(Note: the below is a high level review of certain potential issues and is not to be relied upon in any definitive manner nor as legal and/or regulatory advice).
Prepaid card authorisation under the EU Emoney and Payment Services regulation
One of the main regulatory matters a prepaid card programme scheme operator faces when structuring its scheme is which party (or parties) need to become regulated, via the authorisation requirements of the revised E-money Directive (EMD) or the Payment Services Directive (PSD). Instinctively and prudently, the scheme will aim to avoid regulation altogether.
In certain structures, regulation may indeed be easily avoided depending on the features of the prepaid card. Certain single use gift cards may be easily structured to avoid such regulation insofar that the gift card is only redeemed by its issuer and it is only the issuer who ‘touches’ the funds. However, what if the prepaid card is a general use card to be used in a number of different shops? When might it be useful to become authorised and not rely on the exclusions offered?
The answer boils down to 2 key factors:
- Which exclusion does the operator intend to rely? and
- To what extent will the prepaid card scheme be operated on a cross border basis?
Let me explain.
Commonly used exclusion available to prepaid cards under the EMD and PSD
There is a very useful exclusion aimed at financial products like a prepaid card which is mirrored in each of the PSD and EMD (see Article 3(k) of the PSD / Art. 1(4) of the EMD). This exclusion applies to:
“services based on instruments that can be used to acquire goods or services only in the premises used by the issuer or under a commercial agreement with the issuer either within:
(a) a limited network of service providers; or
(b) for a limited range of goods or services.”
On a simple reading of the exclusion, many prepaid card schemes would be encouraged that they may be able to fall within this exclusion. Particularly when a scheme is in its infancy, it would be reasonable to assume that its service providers and/or goods or services purchased by the card would indeed be limited.
But here’s the rub. The above exclusion does not define what is meant by ‘limited’. And without very clear and certain guidance on what amounts to either a ‘limited network’ or ‘limited range’ within this context, it is difficult for a business to know exactly which side of the regulations it falls. This is particularly important when the consequences of carrying on business without being properly authorised could amount to a criminal offence.
So where does this leave us? Well, there is some local guidance available on the issue, although it is not definitive. If the prepaid card scheme operates solely in the UK, it may take comfort in reviewing its plans if it falls within the FSA guidance. For example, UK FSA guidance provides that it is possible for transport cards, petrol cards, membership and store cards to fall within the exclusion, but something like a ‘city card’ may not. Where does the boundary lie?
The issue becomes even more vexed if the prepaid card is available to be used in different EU countries. This is because the interpretation of the exclusion will differ with each relevant supervisory authority. Sadly, there is no ‘passport’ for exclusions under the directive meaning that if an exclusion applies in 1 EU jurisdiction, it may not necessarily apply in all.
The benefit of a prepaid card programme being regulated
The end result being that if a prepaid card scheme operates on reliance on the above exclusions on a cross border basis then it would be advisable to seek each relevant jurisdictions view on the exclusions application to that scheme. The trouble with this is, of course, that supervisory authorities are becoming less likely to provide any definitive view. Further, given the factual nature of the exclusions, the basis for the falling within the exclusions could change over time – a scheme could indeed fall outside the exclusion if it becomes popular and grows outside of a limited use. This resulting ongoing uncertainty therefore leads one to wonder, for a business looking to grow and prosper – isn’t it just better to be regulated?