Clarification on the difference between payment services and issuance of electronic money - Case C-661/22

The Court of Justice of the European Union (hereinafter “CJEU”) gave a significant decision on 22 February 2024. The CJEU’s decision in case C-661/22 (ABC Projektai) concerned a preliminary ruling requested by the Supreme Administrative Court of Lithuania regarding the interpretation of Directive (EU) 2015/2366 (hereinafter “PSD2”) and Directive 2009/110/EC (hereinafter "EMD2”). More precisely, the CJEU interpreted the circumstances under which a payment service does or does not involve the issuance of electronic money.

In this article, we will shortly describe the background behind the case and review the key points regarding the interpretations made by the CJEU.

Background of case C-661/22 (ABC Projektai)

The Lithuanian company ABC Projektai UAB (hereinafter “ABC ”) had been granted a license to provide payment services from the Bank of Lithuania (hereinafter “BOL”) in 2016. However, BOL revoked ABC’s license in 2020 based on several grounds. One of those grounds were that BOL claimed that ABC had been issuing electronic money despite not having the status of an electronic money issuer, thereby infringing the Laws of Lithuania. In turn, ABC challenged BOL’s view and the matter was proceeded with the Supreme Administrative Court of Lithuania.

Given the facts, the Supreme Administrative Court of Lithuania decided to stay the proceedings and to refer the following question to the CJEU for a preliminary ruling:

“In circumstances such as those in the main proceedings, where a payment institution accepts funds without a specific payment order to transfer them on the same or following business day and the funds remain in the payment institution’s account intended for carrying out payment transactions for longer than the time limits for the execution of the payment service laid down by legislation, are the actions of the payment institution to be regarded as:

(a)    a part of a payment service or a payment transaction, as defined in … Article 4[(3) and (5)] of [Directive 2015/2366], performed by the payment institution; or

(b)    the issuance of electronic money as defined in … Article 2[(2)] of [Directive 2009/110]?”

Thus, straightening out the bends, the national court was asking whether holding of funds on a payment account that is to be used for payment transactions without specific immediate payment orders should be assessed as issuance of electronic money, or not.

Key considerations of the CJEU

As stated in the CJEU’s decision, it follows of PSD2 that any funds received by payment institutions from payment service users with a view to the provision of payment services are not to constitute a deposit or other repayable funds within the meaning of PSD2 or electronic money as defined in EMD2. It is also following of PSD2 that payment institutions are not to conduct the business of taking such deposits or other such repayable funds. Even more importantly, the CJEU emphasized that in order to avoid the reclassification of acts consisting in the receipt of funds as the business of taking deposits or other repayable funds, the accounts to which such funds are credited must, in accordance with PSD2, be used exclusively for the execution of payment transactions.

Further, the CJEU stated it being following of the contents of PSD2, that where a payment service user puts funds at a payment institution’s disposal and those funds are credited to a payment account held by that institution in the name of that user, such transactions must, in principle, be regarded as constituting a transaction related to the operation of a payment account within the meaning of PSD2 and, therefore, as forming part of a payment service, within the meaning of PSD2. The CJEU emphasized that this kind of transactions cannot cease to be classified as payment services on the sole ground that the funds received on a specific payment account are not accompanied by a payment order on the same day or on the following business day.

The CJEU highlighted that even though there are specific rules on time limits in PSD2, no provision of the directive precludes funds from being credited in advance to a payment account for the purpose of executing future payment orders, including payment orders not yet specified. Neither does PSD2 lay down any time limit within which, after a payment account has been credited with a certain amount, that amount must be used for the purposes of a payment transaction. To further emphasize the matter, the CJEU reminded that PSD2 is de facto referring to instances of payment services regarding which the proper execution requires funds to be credited in advance to a payment account without being accompanied by a payment order.

In addition, the CJEU brought up the rules on safeguarding of funds under PSD2. As the safeguarding rules are expressly referring to situations where funds are held by a payment institution for actions not known in advance, e.g., for future payment transactions to payees yet to be known, it must be deemed as that PSD2 is clearly allowing these activities without any connection to electronic money or issuance of such.

Nevertheless, as part of the assessment at hand, the CJEU was in its decision reminding about the contents in Article 18(2) of PSD2, according to which payment institutions, where they engage in the provision of one or more payment services, may hold only payment accounts which are used exclusively for payment transactions.

The nature of electronic money

What it comes to the nature of electronic money, the CJEU stated, referring to the definition of electronic money under EMD2, that even though an entry in a payment account also represents 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, it may be inferred from that definition of electronic money under EMD2. This is following of the fact that the issuance of electronic money is distinct from the mere entry in a payment account in that, inter alia, before being used for the purposes of such a payment, such money must be electronically “stored”, which implies that it has been issued beforehand, that is to say, converted into a monetary asset separate from the funds received, and that its use as a means of payment is accepted by a natural or legal person other than the electronic money issuer.

Moreover, the CJEU stated that in order for an activity to come under the issuance of electronic money within the meaning of EMD2, it is at the very least necessary that there exists a contractual agreement between the user and the electronic money issuer under which those parties expressly agree that the issuer will issue a separate monetary asset up to the monetary value of the funds paid by the user. However, 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 his, her or its express or silent consent to the issuance of electronic money.

Key conclusions

From now on it is clear that payment service providers are able to provide payment accounts to their customers in a manner where the customers can receive and keep funds on their payment accounts without specific payment orders for those funds for the purpose to conduct payment transactions (e.g., with a mobile app or a card) without the necessity for the service provider to apply for an authorisation or registration to issue electronic money.

The CJEU’s decision in case C-661/22 is very significant as similar considerations regarding whether a payment service provider’s business model would involve the issuance of electronic money or not have been made in several EU Member States during the last years. For example, as a result from the differing national interpretations on issuance of electronic money, service providers in the EU have been steered towards (or forced) to apply for an electronic money institution’s license instead of a payment institution’s license. This has also caused situations where companies have been unnecessarily subject to heavier capital requirements, as the minimum capital requirement is higher for electronic money institutions than it is for payment institutions.

Through its decision in case C-661/22, the CJEU is confirming clear and very welcomed lines as to where a specific payment service can be deemed as including issuance of electronic money, or not. This clarification is of high relevance to the European payment services markets, where the prior ambiguous assessment and interpretation of electronic money issuance contra provision of payment services has been causing challenges for companies wishing to enter the markets or broaden their existing scope of services. Naturally, the decision applies to a specific angle and there are still remaining open questions around the definition of electronic money and its issuance in relation to payment services.

It remains to be seen what the final outcome of the CJEU decision is going to be in the Member States. Yet, it can at least be assumed that the CJEU's decision has awakened an interest as to what it comes to keep away from or get rid of avoidable capital requirements. It will also be interesting to follow to which extent the decision will affect the amounts and types of licenses that are applied for from now on.

At Nordic Law, we have extensive experience in successfully guiding companies on the European payment services markets. Would you have any questions on the matter, as how your business operations may seek benefit in the CJEU’s decision, do not hesitate to contact us!

Our Associate Trainee Mikael Huhtala took part in writing this article.