The regulatory regime for prepaid products across Europe changes on 30 April 2011 (at least in those Member States which are on time with implementation, which includes the UK). The new regime may make it easier to break into the prepaid market place.
The €1m initial capital requirement of the current regime has stifled the taking up of Electronic Money Issuer licences in Europe. The lowering of the initial capital requirement to €350,000 under 2EMD is therefore hoped and expected to lead to a flood of new applications. The market has been further stifled by the fact that many gift card programmes, which were never intended to be regulated, became caught by the definition of e-money. Under the current regime, if a gift card is issued and can be redeemed against a different legal entity to the one that issued it, then it is e-money. This catches out franchise operations like pizza parlours, coffee bars and fast food chains where loyalty cards were an obvious opportunity (taking away the clumsy paper and stamp set ups) as well as retailers with concessions and those with a group company structure. As a consequence, many of the prepaid product programmes that would have opened in this space never saw the light of day because the costs associated with launching a full e-money product were far in excess of the likely returns.
Under 2EMD the regulators have created the limited network/limited goods and services exemption for exactly this purpose. Under this, provided the prepaid product can only be used to acquire goods or services and it is "under a commercial agreement with the electronic money issuer, either within a limited network of service providers or for a limited range of goods or services" then it is excluded from regulation.
On the downside, however, 2EMD has brought in a regulation that says e-money must be able to be redeemed at par at any time and that, tied in with the restrictions on charging redemption fees and the ring-fencing provisions, will cause a number of operational issues for the e-money issuers. In the UK, HM Treasury have taken a look at the UK's limitation periods and seen that contractual rights are 6 years. On this basis they have put in an end-stop of 6 years for the expiry of e-money in the Electronic Money Regulations 2011. In other European countries they are also looking at this but some have prescription periods in excess of 20 years so it may be difficult in those countries. Prepaid product terms and conditions will need some careful drafting in light of this regulation to allow for dormancy fees (in lieu of 'breakage') to be taken and accounts closed off.
In addition 2EMD, which follows in form the Payment Services Directive ("PSD") (and indeed will be reviewed with PSD in 2012), has brought in the registration of agents. On the one hand this is good because agents are carrying out a regulated activity (under PSD) and by being an agent (under 2EMD) they are exempt from having to register (under PSD) as a Payment Institution. On the other hand, under the current e-money regime there is no requirement to register agents and so it is an additional burden on the issuers and will potentially slow down the process of getting new prepaid programmes up and running.
There are many other changes such as restrictions on redemption, a revised licence application process, the way in which passporting will be done, the way in which the ongoing capital requirements are calculated, detailed rules on the safeguarding of e-money funds held by the issuer, complaints procedures, offences and of course the detailed transitional provisions. There is no doubt that 2EMD is very good for the prepaid industry but now is the time to work with it to develop exciting and needed programmes that will deliver the potential that is prepaid.
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