability as ‘an intrinsic feature of electronic money’. It also pointed to Article 11, which provides both:

• that the conditions of redemption should be stated in the contract between the e-money issuer and the e-money holder (Article 11(3)); and
• that the redemption rights of a person, other than a consumer, who accepts e-money shall be subject to the contractual agreement between the issuer and that person (Article 11(7)),

meaning that where the person who accepts e-money becomes a holder of e-money, a contractual arrangement between that person and the e-money issuer is required.

For more on the ECJ’s decision in Case C-661/22, take a look at our article ‘Payment services versus e-money issuance: Court of Justice of EU clarifies regulatory border’.

What does this mean?

In the ECJ case referred to above, the issue was whether transferring and holding funds on a payment account without immediately mandating payment transactions up to the value of those funds could be taken to mean that the user of the payment service had given their express or tacit consent to the issuance of e-money. The court held that in these circumstances the fact that funds could be held on a payment account in this way did not of itself mean such consent had been given and that in this instance, the payment institution would not have issued e-money. This confirms the position taken under a previous EBA Q&A that holding funds on a payment account without a payment order would not mean that such funds had to be held as e-money, provided they were intended to be used for future payments.

However, in its decision the court also referenced the Advocate General’s Opinion relevant to the case before it. This stated that in order for an activity to come under the issuance of ‘electronic money’, it is at the very least necessary that there be a contractual agreement between the user and the electronic money issuer under which those parties expressly agree that that issuer will issue “a separate monetary asset” up to the monetary value of the funds paid by the user.

It is this particular aspect that the Commission response takes, alongside EMD2 requirements on redeemability, to support its view that something can only qualify as e-money where:

• it is received as a separate monetary asset by a payee;
• such that the payee becomes the holder of that separate monetary asset;
• whose rights of redemption are covered by a contractual arrangement with the issuer.

Taken at face value, this represents a departure from the approach that both market players and regulators in this sector have adopted to date and in our view doesn’t fit with how e-money is used under various models currently used, including in particular under card scheme frameworks.

As a Q&A, the Commission’s response is not binding; however, we recommend this is something firms keep under review given how far-reaching the consequences would be if regulators adopted this view.

If you have any questions arising from this article, please get in touch with any of the listed people or your usual Hogan Lovells contact. 

Authored by Eimear O’Brien, Roger Tym, Charles Elliott, Charles-Henri Bernard and Virginia Montgomery.