For some time, market commentators have been forecasting a surge in demand for mobile payments and mobile banking, and it is certainly true that the technology has existed for a number of years in one form or another. It is perhaps surprising, then, that the emergence of mobile payments services has been slower than predicted. At last, it seems, the momentum is gathering, with a number of initiatives recently announced and the operational launch in the UK of Quick Tap, the Orange/Barclaycard mobile contactless payments service. It is initiatives like this that commentators have been expecting for some time and, combined with the rapid take-up of smartphones, it is believed that consumers will start to make the switch to mobile banking and mobile payments.
The legislative landscape has also developed and in this article we consider the impact of the second Electronic Money Directive (2EMD), which has recently come into law, and which should facilitate the spread of mobile payments services. 2EMD allows mobile operators, online retailers and others an opportunity to provide customers with prepaid accounts – under a ‘reduced’ regulatory regime, or outside of financial services regulation altogether.
2EMD was meant to be implemented throughout the EU by 30 April 2011. While there have been delays in a number of other EU jurisdictions, the UK brought in its Electronic Money Regulations 2011 on time. Although this article does have an English law focus, broadly the same issues should arise elsewhere in the EU.
What do we mean by mobile payments?
Mobile payments are likely to include:
· mobile phones that can be used to make contactless payments at physical points of sale (Barclaycard and Orange rolled out the first such service in the UK this summer and Zoosh have launched an app allowing contactless payments without the need for near field communication);
· m-commerce, involving online payments through smartphones;
· phone applications allowing customers to send funds from their accounts to other individuals or to pay suppliers; and
· online banking through a smartphone.
Further services may of course develop, in what is a fast-moving market.
What is the link to e-money?
Whatever the service, mobile payments are likely to involve payments to or from an account. While the account could be a regular bank or credit account, a number of emerging models link the mobile payments service to a prepaid/e-money account, and that is the model that we will assume for the purposes of this article.
‘E-money’ is a prepaid product similar to a deposit, but with the core difference of being a means of spending rather than a means of saving. 2EMD defines e-money as ‘electronically, including magnetically, stored monetary value as represented by a claim on the issuer [of the e-money] which is issued on receipt of funds for the purpose of making payment transactions [as defined in the Payment Services Directive 2007], and which is accepted by a natural or legal person other than the electronic money issuer’.
Whereas deposit products (ie bank accounts) can be provided only by fully authorised banks, e-money can be provided either by a bank or by an ‘electronic money institution’.
2EMD applies a lighter touch supervisory regime to electronic money institutions than the banking supervisory regime. This makes e-money relatively accessible to new entrants, whether they be financial services providers operating outside of traditional banking, or players from other sectors. For example, O2 (the UK mobile phone operator) has announced that it is applying for authorisation as an electronic money institution, which allows it to provide its own e-money accounts rather than having to outsource provision to another financial services provider.
Some key impacts of 2EMD
2EMD replaces the first Electronic Money Directive 2000 (1EMD), which may in some respects have impeded the development of e-money. It aligns many aspects of the e-money regime with the Payments Services Directive 2007 (PSD).
Some of the key changes include:
· An entity which is an electronic money institution can now carry on unrelated activities, whereas under 1EMD it would have been restricted to issuing e-money and closely related services (a restriction that only applied to electronic money institutions, as opposed to banks that issued e-money). So, for example, a mobile operator can now provide both network services and prepaid accounts via the same entity. In our view, however, this change may be of limited significance as, under 1EMD, it was always open to a mobile operator to use an associated company to issue e-money. That might still be the preferable approach, to avoid the Financial Services Authority bringing the operator’s non e-money activities within the scope of FSA supervision.
· 2EMD adds, to the existing partial exemption for ‘small’ electronic money institutions, two full exemptions from the e-money regime, each of which derives from the PSD.
The first is the ‘download exemption’, which according to the PSD is aimed at (among other things) ‘telecommunication, information technology or network operators to facilitate purchasing of digital goods or services, such as ring tones, music or digital newspapers‘. It could, for example, enable mobile operators to avoid regulation if they allow their prepaid airtime (or other prepaid account) to be spent on downloads from third parties. Equally, this may be available to platform providers such as Facebook if they offer accounts to buy digital goods through an online marketplace accessible through a phone.
The second exemption is the ‘limited network exemption’, which may be available where a prepaid account can be used only to buy goods and services from a limited range or from a limited network of suppliers. This could, for example, cover prepaid accounts that are only used to purchase travel tickets, such as the Oyster card which provides access to different operators within the London transport system. Another possibility is a mobile e-wallet that can only be used for contactless payments at certain outlets.
Possible drawbacks to relying on the download or limited network exemption are uncertainty as to their scope (due to vague drafting of the exemptions); and the possibility that a key exemption, available for certain e-money products, from needing to carry out customer due diligence for anti-money laundering purposes may technically be unavailable.
The ‘prudential requirements’ applicable to electronic money institutions have changed. The initial minimum capital requirement is reduced from €1m to €350,000 (and the basis for calculating ongoing capital requirements has been adjusted). PSD requirements on safeguarding customer funds (typically by placing them in a segregated account) replace previous rules restricting how the funds could be invested. As to ‘small’ electronic money institutions, they have become subject to a greater level of regulation than under 1EMD. (To be a small e-money institution, the applicant, immediately before registration, must not generate average outstanding e-money exceeding EUR 5,000,000, and the monthly average of relevant payments transactions for the 12 months before the application must not exceed EUR 3,000,000.)
Finally, 2EMD largely spells the end for ‘breakage’, which is where an e-money issuer gets to pocket unspent e-money. Previously, breakage was possible a year after the e-money was originally issued whereas, following UK implementation of 2EMD, customers will be able to reclaim e-money for six years after it has expired, and during that time the unclaimed e-money will continue to count towards the issuer’s capital requirements.
It may have taken some time for the full potential of mobile banking and mobile payments to capture the imagination of both the industry and its consumers, but it seems that the revolution that industry analysts have been predicting may finally arrive. The changes to the European regulatory regime should only act as a further catalyst for growth in this space. More than ever, the next few years seem likely to be a period of rapid evolution in the world of mobile payments.
Ben Regnard-Weinrabe and Mark Taylor are Partners at Hogan Lovells LLP. Rachel Shepherd is a Trainee Solicitor there.
