Technological development... Consumer protection... Stability of payment systems Desirable size of E-Money institutions

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1 International and European Affairs BANCA INTESA S RESPONSE TO THE QUESTIONNAIRE ON THE ELECTRONIC MONEY DIRECTIVE REF. : E-MONEY 003/2005 GENERAL COMMENTS ANSWERS TO QUESTIONS Technological development.... Consumer protection.... Stability of payment systems Desirable size of E-Money institutions I. Review of the primary goals of the E-Money Directive. II. Review of the Directive in accordance with Art. 11, Dir 2000/46/EC. III. Review of other provisions of the Directive Banca Intesa is the holding company of the Intesa Group, one of the largest Italian banking groups. Through its subsidiaries, the Intesa Group is active in new Member States like Hungary, where Central-European International Bank- CIB is the fourth largest bank, and Slovakia, where Všeobecná úverová Banka- VUB is the second largest bank. In the field of payment cards, the Intesa Group operates under the name of Banca Intesa and Setefi, a wholly owned subsidiary and one of Italy s largest cards processing company. The Intesa Group is a leader in Italy in the field of payment cards, and it has developed a wide array of products tailored to the specific needs of its customers, both retail and corporate. These products include debit and credit cards and electronic purses. All of them incorporate the most advanced technological solutions aimed at securing payment means from fraud while offering at the same time a variety of functionalities to clients. In particular, in the field of E-Money Banca Intesa has recently launched a new card, Intesa Flash. The card, which can be used in Italy and abroad, thanks to

2 its specific security features and to its nature, aims at fostering the confidence of its customers when they carry out e-commerce transactions. For a thorough description of the cards offered by the Group, please refer to our website at the following link: Banca Intesa welcomes the Commission s open and transparent consultation process on Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business of electronic money institutions (henceforth the Directive) and would like to submit the following comments. GENERAL COMMENTS Banca Intesa believes that when the Commission reviews the functioning of the Directive and assesses its impact on the development of E-Money institutions at EU level, it should take into consideration a number of factors, such as the technological development, consumer protection, the stability of payment systems and the desirable size of the E-Money institutions. Technological development In the last decade the card industry and banks have massively invested in upgrading the security of their products, so to preserve the users confidence in their systems and in their payment means. In fact, the increasing number of frauds on cards was perceived as a threat to the development of a wider use of E-Money, which, on the contrary, was supposed to facilitate the smooth transition to the Euro. Therefore, cards with magnetic strips are being progressively replaced with new ones with micro chips and PIN codes. The security of both magnetic and chip cards has been upgraded according to the most secure standards, so that they are fully compliant with security systems designed for internet transactions (eg Securecode and Verified by VISA). In the field of e-purses, banks have diversified the points where cards can be reloaded. For instance, our e-purse Intesa Flash can be recharged either by directly debiting a current account; by using a normal payment card at any ATM of the Bank s network, through our website or by cash at any bank branch. Moreover, the use of our e-purse is not limited to the EU, but can be used more widely at an international level, thus granting the maximum flexibility to our clients while maintaining a high level of security. In our view, this leads to the following conclusions: i) The Directive has been technologically neutral and hence has not hampered the development of new products; 2

3 ii) The recent substantial development has occurred as a market driven process rather then being mandated by binding legislation; iii) The issue of trust in payment means and systems has been duly addressed by the industry. Furthermore, we observe that the reason for the low level of popularity of e- commerce in the EU cannot be ascribed to the payment industry, and should rather be considered as an issue of content sellers, which have not always been up to the expectancies of the customers. Consumer protection When assessing the pressures coming from part of the industry and of the service sectors that advocate the need to widen the scope of the Directive in order to include also the so-called hybrid business, Banca Intesa would like to draw the Commission s attention to the customers low level of awareness concerning pre-paid cards. In fact, according to our daily experience, customers do not always distinguish among the different card issuers and thus are not able to assess the very practical implications attached thereto. For instance, when buying cards they do not know that pre-paid cards issued by mobile telephone companies are not usually refunded by the issuer in the case of a client s error, as opposed to bearers of cards issued by Banca Intesa. Customers do not know that in the case of a card issued by a retailer, there can only be a contractual obligation to redeem the e-money stored on that support and not a statutory one, as provided for in Article 3 of the Directive for ELMIs and banks. In our view, considering that the average pre-paid card user is not informed of the complex legal implications of the different cards (e.g. E-Money vis-à-vis debit and credit cards and those issued by non financial entities), we believe that users should enjoy the same level of protection when using any type of payment card. Otherwise, the insolvency of one issuer would undermine his confidence in all systems of e-payments. This would affect also very secure means of payments such as those issued by banks. Moreover, as a further tool of consumer protection, banks and international card networks have substantially invested in order to prevent frauds on cards, such as clonation and number generation. Stability of payment systems Because of the potential substantial impact that these cards can have on payment systems in the case of insolvency of an issuer, Banca Intesa believes that the issuing of E-Money should be restricted to credit institutions because: 3

4 - All the risks (including the operational ones) incurred are duly managed and covered by the relevant legislation (i.e. the Capital Requirement Directive); - In the case of banking crisis or insolvency, deposits are covered by the deposit guarantee schemes. Desirable size of E-Money institutions When assessing the possibility of opening the E-Money market also to hybrid companies, the Commission should take into consideration the fact the E- Money institutions should have a minimal critical size so that they can reasonably survive in downward economic cycles. Therefore, only large companies, which can potentially issue substantial values of E-Money, should be granted the licence to become ELMIs. In fact, in our view, a frequent turnover of ELMIs would confuse users, which would easily find themselves in the position of not being able to use their cards. In conclusion, only well established companies can bring added value to the development of payment systems to the benefit both of the industry and of the users. ANSWERS TO QUESTIONS I. REVIEW OF THE PRIMARY GOALS OF THE DIRECTIVE Questions 1 a) Has a level playing-field between ELMIs and other credit institutions issuing E- Money been achieved? b) Has a level playing-field between ELMIs and other pre-paid payment service providers issuing E-Money been achieved? c) Has the Directive encouraged competition? If so, is competition between institutions issuing E-Money fair? d) Has the Directive encouraged new market entrants? a) Banca Intesa believes that there is a level playing field between ELMIs and other credit institutions and that the current regulatory framework should be largely maintained. b) We do not believe that a level playing field has been achieved between ELMIs and other pre-paid payment services providers, since the latter have less regulatory constraints than E-Money institutions, for instance in the field of 4

5 redeemability. For a further explanation of our position on this point, please refer also to our answers to questions 8 and 12. c) There is a fierce competition among banks issuing E-Money. d) The Directive puts some limitations to new entrants, not only for hybrid institutions, such as retailers and mobile phone companies, but also for card processing companies, since ELMIs are not allowed to issue credit cards. Questions 2 a) Have the harmonised provisions of the E-Money Directive eliminated legal uncertainty in the field of E-Money? b) Does the directive establish the conditions necessary to ensure that any kind of E- Money issuance takes place within a clear legal framework? c) Does the Directive establish market confidence in, and public awareness of, E- Money? a) The concept of E-Money per se is all but clear. In fact, the distinction between E-Money and deposits usable by means of a card is a pure legal fiction, which has been introduced in order not to apply Article 3 of the Consolidated Banking Directive to ELMIs. b) There is a great deal of confusion also on the concept of E-Money. In fact, also non-financial institutions do issue pre-paid cards, which however do not qualify as E-Money since they cannot be used as means of payments to undertakings other than the issuer. c) The Directive has not established neither market confidence nor public awareness of E-Money because of the subtle difference between E-Money and other pre-paid cards. On the opposite, the only distinctive feature, which is perceived by average consumers, is the quality and status of the issuer (i.e. bank issuer). Questions 3: a) Has the regulatory prudential framework achieved its objective of ensuring stability and soundness of issuers? b) Has the regulatory prudential framework increased business and consumer confidence in E-Money product? a) According to our preliminary analysis, the legal constraints of the Directive have hampered the development of ELMIs. The overwhelming majority of E-Money issuers are banks. In view of the fact that banks have the most stringent capital requirement and the sovency regime, we can conclude 5

6 that the Directive has reached the goal to ensure the stability and soundness of issuers. b) Generally speaking banks are considered to be financially stable. ELMIs, on the other side, are not well known by the public at large and consumers do not make the distinction between ELMIs and other issuers of pre-paid cards (e.g. retailers). In this respect, the Directive has failed in establishing consumer confidence in ELMIs. Consumer trust in E-Money largely depends on the banking status of the issuer. Question 4 a) Has the regulatory framework of the E-Money Directive assisted the development of E- Money in the context of electronic commerce and avoided hampering technological development? b) Has the Directive encouraged technological innovation? a) and b) As per our general comment, we are convinced that the development of E-Money in the context of E-Commerce has been conditioned by a number of factors, such as the overall economic context, the trust on E- commerce sellers, the security of payment systems, the ability of E-Money cards to be spent in a significant number of web-sites. The Directive has been per se neutral with respect to the technological development and innovation, which has been market driven. Question 5 a) Has the E-Money Directive facilitated access by ELMIs from one Member State to another? b) To what extent has the E-Money Directive facilitated integration of E-Money Market across the EU? a) Because of the strong limitations on the corporate scope of ELMIs and on their use of monetary funds, these intermediaries are not attractive from a business perspective. In fact, the mere activity of E-Money issuance is often not sufficient to sustain a sound business plan. Therefore, there are no significant examples of either domestic or cross-border ELMIs. For a further explanation of our position on this point, please refer also to our answers to questions 8. b) By providing for a definition of E-Money, the Directive has facilitated the integration of the E-Money Market. In fact, in order to allow cross-border E- Money transactions, it is essential that in the whole internal market the same definition of E-Money applies. 6

7 Question 6 a) Has the regulatory framework of the E-Money Directive enabled the development of E- Money unimpaired by strict technological rules? b) To what extent has the regulation of E-Money succeeded in its original aim of remaining technologically neutral? a) In our view, the rules set forth by the Directive have not produced a material impact on the technological development, which in turn has been largely driven by the necessity to guarantee the safety of electronic payments so that consumers could trust this relatively new means of payment. b) The Directive has remained technologically neutral, hence fully succeeding in its original aim. Questions 7 a) Do you agree that the original goals of the E-Money are those which the Commission has identified above? b) Is there a risk that the goals as set out above conflict with one another (e.g. the need to ensure stability and soundness vs. encouraging new market entrants and assisting the development of E-Money)? c) Is there a need to re-assess the original goals and to perhaps establish new goals? If so, what should these be? d) Should e.g. establishing consistency with the New Legal Framework for Payments be considered as a new goal? a) Banca Intesa believes that the Commission should prioritise the goals to be pursued through the Directive. In fact, in the first place any E-Money legislation has to ensure a proper consumer protection and the stability of the payment system. On a subordinated basis, once E-Money has become well established and there is widespread public confidence on this substitute of cash, the Legislator can address the issue of new entrants. b) There indeed is a risk of conflict among the goals identified by the Commission. In fact, if new entrants do not have to comply with the same requirements as banks and ELMIs, the satisfaction of the goal of opening up the E-Money market to new players plainly conflicts with (i) the maintenance of a good level of consumer protection; (ii) the stability of the payment system; (iii) the establishment of a level playing field among market players; and possibly (iv) any incentive of banks and ELMIs to further invest and innovate in this business. c) As said above, we think that the Commission should prioritise its goals, rather than establishing new ones. 7

8 d) The New Legal Framework for Payments is a very ambitious project, which aims at regulating all forms of payments except cash. This project is likely to affect the overall architecture of payments systems. Therefore, on the ground of legislative consistency which is an implied goal of any piece of legislation the provisions of the Directive and those of the New Legal Framework for Payments need to be coherent. II. REVIEW OF THE DIRECTIVE IN ACCORDANCE WITH ARTICLE 11 OF DIRECTIVE 2000/46/EC Questions 8 a) Has the Directive created an appropriate legal background to protect E-Money bearers? b) Have there been cases of consumer detriment caused by the lack of adequate measures to protect E-Money bearers? c) Is there a need for additional measures aimed at the protection of bearers of electronic money? d) Do you think that E-Money should be covered by a guarantee scheme? e) If so, how should it be funded? a) and b) In our knowledge there has not been any significant case of inadequate protection of E-Money bearers. However, this should be ascribed to the strict conduct of business rules and capital requirements of banks, rather than to the provisions of the Directive. In fact, almost all E-Money has been issued by banks, and not by ELMIs. Concluding, we can say that the provisions of the Directive have not been practically assessed per se, but the current system (i.e. E-Money issued by banks) has been largely tested and has proven to be absolutely adequate. c) The Intesa Group is convinced that the current protection has proven to be adequate. At the same time, we believe that the protection level needs to be maintained at the current standards and should not be lowered. d) We are convinced that the current E-Money market environment is so successful in terms of stability, bearers trust and development and that it should be crystallised by the law. Therefore, only banks should be allowed to issue E-Money. This would lead to three main consequences: 1. the fictitious distinction between deposits and E-Money is wiped out and E-Money is considered as a deposit stored on an electronic device; 8

9 2. bearers of E-Money are entitled to rely on a deposit guarantee scheme in case of insolvency of the issuer, along the same line as depositors whose money has not been stored on an electronic means; 3. the issuers of E-Money are entitled to grant credit facilities. This is a practical need since the current systems do not allow the reconciliation of payments and credits on a daily basis. There is an organic 1 day mismatch between the debiting and the crediting, which makes it necessary to rely on a overnight credit. e) If E-Money issuance is reserved to banks only, the funding of the deposit guarantee scheme can be granted by the overall business and by the commissions paid by merchants. Furthermore, it has to be observed that the marginal impact of the E-Money-linked deposit arrangement contributions would be much lower in the case of banks than for any other financial intermediary. Questions 9 a) Is there a need to review provisions on initial capital and ongoing own funds requirements? b) Are the requirements of the Directive proportionate to risks E-Money institutions are exposed to? a) and b) In our view the initial capital of ELMIs should be increased to 5 million and the own funds to 10%. The proposed capital requirements on a one side would introduce a better proportion between ELMIs and banks, and on the other side would increase the financial stability of ELMIs. Questions 10 a) What has been your practical experience of the application of waiver rules? b) Do the existing rules correspond to the needs and realities of E-Money business? c) Should the rules on waivers be changed, and if so in which way? d) Could the extensive and consistent application of waivers encourage E-Money issuance at national level? e) Should the threshold of financial liabilities ( 6 million) related to outstanding E-Money be amended or removed? f) Is the amount of maximum storage at the disposal of bearers for the purpose of making payments ( 150) still relevant in the case of a waiver? g) Is there a need to allow the competent authorities of Member States to waive the application of provisions of the Directive in other specific cases not provided for in the Directive? h) Should the waiver be granted automatically or should every waiver be decided by the competent authority case by case? 9

10 a) and b) Banca Intesa does not have any experience in the application of waivers under Article 8 of the Directive. c), d) and g) In the perspective of the establishment of the internal market for E-Money, as far as the waivers are concerned, Banca Intesa suggests the following: - Waivers should be harmonized so that Member States should not be allowed to enact national rules on waivers; - Waivers should be as limited in scope and in number as possible; - The scope of waivers should be clearly identified: for instance a limited number of undertakings (Article 8 para 1 c)) is an elastic concept and therefore can be interpreted in a number of ways; - Waivers should be public and therefore should be published. e) and f) Banca Intesa considers the EUR 6 million and EUR 150 still valid. h) Banca Intesa strongly supports the concept of granting waivers only on the basis of a case by case decision taken by the competent authority and made public. Questions 11 a) Are there any examples of ELMIs having offered to pay interest on E-Money or demanding the right to pay interest? b) Is there a need to prohibit interest being paid on funds received in exchange for electronic money? a) We do not have any knowledge of ELMIs having offered to pay interest on E-Money. b) Rebus sic stantibus, in order to draw a practical consequence from the distinction between deposits and funds received in exchange for E-Money, there is a need to prohibit the payment of interest on the latter. Should the Commission decide to qualify these funds as deposits, then we believe that interest should be paid. III. REVIEW OF OTHER PROVISIONS OF THE DIRECTIVE Article 1: Scope of the Directive, definitions of electronic money institution and electronic money and restriction of activities Questions 12 a) Should the definition of E-Money institution be broadened/narrowed to cover/exclude 10

11 institutions issuing a prepaid means of payment for their core service but which may also issue E-Money as a non-core part of their business (e.g. mobile operators and other hybrid institutions )? b) Should a special EU regime be introduced for institutions issuing E-Money as a noncore part of their business (e.g. mobile operators and other hybrid prepaid instrument providers)? a) Banca Intesa believes that the current definition of E-Money institutions is satisfactory and therefore should be maintained, since it has ensured a level playing field between ELMIs and credit institutions. Hybrid institutions should therefore not be allowed to enter into the E-Money business as they cannot comply with all relevant provisions of the Directive. b) Banca Intesa believes that it not desirable to provide for a specific regime for hybrid institutions, since this would be likely to generate an unleveled playing field with institutions having the issuance of E-Money as a core business. We believe that in assessing the option of introducing a specific regime for hybrid institutions, the Commission should consider the prospective impact that the failure of such institutions can have on payment systems. The financial stability of payment systems is considered a public good for the entire business community, which deserves to be duly protected. Questions 13 a) Is the definition of E-Money appropriate and adapted to any kind of E-Money issuance? b) For the sake of clarity and to avoid any legal uncertainty, does the definition of E- Money need to be clarified? Has the definition of E-Money given rise to different interpretations, either across different business models or as a result of different Member States interpretations? c) Does the definition of E-Money correspond to the way the market has developed or is likely to develop? a) and b) From the perspective of a credit institution, Banca Intesa believes that the current definition of E-Money is not clear, since it appears to be a pure legal fiction, in order not to apply to E-Money institutions the provisions of Article 3 of the Consolidated Banking Directive. In our view, it would be desirable to change the definition in order to include the activity of deposit taking. For the reasons explained in our General Comments - section Consumer Protection, we believe that it would be highly desirable to have an unambiguous definition of E-Money which makes reference to deposits and hence reserves E-Money issuance to banks. 11

12 Questions 14 a) Is the limitation of E-Money institutions activities too restrictive? b) Does the limitation of activities discourage new entrants, restrict competition or hinder innovation? c) Does the limitation of activities contribute to preserving a level playing field between ELMIs and other credit institutions or alternatively disadvantage ELMIs in comparison with other credit institutions that issue E-Money?? d) Does the restriction on the granting of any form of credit have an impact on the payment possibilities offered through E-Money instruments? For example, does the delay in some payment transactions constitute credit in your experience/member State? a) Banca Intesa believes that the current scope of activities of E-Money institutions is restrictive, but this limitation is desirable since it serves the goal of ensuring the stability of the ELMIs and of the payment systems (see also the response to question 7 a). b) Banca Intesa acknowledges that the limitation of the activities does discourage the entrance of hybrid institutions, but it does believe that it neither restricts competition nor hinders innovation. In fact banks do compete among themselves but they do not compete against mobile phone companies or against retailers in their core businesses. As far as innovation is concerned, please refer to our General Comments. c) and d) Banca Intesa believes that the limitation of activities of ELMIs can be considered as an objective disadvantage vis-à-vis credit institutions, since they face regulatory constraints for the use of funds and they totally depend on credit institutions as far as the management of deposits is concerned. Moreover, given that the delay in payment transactions due to the time mismatch between the debiting and crediting of the accounts constitutes credit, E-Money institutions have to rely on a regular basis on credit institutions for the granting of credit facilities. Article 2: Application of banking directives Questions 15 a) Has the application of the passporting provisions of Directive 2000/12/EC given rise to any specific problems? b) To what extent has the single passport been used by licensed ELMIs? c) Is it still valid to define an ELMI as a credit institution under Directive 2000/12/EC (as amended) despite the fact that ELMIs are legally barred from granting credit and from paying interest on funds received in exchange for E-Money issued? a) and b) Please refer to the answer to questions 2 a) and 5 a). 12

13 c) Banca Intesa believes that ELMIs should not be defined as credit institutions under Directive 2000/12/EC, since they cannot grant credit, or pay any interest on the values stored on E-Money. Furthermore, from a consumer perspective, the inclusion of ELMIs in the definition of credit institutions could be misleading as E-Money is not considered as a deposit and thus does not enjoy the protection of any deposit guarantee scheme. Questions 16 a) Is it still valid to distinguish between the different nature of the issuance of electronic money and a deposit-taking activity in the interests of bearer confidence? b) If funds received are immediately exchanged for E-Money, at which point in time does the conversion into E-Money actually take place? c) Should the notion of deposit-taking in Article 3 of Directive 2000/12/EC be clarified? a) Since Banca Intesa, as explained in our responses to question 8 d) and 13 a) and b), maintains that the issuance of E-Money should be based on deposits, there is no reason to distinguish between E-Money and the deposit taking activity. However, shall the current regime be maintained, it is in the interest of pre-paid card bearers to draw a distinction between the two activities and hence between the different conditions depending on them. b) There is no clarity on the point of time at which the conversion into E- Money takes place. c) We suggest including E-Money in the notion of deposit-taking rather than clarifying it. In fact, we believe that it is not clear the reason why cash credited to the ELMI and stored on an electronic device cannot be considered as a deposit, whereas cash credited to a bank and spent by means of a debit card is considered as a deposit. Article 3: Redeemability requirements Questions 17 a) Does redeemability at par value pose any special problems for E-Money issuers? b) How could this rule be adapted to institutions issuing E-Money as a non-core part of their business (for example, mobile operators) for which the E-Money float on prepaid cards or accounts is only known ex post when customers have purchased goods and services from a third party? c) Is a minimum threshold of EUR 10 for redemption at par value still relevant? a) and b) Banca Intesa believes that the redeemability at par should remain a firm point of the Directive, if E-Money is meant to replace cash. Any departure 13

14 from this principle would not only undermine the confidence of users but would also represent an unjustified unleveled playing field for credit institutions. For this reason, Banca Intesa believes that this rule should not be adapted to hybrid institutions that are able to ascertain the value stored on the pre-paid cards only on an ex-post basis. c) Banca Intesa believes that if E-Money is to be considered as cash there is no reason at all to set a minimum threshold of EUR 10 for the redemption at par value. Therefore the provision of Article 3 (3) should be modified accordingly in order to treat pre-paid card bearers fairly. Article 5: Limitations of investments Questions 18 a) Have the provisions of the Directive on limitation of investments achieved their aim of establishing a level playing field between ELMIs and credit institutions? b) Are the provisions of the Directive too restrictive for ELMIs? c) If so, have they deterred new market entrants, restricted competition or hindered innovation? a) and b) Banca Intesa believes that the rules on the limitations of investments have achieved a level playing field between ELMIs and credit institutions. In fact, ELMIs are not subject to the Capital Requirement Directive and therefore do not have the tools to identify, manage and hedge the risks incurred in the fund management. c) Please refer to the response to question 5 a). * * * For any further comments or questions, please contact: Alessandra Perrazzelli Francesca Passamonti Head of International and European Affairs Responsible for EU Affairs Banca Intesa Banca Intesa Square de Meeûs, 35 Square de Meeûs, 35 B 1000 Brussels B 1000 Brussels alessandra.perrazzelli@bancaintesa.it francesca.passamonti@bancaintesa.it Brussels, 14 October