Institute for Prospective Technological Studies Innovation and Regulation -the Case of E-money Regulation in the Eu - Background Paper No. 5 Electronic Payment Systems Observatory (epso)

In September 2000 the EMI Directive was accepted and member states now have to implement it within national legislation by April 2002. One of the European Commission’s main goals was to encourage competition and innovation in the field of electronic payments while maintaining prudent supervision requirements. The Directive sets out to achieve this in two ways: first, it introduces the concept of an ‘Electronic Money Institute’ (EMI), and, second, it provides a European passport for EMIs. Since it is easier to become an EMI than a fully-fledged credit institution, it is hoped that the entry barriers for non-banks will be lowered by the Directive. Similarly, it is expected that the passport will make it easier to offer pan-European solutions. At the moment it is still questionable, however, whether the Directive will have a strong impact on innovation and competition. First, the Directive still has to be implemented in member states. Available information suggests that national legislators are implementing the Directive in a rather restrictive fashion. Second, e-money issuing seems to be interpreted very much as a stand-alone business. This Background Paper will show, however, that there are strong complementarities between payment services and other financial and non-financial services, which may make it unattractive for would-be issuers to enter this market if they cannot exploit such complementarities. Third, it is not always clear which activities are covered by the Directive and which are not. For instance, the status of bonus-points is still unclear. Are bonus-points covered? Should they be covered? If bonus-point or barter schemes are covered by the Directive, they would have to adhere to the redeemability requirement. Up until now, many of these schemes have issued nonredeemable value points. Thus, if bonus points are covered by the Directive, the question arises whether it is really necessary to force redeemability on such schemes. This paper is organised as follows: First it looks at innovation in general, outlining the most important factors that have an impact on the spread of innovative new solutions. Second, it analyses the special features of payments, pointing out that payments are often bundled together with other financial, and increasingly non-financial, services to reduce costs and that non-bank players are becoming more important. Third, it raises the question “What is really new about e-money?” The main conclusion is that existing e-money schemes are not an electronic analogue to cash. Rather they are a means of shifting and reducing credit risk in offline transactions. Fourth, the paper looks at current e-money regulation. After summarising the final version of the EMI-Directive, the state of implementation in the member states is outlined. The evidence collected shows that many member states interpret the Directive in a rather restrictive fashion. Finally, the consequences for competition and innovation and possible modifications of the Directive are discussed.