Key takeaways

• In a decision that should be welcomed by payment institutions (PIs), the ECJ has held in ‘ABC Projektai’ UAB v Lietuvos bankas (Case C-661/22) that where a PI receives funds to customers’ payment accounts without a specific payment order and holds them for several days or even months without transferring the funds to the recipients, this should not in itself constitute e-money issuance.
• Rather, the minimum requirement for the classification of transferring and holding funds on a payment account as the issuance of e-money is a contractual agreement between the customer and an e-money issuer to issue a separate monetary asset up to the value of those funds (and the other requirements of the definition of e-money must be met).

What do firms need to be thinking about?

• In its judgment, the ECJ highlighted the PSD2 requirement that PIs providing payment services can only hold payment accounts which are used exclusively for payment transactions. It also emphasised that the same point should be borne in mind to avoid reclassification of payment services activities as deposit taking.

• For more thoughts on the impact of the ECJ’s decision, see ‘What is this ECJ decision likely to mean for the current regulatory approach in member states and the PSR/PSD3 legislative proposals?’ and ‘What about the UK?’ below.

What’s next?

• The current PSD3 legislative proposal looks to merge the e-money and payment services regimes. In light of this ECJ decision, which reduces the scope of what some have considered ‘e-money’ to be, it will be interesting to see how the distinction between holding funds in a payment account and issuing e-money is dealt with under the combined regime. More immediately, should the ECJ’s finding now be reflected in the proposals currently making their way through the EU legislative process? Click here for our latest Engage article on PSD3.

Read on for a more detailed look at the reasoning of the ECJ in ‘ABC Projektai’ UAB v Lietuvos bankas.

Background and decision

The Bank of Lithuania revoked the licence of a PI for a number of reasons, including that the PI had issued e-money despite not being an authorised e-money institution (EMI).

According to the Bank of Lithuania, the PI retained customer funds for longer than the time required for the execution of payment transactions. It was of the view that crediting funds received from customers to payment accounts without a specific payment purpose/order and retaining them for several days, and sometimes several months, without transferring the funds to the recipients of those payments de facto constituted issuance of e-money.

The PI challenged the decision revoking its licence before the Lithuanian courts, which led to the reference to the ECJ for a preliminary ruling as to whether the services outlined above should be regarded as services linked to the issuance of e-money. In line with the Advocate General’s (AG) Opinion in the case (October 2023), the ECJ held that they shouldn’t.

What was the reasoning of the ECJ?

Crediting funds to a Payment Service User's (PSU’s) payment accounts at PI is in principle a transaction forming part of a payment service under PSD2 even if not accompanied by a payment order.

• According to Article 4(5) of PSD2, a ‘payment transaction’ means an act, initiated by the payer or on that payer’s behalf or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee.
• Therefore where a PSU puts funds at a PI’s disposal and those funds are credited to a payment account held by that PI in the name of that PSU, such transactions must, in principle, be regarded as constituting a transaction related to the operation of a payment account within the meaning of Article 4(12) PSD2 and as forming part of a payment service, within the meaning of Article 4(3) of that Directive.
• This classification does not change solely because the funds are not accompanied by a payment order on the same day or on the following business day.

Nothing in PSD2 prohibits advance payments for future payment orders or imposes time limits for use of funds credited to payment accounts.

• There is no provision of PSD2 that prohibits funds from being credited in advance to a payment account for the purpose of executing future payment orders, including payment orders not yet specified, or that stipulates any time limit within which, after such an account has been credited with a certain amount, that amount must be used for the purposes of a payment transaction.
• As the Advocate General observed in his Opinion, PSD2 in fact refers to instances of payment services where proper execution actually requires funds to be credited in advance to a payment account without being accompanied by a payment order. Examples given in the judgment include provisions relating to execution of direct debits and safeguarding requirements.

PSD2 requires that PIs providing payment services can only hold payment accounts used exclusively for payment transactions.

• The ECJ emphasised that the transfer of funds to a payment account must always be made for the purpose of executing payment orders, irrespective of whether or not those orders have already been specified. Under Article 18(2) of PSD2, PIs engaging in the provision of one or more payment services can only hold payment accounts which are used exclusively for payment transactions. This is also necessary to avoid the reclassification of the receipt of funds as the business of taking deposits or other repayable funds.
• There remains a reclassification risk, based on the actual ways in which:
  • payment accounts and related payments in/out are described by PIs;
  • payment accounts and related payments in/out are covered in contracts with PSUs; and
  • the payments and accounts operate in practice.

PIs should therefore not view this judgment as "carte blanche" to allow payments into a payment account to remain there indefinitely, or to mean they can advertise as providing banking services.

Minimum requirement for classification of transfer and holding of funds on a payment account as issuing e-money is contractual agreement to issue a separate monetary asset up to the value of those funds.

• Regarding the potential reclassification of transactions such as those at issue in the main proceedings as issuing e-money within the meaning of Article 2(2) EMD2, an entry in a payment account does also represent a claim, expressed in monetary value, on the institution concerned vis-à-vis a user of its services which has been issued on receipt of funds.
• However, the ECJ considered that it can be inferred from the Article 2(2) definition that the issuing e-money is distinct from a mere entry in a payment account in that, among other things, before being used for the purposes of such a payment, such money must be electronically ‘stored’. This implies that it has already been converted into a monetary asset separate from the funds received, and that its use as a means of payment is accepted by a third party.
• The ECJ agreed with the AG’s Opinion that, in order for an activity to be classed as the issuance of e-money within the meaning of Article 2(2), it is, at the very least, necessary for there to be a contractual agreement between the user and the e-money issuer under which those parties expressly agree that that issuer will issue a separate monetary asset up to the monetary value of the funds paid by the user. Transferring and holding funds on a payment account without immediately mandating payment transactions up to the value of those funds does not mean that the user of the payment service has given their express or tacit consent to the issuance of e-money.

What is this ECJ decision likely to mean for the current regulatory approach in member states and the PSR/PSD3 legislative proposals?

Belgium

The National Bank of Belgium (NBB) has taken the view for a few years now that the distinction between the PSD2 and the EMD2 regimes should be the nature of the funds and not the nature of the payment execution (in line with an EBA Q&A).

In the NBB’s view, funds may be held in payment accounts without any pre-established link with a specific payment order and they are not converted 'magically' into e-money.

It is a view that had an impact on certain PIs/EMIs established in Belgium but having another authorisation abroad as in certain cases they saw a mismatch between their Belgian and foreign authorisations, ie they are authorised as a PI in Belgium but as an EMI in another jurisdiction although they offer the same services in both countries.

The NBB’s approach could have created issues for firms passporting out of Belgium into other EEA jurisdictions as host country regulators could have refused the passport by saying that a PI passport was not sufficient, and that an EMI passport was required. That said, the NBB’s approach is now aligned with the ECJ decision and should therefore be commonly accepted by host country regulators within the EEA.

Ireland

We expect that the Central Bank of Ireland (CBI) will carefully review and consider this decision. We do not expect changes to the PI or EMI authorisation process in Ireland in the short term as a result of this case. It will be interesting to see if any of Ireland’s large and vibrant population of PIs will use this decision as a grounds to amend or extend their existing product lines.

PSR/PSD3

More generally, this decision raises questions on the future of the concept of 'electronic money' under PSD3. It drastically reduces the scope of what is to be considered ‘e-money’. It will now be harder to understand what future e-money has in an account-based (as opposed to instrument-based) payments world where this ruling clarifies that account-based funds are not automatically e-money. Should this now be reflected in the PSR/PSD3 legislative proposals?

What about the UK?

The UK Financial Conduct Authority (FCA) is of the (very restrictive) view that PIs can’t hold funds in a payment account unless those funds are directly linked to a payment transaction (see PERG 15.2 Q.5 here: PERG 15 - FCA Handbook). This has not been a view we agreed with and EBA Q&As have been in line with our view. It will be interesting to see whether the FCA modifies its views and its guidance in PERG following this judgment, which, of course, is not binding in the UK.