This article is written by Shivani Garg, pursuing a Diploma in Business Laws for In House Counsels from Lawsikho.

Introduction

Some have a habit of never backing down no matter how hard the challenge gets. The one fair example has been set down by European Union a few years ago by making a huge move and competing with every other country standing neck to neck while making its own way. We need to learn from them. Back in 2011, an international non-profit association called as European Payment Institutions Federation (EPIF) was set up in response to the adoption of the Payment Services Directive (PSD). This move of PSD to introduce a new category of payment institutions was established to encourage more competition at the European level. You can feel by the actions that a huge change was about to come in the market. Although there were banks and other financial institutions as well even then the new payment institutions were set up and permitted to provide payment services alongside the banks. So, how can you have access to such services? Simply, by means of a European passport available to you under the PSD, payment institutions can offer payment products and services across borders. This made it attractive for European customers to pay and receive the money within as well as outside their home country. The aim was to create a single market available for all, both euro and non-euro markets.

When was the law about these institutions enforced?

To establish a legal foundation for an EU single market for payments, to establish safer and more innovative payment services across the EU, the first Payment Services Directive (PSD1) was adopted in 2007. The EU Directive is administered by European Commission so as to regulate payment services and payment services providers throughout the European Union (EU) and European Economic Area (EEA). With time, amends have come with the only aim to better protect their consumers when they do online payment. This harmonizes customer protection and the rights and obligations of payment providers and users.

Objectives of payment institutions

The main objectives with which payment institutions were set up are as follows:

• To achieve a single payment market in the EU
• To provide the regulatory framework for a single payment market.
• To enhance the competition in the EU market.
• To ensure consumer protection and further improving transparency
• To create more efficiency of the EU payment system.

What are small payment institutions (SPI)?

To know what the proposed amendments done by the EU with respect to small payment institutions, you need to know what exactly SPI means. As per Financial Conduct Authority in accordance with Payment Services Regulations, it states these small payment institutions as being any person that includes a corporate entity, which is registered as a payment institution and also included by the institution. In the past few years, the demand for SPI has increased tremendously. SPI has become a very popular activity to launch payment services among the firms in the FinTech sector. There is no denial of the fact that FinTech is popularly spreading in the market all over the world, let alone the European Union. As we all know that figure never lies. To date, more than 90 firms from the Fintech sector have been registered with the Polish Financial Supervision Authority. It might not come surprising to you that the entire registration process might take up to 3 months of time. So, when the transaction thresholds described above are exceeded, an SPI may apply to the Polish Financial Supervision Authority for the license to provide services as a payment institution. All the SPIs have to follow certain rules as well.

How to apply to become a small payment institution?

There are certain conditions that you need to meet if you want to apply to become a Small Payment Institution. Those conditions are:

•  Average monthly payment transactions in the preceding 12 months must not exceed €3 m
•  Whether you are providing payment services for less than 12 months or you have not been providing payment services, your projected average monthly payment transactions must not exceed €3 m.
•  Managers of the company must not have been convicted of money laundering, terrorist financing, or other financial crimes.
• The place of head office and registered office must be in the country you are applying  for
• Whether the applicant is a partnership, an unincorporated association, or a corporation, anyone who is having a qualifying holding must be fit and proper for the conduct of a small payment institution
•  If the applicant is a corporation that has close links to another person, those links shouldn’t become a hindrance ineffective supervision of the business.

If you manage to comply with the above-mentioned conditions, then you are good to go to apply for a small payment institution. One more thing, you need to have an EU passport to have a license from a small payment institution.

Existing EU laws on small payment institutions

Before knowing about the amendments that were proposed by the Polish Ministry of Finance, it becomes important to know what exactly have been the existing provisions on small payment institutions. Here are the few things one needs to be aware of. Under the current Act on Payment Services in Poland, payment services that exist may be provided in the form of an SPI. But there is an exemption on that due to which member states can apply in their national laws under Article 32 of European Union’s Directive 2015/2366 of the European Parliament and of the Council (PSD2). You must be wondering what exactly is Article 32 as it is the center point of all this. Under Article 32, member states may introduce, in their national legal systems, an additional type of payment service provider that is less stringently regulated, while certain restrictions will continue to apply to business operations of that kind. Those restrictions are notable

• The payment services that are provided by the SPI do include payment initiation services (PIS) and account information services (AIS);
• Limit on the value of transactions: the monthly average value of transactions executed in the preceding 12 months may not exceed EUR 1.5 m;
• Limit on funds: the total amount of funds on the payment account for one payment service user shall not exceed EUR 2.000 which is held by SPI;
• Small payment institutions may only operate within Poland.

What were the reasons that led to recent amendments?

Well, the common reason behind any amendment is to make things better than they already existing ones. So was the case when it came to payment services. Few reasons that led to recent amendments:

•  To make payments more safe and secure
• To protect the consumers
• To bring more efficiency in the European payments market
• To bring in legal certainties for the companies in the market.

What are these amendments?

There are certain amendments that are being proposed by the Polish Ministry of Finance to the Act on Payment Services. Let’s see what the proposed amendments are. One of the proposed amendments is related to the activities of small payment institutions with regard to AML compliance and notification obligations towards the Polish Financial Supervision Authority. Which is to say, under the said proposal (11th Jan 2021), while applying to be registered as an SPI, all the information regarding the AML compliance procedures and information concerning any other activity will be submitted to the Polish Financial Supervision Authority by the SPIs. That’s one of the essential requirements in the proposal. Another thing in that proposal was about the protection of user funds. SPI shall provide to the regulatory authority a copy of the payment account agreement which is used by SPI to execute its payment transactions. These amendments are aligned with a certain shift in approach by the Polish Financial Supervision Authority.

Conclusion

There is no doubt about the fact that the changes conceived in the proposal shall simplify and improve the conduct of operations by all the market participants. With the attempt to further put limits on the transactions affected by payment service offices, the requirements and regulatory obligations are kept in mind to make it easier. These payment institutions were indeed set up to make cross-border payments as easy, secure, and efficient. The entire system is based upon the very fact to treat all the member and non-member states equally. The amendments were made from time and again to take account of new types of payment services and bring advancements in terms of that. Well, results can be seen in terms of new innovation and competition that has been brought into the limelight further providing more and often cheaper alternatives for internet payments. All the amendments made by the EU are with the very agenda to benefit potential market entrants and contribute to the single market. Well, the time will only tell how far this dream of the EU will take to make it a reality but one thing is sure they are doing everything in their power to make things right for everyone and not just for themselves.

References

1. https://paymentinstitutions.eu/about-epif/who-we-are/
2. https://doubleoctopus.com/security-wiki/regulations/payment-services-directive/
3. https://www.lexology.com
4. https://ec.europe.eu/commission/presscorner/detail/fr/MEMO_15_5793
5. https://www.alepietrocola.com/en/bootstrappers-guides/payment-services-providers/2020/06/18/the-bootstrappers-guide-to-authorised-payment-institution-or-electronic-money-institution-licence-in-europe/

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