Making sense of ECB’s “Policy on access by non-bank payment service providers to central bank operated payment systems and to central bank accounts”

As previously announced in my recent posts, on July 19, 2024, the ECB, i.e. Eurosystem issued the important “Policy” document primarily addressed to its members in the eurozone (https://www.ecb.europa.eu/paym/target/target-professional-use-documents-links/tips/shared/pdf/Eurosys_pol_on_access_to_central_bank_operated_payment_systems_by_NBPSPs.pdf). The 8 pages document will form the backbone of the future legal acts and guidelines applicable “for all systems” (esp. TARGET). The Eurosystem “will monitor the implementation of this policy” to ensure, inter alia, the “harmonised approach to access by non-bank PSPs to all central bank-operated payment systems”.

?

It is time to look closely at this document.

The Safeguarding In The Central Bank

We must remember the central bank has its special powers as an independent institution for formulating and executing the policy of the state (i.e. it shall not “seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body”, art. 130 of TFEU). Although its competences are limited in scope and must always remain within the limits of the law, the law itself must leave the proper discretionary powers to the central bank to make its own decisions. Therefore, although in the amended PSD2 we can read that Payment Institutions (PIs) and Electronic Money Institutions (EMIs) shall deposit funds received – directly or indirectly - from the payment service users (PSUs) “in a separate account in a credit institution or in a central bank at the discretion of that central bank, or invested in secure, liquid low-risk assets as defined by the competent authorities of the home Member State” (art. 10 (1) (a) of PSD2, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02015L2366-20240408), then we shall still bear in mind that “any decision to grant direct access to central bank-operated payment systems and/or to offer accounts for the purposes of safeguarding remains at the Eurosystem’s discretion” (Policy, p. 2) what the ECB justifies at least in the a/m art. 130 of TFEU.

Therefore, we have received the following statement in the Policy (chapter 4, p. 6):

?“1. It is not a core function of central banks to act as a substitute for credit institutions in providing safeguarding services.

2. Eurosystem central banks shall not offer safeguarding accounts to non-bank PSPs. In the event that a participant relies on client funds for settlement activities, it remains the responsibility of the participant to ensure that its operational model complies with the respective national legislation.”

The Reasons

Although some key justifications of this position refer to such “concerns” like:

• blurring the lines between the deposit-taking banks and PIs & EMIs existing solely “for the facilitation of e-money and payment services”,
• encouraging PIs & EMIs and so PSUs to “hold” with them “more funds than needed for making payments” (here – at page 7 - the interesting concepts of a “synthetic central bank digital currency” and of a “narrow bank” are being shortly discussed),
• exposing central banks to reputational risks (e.g. nb PSP’s regulatory noncompliance or involvement in fraudulent activities or even financial crimes)
• last but not least, ECB confirms that the same (negative as regards safeguarding) position holds for the issuers of EMTs and ARTs being CASPs and for any “ancillary systems for the purpose of backing stablecoins”,

the main reasons come from the teleological (i.e. purpose-oriented) interpretation of the settlement account being held in a central bank, namely that it:

“implies the placing of funds to meet settlement obligations, and the balance on such an account should therefore be limited to the funds necessary to meet such obligations (based, for example, on historical transaction data). This does not require or justify the placing of additional funds (particularly not all or the majority of users’ funds) in the payment system account. From a financial stability perspective, it is important that such accounts are primarily used for payment purposes and not misused for safeguarding purposes. No restrictions will be imposed on the type of funds (own funds or client funds) used for the purposes of payment activities, as this is subject to the full compliance of the participant with the respective national legislation and is outside the remit of the payment system operator.” (chapter 3.1 point 2 of the Policy, p. 4)

The Broader Matter

Thereby, although the “no safeguarding” position of the ECB (to be closely followed by the NCBs of the Eurosystem) refers only to these PIs and EMIs, which do not apply other ways “to safeguard all funds which have been received from the payment service users or through another payment service provider for the execution of payment transactions” (PSD2, art. 10 (1)), like:

• funds held by the payment institution or electronic money institution only to be “delivered to the payee or transferred to another payment service provider by the end of the business day following the day when the funds have been received” (PSD2, art. 10 (1) (a)),
• funds “invested in secure, liquid low-risk assets as defined by the competent authorities of the home Member State” (PSD2, art. 10 (1) (a)) still properly insulated,
• funds “covered by an insurance policy or some other comparable guarantee from an insurance company or a credit institution, which does not belong to the same group as the payment institution or electronic money institution itself” (PSD2, art. 10 (1) (b)),

there will be special restrictions regarding central bank account access for all types of PIs & EMIs (except for those e.g. exempted on the basis of art. 32 of PSD2, like Polish small payment institutions or AISPs, which are entirely excluded from the right to access accounts in the central banks).

Restrictions Of Use

These restrictions, notwithstanding general requirements (DORA compliance, conditions set in art. 35a of PSD2), are the following:

• no “access to an intraday credit facility on the basis that access shall be provided to non-bank PSPs to facilitate the smooth operation and efficiency of retail payments (as opposed to wholesale payments)” (chapter 3.2 point 5 of the Policy, p. 5),
• “settlement accounts should only hold sufficient funds for settlement and prefunding. As the purpose of providing access is to facilitate the uptake of instant payments and the efficiency of the retail payments market, settlement accounts will be subject to a limit based on their anticipated settlement of retail payment transactions (based on, for example, historical transaction data)” (chapter 3.2 point 6 of the Policy, p. 5). This limit will not be enforced automatically, technically but must be observed by the participant itself,
• the nbPSP “is required to ensure that at the close of the business day the balance on its settlement account does not exceed the maximum balance determined in accordance with point 6. In determining the maximum balance, the Eurosystem will take into account factors it considers relevant given the potential impact on price stability and financial stability. It is the responsibility of the participant to sufficiently defund the settlement account prior to the close of each business day. For each day that the balance on a settlement account exceeds the maximum balance, the Eurosystem may apply a penalty to the excess funds” (chapter 3.2 point 7 of the Policy, p. 5).

?

On the positive side, the settlement accounts will be remunerated (currently, this option does not offer interest) since all other conditions shall be at the level playing field with the banks (chapter 3.2 points 8 and 2 of the Policy, p. 5 and 4 respectively).

On the negative side: the Bank of Lithuania will have to change its current arrangement for access of EMIs and PIs (Annex 1 to the Policy, p. 8) to be compliant with the ECB's Policy.

Summing Up

Generally, it looks like the safeguarding of funds will remain the sole responsibility of the PI or the EMI itself and banks (credit institutions) shall play the key role in this safeguarding (taking also some of the related risks listed by the ECB). Central banks will - for now at least - stay away from it.

As safeguarding became a valuable sub-branch of regulatory as well as operational competence of credit institutions as well as PIs, EMIs, it is going to continue being important for PIs, EMIs and the banks which would be ready to cooperate with them.

?

The ECB seems to fit its role into the most basic “model” of safeguarding, as if any PI or EMI having an account with the central bank were to apply the way of safeguarding PSU’s funds described as funds being “delivered to the payee or transferred to another payment service provider by the end of the business day following the day when the funds have been received” (compare PSD2, art. 10 (1) (a)). Whether it is helpful approach or it will make the life of PIs and EMIs even more complicated (how can an EMI in need of safeguarding PSU's funfds transfer them to its unsafeguarded account with the central bank?) - remains to be seen.

The above picture still seems to be the simple one which will become more complicated (esp. the distribution of PI’s or EMI’s held funds among banks to avoid risk concentration – compare the drafted recital 30 of PSD3) after the PSD3 becomes the law and is implemented.

?

?

28 July 2024

The above publication contains its author’s private opinions only.

?

?