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Electronic money: the prepayment and gift card regime
Cristina Sánchez Somoza, associate at Garrigues' Corporate Department.
Prepaid and gift cards are hybrid products whose issuance normally implies the provision of diverse regulated services. The differences between both type of electronic money instruments and the relevant applicable regulations are analysed hereunder.
It has now been two years since Spain transposed the PSD2 (Directive 2015/2366) which has implemented a number of amendments in the field of payment services mostly resulting from the changes technological innovation has brought to this sector. Since, as the PSD2 states in Recital 4 “[s]ignificant areas of the payments market, in particular card, internet and mobile payments, remain fragmented along national borders. […]. Furthermore, the scope of Directive 2007/64/EC and, in particular, the elements excluded from its scope, such as certain payment-related activities, has proved [...] to be too ambiguous, too general or simply outdated, taking into account market developments. This has resulted in legal uncertainty, potential security risks in the payment chain and a lack of consumer protection in certain areas. It has proven difficult for payment service providers to launch innovative, safe and easy-to-use digital payment services and to provide consumers and retailers with effective, convenient and secure payment methods in the Union.”
Besides affecting payment services, the amendments made by this new legislation - implemented in Spain by Royal Decree-Law 19/2018 - have also changed the rules governing electronic money services. The legal construction of electronic money is relatively recent, first appearing in Spanish law in 2011 (although the Directive on this subject dates back to 2009). This does not mean that the instruments now governed by these regulations were not provided earlier than 2011, it simply implies that when the legislation came into force in Spain, as a general rule with the exception of those qualifying for an exemption, all those instruments – together with the entities issuing them – started to be regulated. To clarify what we are dealing with, electronic money means: electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions and which is accepted by a natural person or legal person other than the electronic money issuer. This implies that to be able to consider that electronic money exists, the “balance” needs to be stored electronically or magnetically (which may be in an online account or on a payment card); to be issued on receipt of funds (normally in the form of a “reload”); and the purpose must be to make payment transactions.
Despite being a little known legal concept, electronic money is currently used in a variety of formats which have benefited from the application of new technology developments in finance. One of the forms it takes are the cards we now use as “prepaid cards” and “gift cards”. From a financial regulation perspective, these cards are hybrid products and issuing them usually involves the provision of various regulated services. For one reason, as a result of the electronic money being stored on a card that allows its owner to use the stored balance, a payment service is being provided consisting of issuing payment instruments. Secondly, since the cards are used to buy products, they also enclose the provision of a payment service enabling this to happen (as we have mentioned, a condition for the existence of electronic money is that the purpose must be to carry out payment transactions). And, lastly, we have the actual issuing of electronic money when the user “reloads” the instrument.
Prepaid cards vs. gift cards
The prepaid card types are usually payment cards that allow the owner to add to and reduce their balance by “loading” and “withdrawing”. So the owner is always able to determine the amount stored on them, which is why they are particularly useful for online payments because the risk of losing funds as a result of fraudulent use of the data associated with the card is considerably reduced. Another feature of these instruments is the option of a refund so the owner can recover all or part of the stored balance at any time. This means the provider simultaneously has to hold funds equal to the balance of the instruments it issues, so that it can make refunds if they are requested (a safeguard fund).
Whereas instruments in the form of gift cards do not usually allow funds to be reloaded after they are acquired and the balance that is stored on them is the predetermined amount for which they were purchased. Normally they can only be used at the establishment that supplied them, and do not give the option to exchange them anywhere else or request a refund.
Despite the comments made above in relation to the provision of regulated services, it may be seen in the market that not all providers of these types of instruments (especially in the case of gift cards) have been authorized as regulated entities. This is allowed to happen because the European regulator has acknowledged that in certain scenarios where there is a limited risk and scope for use, entities should be able to provide these types of instruments, if a number of requirements are met, without needing to be regulated. In other words, it is stated that the rules on electronic money do not apply to a monetary value complying with the following requirements:
- Stored on instruments that may be used to acquire goods or services only in the premises of the issuer or, under a commercial agreement with the issuer, either within a limited network of service providers or from among a limited range of goods or services.
This is known as the “limited network” exemption with which it is sought for the rules on these instruments not to apply to suppliers of goods or services that issue this type of instrument in a way that limits its use to a very specific network of suppliers or for a restricted set of services, which implies, among other elements, that they do not require authorization to provide the services.
Any providers intending to benefit from this exemption must report this information to the Bank of Spain if they have carried out in the previous 12 months payment transactions having a monthly average total value above one million euros. These reports are required to be made annually in the first quarter of the year and have to include a description of the services provided and of the exclusion that is applicable.
- Used to perform exempt payment transactions. Since the electronic money must be issued for the purpose of making payment transactions, in order for the exemption described above to take effect, the payment service linked to the issuing of electronic money also has to be exempt.