EBA guidance on acquiring payments transactions and whether electronic money institutions can apply negative interest

In our previous post we covered two new and important pieces of guidance from the European Banking Authority. In this post we cover two more and look at the impact on EU payments firms.

The provision of acquiring payment services in the EU

The EBA was asked to provide a view on whether the payment service of acquiring payment transactions (in this case on an EU webshop) could be provided by a payment service provider from a third country.

As part of the background to the question, the submitter pointed out that payment service users may maintain their bank accounts held with financial institutions outside the EU and can use payment services provided by the financial institutions from non-EU countries, as long as they are provided outside the EU.

The answer prepared by the Commission is that entities in non-EU countries that have not been granted authorisation by a Member State regulator to provide acquiring services “are not permitted to offer these payment services in the EU”.

In other words, acquiring services cannot be provided on a cross-border basis into the EU without a licence from a Member State and one of the requirements to obtain a PSD2 licence is that the applicant must be a legal person established in an EU Member State.

This position diverges from that of the UK where the follow FCA guidance indicates that there is greater scope for providing payment services into the UK on a cross border basis: “[The FCA] would not generally expect a payment services provider incorporated and located outside the UK to be within the scope of the regulations, if all it does is to provide internet-based and other services to UK customers from that location” (PERG 15.6 Q46).

The link to the EBA's Q&A response can be found here. 

Electronic money firms' application of negative interest to clients

The EBA was also asked if an electronic money institution (EMI) is allowed to apply negative interest rates to its clients (electronic money holders). In the background to the question the submitter pointed out that the E-Money Directive refers to "the granting of interest and those other benefits" which could be taken to mean that only the granting of positive interest is banned.

Unsurprisingly the Commission's view is that the ban extends to negative and positive interest. This leaves EMIs in a more challenging position where banks apply negative interest rates to EMIs bank accounts and EMIs cannot pass this cost on. 

Banks may apply negative interest rates when a central bank reduces the nominal interest rate below zero % with the intention of boosting economic activity. This results in a charge for banks to store reserves at the central bank rather than receiving interest income. Banks may in turn pass this cost onto EMIs.

The link to the EBA's Q&A response can be found here.