What's Happening?
The European Banking Authority (EBA) has issued a ruling that impacts non-bank payment service providers (PSPs) by stating that funds held in a European Central Bank (ECB) TARGET settlement account cannot be considered a safeguarding measure under Article
10(1) of the Payment Services Directive 2 (PSD2). This decision closes a potential regulatory workaround that many in the industry had anticipated. The ruling clarifies that while the ECB provides settlement services, it does not act as a custodian, and thus, funds in these accounts do not meet the insolvency protection requirements of PSD2. This decision affects non-bank PSPs, including payment and e-money institutions, which had hoped to use central bank accounts as a substitute for commercial safeguarding arrangements.
Why It's Important?
The EBA's ruling has significant implications for the fintech industry, particularly for scaling non-bank PSPs. These institutions are required to hold client funds in ring-fenced accounts at approved credit institutions to protect against insolvency. The inability to use ECB accounts for this purpose means that PSPs remain dependent on commercial banks, which can be a financial burden as their user base grows. This dependency can limit the capital available for product development and distribution, as funds must be reserved to meet safeguarding obligations. The ruling underscores the challenges non-bank PSPs face in finding cost-effective safeguarding solutions, potentially affecting their growth and innovation capabilities.
What's Next?
The ruling comes at a time of regulatory reform, with the UK reviewing its Payment Services Regulations and the EU working on PSD3, which may introduce clearer rules around safeguarding assets. Until these new frameworks are established, non-bank PSPs will continue to rely on commercial banks for safeguarding, despite their regulatory status or size. The EBA's decision highlights the need for alternative safeguarding mechanisms, such as insurance or cooperative pooling models, though these options currently face challenges in terms of risk and scalability.
