Payment institutions as wallet providers - CJEU judgment

Since they first became subject to bespoke regulation at the European level in the early 2000s, one of the core features of electronic money institutions ("EMIs") has been their ability, through the issuance of electronic money ("e-money"), to hold customer funds for an extended period of time pending a decision by the e-money holder to make a payment using the e-money issued.

Historically, this has been thought of by market participants as a key distinguishing feature towards licensed payment institutions ("PIs") and the basis for EMIs offering wallet-products whereas PIs - which can hold customer funds on payment accounts but only for the purpose of executing payment transactions - could not. It is also a large part of the justification for the more onerous own funds requirement applicable to EMIs compared to PIs.

In recent years, however, a discussion opened up in the market - based on diverging views among supervisory authorities in different EU member states - whether PIs might be permitted to receive and hold for an extended period of time customer funds for which it had not (yet) received a payment order specifying a payment transaction. If possible, this might enable PIs to effectively create and offer wallet-products but without the onerous own funds requirement applicable to EMIs.

On 22 February 2024, the Court of Justice of the European Union (the "CJEU") published its judgment in case C-661/22, "ABC Projektai" UAB vs. Lietuvos bankas (the Lithuanian central bank), and effectively settled this question.

The facts of the case can be briefly summarised as follows: ABC Projektai was a Lithuanian licensed PI that permitted its customers to transfer funds to the company without an accompanying payment order but with the intention of subsequently - at an unspecified point in the future - using those funds to make payment transactions. The Lithuanian central bank was of the view that this constituted the issuance of e-money for which ABC Projektai was not licensed and (for this and several other reasons) revoked the company's license as a PI.

In accordance with the Advocate General's earlier opinion in the case, the CJEU ruled, with remarkable brevity and clarity, that (paragraph 53 of the judgment):

"the activity of a payment institution which consists in receiving funds from a user of a payment service, where such funds are not immediately accompanied by a payment order and therefore remain available on a payment account […] operated by that institution, constitutes a payment service provided by that payment institution […] and not a transaction consisting in the issuance of electronic money […]."

While this state of law is interesting enough in itself, the CJEU's preceding reasoning also contains a number of interesting and important arguments to consider when assessing the effect of the judgment. The key statements by the CJEU are that:

• transferring customer funds to a payment account with a PI, as a starting point forms part of the payment service of operating a payment account (as opposed to the service of issuing e-money) and does not cease to be classified as such merely on the ground that it is not accompanied with, or followed shortly by, a payment order (paragraphs 34 and 35 of the judgment);
• while the Second Payment Services Directive (PSD2) does contain limits on how long a PI has to execute a payment transaction after it has received the requisite payment order, it does not contain provisions precluding payment accounts from being pre-funded or requiring funds on a payment account to be used within a certain period of time (paragraphs 36 and 37 of the judgment); and
• the pre-funding of a payment account in this manner "must always be made for the purpose of executing payment orders, irrespective of whether or not those orders have already been specified" (emphasis added) (paragraph 43 of the judgment).

Furthermore, in remarks that may, at least when compared to a Nordic legal tradition, ring somewhat formalistic and decoupled from a purpose-driven interpretation, the CJEU further argues (at paragraphs 47 and 48 of the judgment) that for a pre-funding of an account to constitute an issuance of e-money:

• the funds received must formally be "converted" into a "monetary asset separate from the funds received" and that monetary asset must be accepted as a means of payment by third parties; and
• it is necessary that the parties (the customer and the payment account operator) "expressly agree" that the operator will issue such a separate monetary asset up to the value of the funds received.

Particularly the latter remark is surprising since it largely puts the regulatory classification of a transaction (whether it constitutes an issuance of e-money or not) into the hands of the parties to the transaction.

Plesner's comments

It must be welcomed that the CJEU has provided authoritative guidance to the market on the ability of PIs to hold customer funds without a corresponding payment order, although PIs seeking to avail themselves of the possibilities set out in the judgment would probably be well advised to not be overly reliant on the discretion the CJEU seems to grant to the commercial parties to actively determine the regulatory classification; there is presumably still scope for national supervisors to label something as circumvention of the e-money rules, if a PI structures a product which is indistinguishable from an e-money wallet.

Furthermore, while the judgment clarifies some questions regarding the interaction of payment services and e-money regulations, it must simultaneously leave market participants more in the dark on how to distinguish between payment services and e-money issuance and why any wallet provider should in the future wish to subject itself to regulation as an EMI if the same rights can largely be obtained through a license as a PI. In this regard, it is helpful that the judgment has been passed at the early stages of the PSD2 review so that the EU legislators can consider whether the state of law reflected by the CJEU's latest judgment is the right one.