A key trend driving developments in the European financial infrastructure is the EU’s ambition to level the playing field between banks and non-banks.

The first Payment Services Directive (PSD) created a legal framework within which so-called ‘Payment Institutions’ could legally operate and offer payment services. The draft of the second Payment Services Directive (PSD2) takes the EU’s ambition a step further and proposes to grant non-banks access to the beating heart of payments: the payment systems.

Direct access to the clearing and settlement mechanisms (CSMs) by non-banks could fundamentally change the European payments landscape.

But oddly, Article 29 grants this access and then, just as quickly, takes it away again. What is going on here?  

Article 29 starts out by giving non-bank payment service providers access to payment systems and only allows restrictions in order to reduce risk for those involved. This is akin to the restrictions placed on banks themselves.

The precise text is as follows:

Article 29

Access to payment systems

1. Member States shall ensure that the rules on access of authorised or registered payment service providers that are legal persons to payment systems shall be objective, non-discriminatory and proportionate and that those rules do not inhibit access more than is necessary to safeguard against specific risks such as settlement risk, operational risk and business risk and to protect the financial and operational stability of the payment system.

Payment systems shall not impose on payment service providers, on payment service users or on other payment systems any of the following requirements:

(a) any restrictive rule on effective participation in other payment systems;

(b) any rule which discriminates between authorised payment service providers or between registered payment service providers in relation to the rights, obligations and entitlements of participants;

(c) any restriction on the basis of institutional status.

A payment service provider is defined in Article 1 and includes licensed Payment Institutions.

A payment system is defined in Article 4.6 as

a funds transfer system with formal and standardised arrangements and common rules for the processing, clearing and/or settlement of payment transactions

I understand this to mean that all kinds of payment service providers will be granted direct access to systems for the clearing and the settlement of payments. This means access to EBA STEP2 and TARGET2. Reasonably enough, direct participation in these systems can be limited to reduce risks.

This allows for a host of possibilities. I imagine lower rates for all kinds of payment services as service providers can cut out banks that have so far remained the necessary middle men. I also imagine better value added services for retail as well as wholesale payments due to increased competition from agile and tech savvy firms.

But then Article 29 continues to specify the negative scope:

2. Paragraph 1 shall not apply to:

(a) payment systems designated under Directive 98/26/EC;

This excludes just about every payments clearing and settlement system in Europe!

Directive 98/26/EC is the Settlement Finality Directive that seeks to minimise systemic risk by ensuring that any payment deemed final according to the system rules is indeed final and irreversible, even in the event of insolvency proceedings.

If this definitive finality were not the case, the insolvency of one participant could undo transactions deemed settled and open up a host of credit and liquidity issues for the other participants in the payment system. This translates into systemic risk and undermines confidence in all the payments processed by the system.

Thus, by ensuring definitive settlement, the concept of finality fosters trust in the system and reduces systemic risk. This makes it one of the most important concepts in payments. As a result, it is a concept applied to all clearing and settlement systems, including for instance settlement and high-value payment system Target2 and bulk SEPA clearing system STEP2.

In light of this exclusion, it is odd that preamble 34 of the Directive specially states the following:

It is essential for any payment service provider to be able to access the services of technical infrastructures of payment systems. …  These payment systems typically include … major systems processing credit transfers and direct debits.

The systems processing credit transfers and direct debits are precisely those excluded from scope because they fall under de Settlement Finality Directive.

If such systems are excluded, what then are non-banks granted access to by Article 29?

Not other private systems either as the PSD2 continues to exclude:

(b) payment systems composed exclusively of payment service providers belonging to a group composed of entities linked by capital where one of the linked entities enjoys effective control over the other linked entities.

What am I missing here? Why are just about all CSM’s excluded? What systems are opened up for competition?

Honestly, I’m not sure. Any insights or suggestions?