Opinion of the Economic and Social Committee on the 'Communication from the Commission to the European Parliament, the Council, the European Monetary Institute and the Economic and Social Committee: "Boosting customers' confidence in electronic means of payment in the single market"` (98/C 95/05)

On 4 August 1997 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 7 January 1998. The rapporteur was Mr Burani.

At its 351st plenary session (meeting of 28 January 1998) the Economic and Social Committee adopted the following opinion by 118 votes to two with two abstentions.

1. Foreword

1.1. The rapid development of technology and of its application to economic activities has brought about radical changes in all fields, especially that of systems and means of payment. There are open systems like Internet, and a multitude of closed systems, often structured in such a way as to be interoperable with other existing or future systems. The global communications network, which offers links at ever decreasing cost, has long since overcome the barriers between states: the 'global market` is a practical reality even before becoming the subject of international agreements.

1.2. The Commission is following these trends with interest: particularly in the last few years it has shown a praiseworthy sensitivity to social and market problems, with the aim of encouraging the rapid growth of the information society as a harmonious and coordinated whole. Bearing in mind that some third countries - Japan and above all the United States - enjoy an advantage in terms of research, industrial production and sometimes applications (), the Commission intends to create the regulatory conditions for Europe to develop its own policy, so as to bring it to the leading position which befits it.

1.3. In the specific field of applied techniques the Commission has published a highly important document, the communication on 'A European initiative in electronic commerce` (), which sets out the strategic and regulatory course of action to enable European commerce to benefit from the 'new` technologies. This document establishes a link between electronic commerce and payment systems: the Commission rightly regards the latter as being among the 'key sectors` of global interoperability ().

1.4. Payments of whatever kind and type constitute as a whole an independent system, separated from others in that it covers a range of products and solutions linked not only to commerce but to other sectors (capital and foreign exchange markets, securities markets). The individual markets, differing in their features and purposes, have one common feature: they require a high level of protection for the public, which is the final user. The task of monitoring the soundness of the system and of individual financial operators is entrusted to the central banks and other public bodies; but there must also be a check on the behaviour of individual operators in relation to consumers. On this last aspect, the Commission's activity is especially sustained; the present communication is evidence of this.

1.5. The communication shows the development of the Commission's thinking on means and systems of electronic payment, especially as regards relations between issuers and users of electronic means of payment. It concludes with a recommendation, which updates and applies to new products the provisions of an earlier recommendation () enshrining principles which have stood the test of time.

2. Introduction

2.1. Ten years have passed since the initial communication of January 1987 (): a relatively short period which has seen a far-reaching development of the products then regarded as 'new` (credit and cash cards) and the introduction of others (home banking, pre-paid cards) which initially did not exist or were at an experimental stage. Means of payment other than cash have now come into daily use by the majority of citizens and of commercial operators, and even by 1995 they made up 13,5 % of total payments as a European average - but with significantly higher percentages in some countries.

2.2. The Commission document divides into two distinct categories the innovative products which have been gradually introduced in this period:

- 'bank-account-access` products: this category includes instruments that provide for remote access to accounts held at financial institutions; this category includes home-banking and phone-banking applications (), as well as the traditional payment cards;

- 'electronic money` products: instruments on which electronic value is stored - either magnetic stripe or micro-circuit cards (prepaid cards) or computer memories ('cyber-money`).

2.3. The Economic and Social Committee takes the view that this classification - important for the purposes of regulation - is inadequate in that it does not specify in which of the two categories prepaid bank issue cards should be placed. They allow remote access to a bank account, even if such access is limited to the value-storage stage: in that respect, they would belong to the category of 'bank-account-access` products. However, these cards do not allow any further access to the account in their use stage.

2.4. On access to the account, the ESC would point out that only once - with reference to the classification mentioned in point 2.2 above - does the Commission document refer to 'accounts held at financial institutions` (). On all of the many occasions when the subject is referred to subsequently, and the recommendation itself, the reference is simply to an 'account` which is not further specified. Since the collection of deposits, and hence the opening of accounts, is limited to properly authorized financial institutions (), clarification is needed as to whether the omission is deliberate or whether 'accounts` is always meant to refer to those opened with financial institutions. The clarification is essential for understanding whether, when the document refers to cards which allow access to the account, it means cards issued by banks, or cards which may be issued by non-banking institutions as well. Given that it is, at least for the moment, illegal for the latter to raise funds, the ESC holds to the first of the two interpretations.

2.5. The Commission points out that by the end of the next decade a significant proportion of retail trade will be carried on through Internet, causing competitive pressure on financial operators to offer ever simpler, safer and more efficient means of payment. The ESC points out that, if Europe wishes to meet the American challenge as stated in the communication on electronic commerce, the development of traffic on Internet etc. must take place long before the end of the next decade. In terms of security, a decisive step forward was taken by adopting the SET (Secure Electronic Transactions) system; other innovations are in progress or planned. Moreover, means of payment must also become gradually more economic as a result of competition not only among financial operators but also among network service providers.

3. Aim and contents

3.1. As already mentioned in point 1.3 above, the Commission makes a link between means of payment and electronic commerce, stressing that the existence of secure, transparent systems will facilitate inter alia the transition to the single currency. In this connection, the ESC points out that, in its opinion on the Green Paper on the practical arrangements for the introduction of the single currency (), it had asked the Commission to encourage the use of cards, stating that they were 'simpler and more flexible than other payment systems`. This request still applies: it is necessary to avoid costs and/or red tape becoming an obstacle to or a brake on the use of such products by consumers.

3.2. The Commission then identifies four main areas of action in the field of payment systems: defining the framework for supervision of issuers, ensuring the confidence of users, applying clear competition rules, and countering fraud by improving security. The second of these subjects is developed in the recommendation included in the communication; the others form part of short-term programmes which should supplement the regulatory framework of payment systems, at least until current and future developments made it necessary to review them.

3.3. The first area of action is the definition of a supervisory framework appropriate for the issuance of electronic money so as to ensure the stability and soundness of issuers. A draft directive along these lines will be presented by the end of 1997. The ESC does not intend to go into the substance of the matter, at least until the proposal is known; but it feels it must stress at this stage that the directive must be based on the principle that in this area consumer protection must take priority over any other consideration. Confidence in the money issued by the state is absolute; it must be the same in the case of electronic or virtual money. The soundness of issuers, their ability to meet the commitments they make to consumers and acceptors, and the effectiveness of checks must not be put in doubt in any way.

3.4. Another area is clear application of the Community's competition rules, so as to achieve an appropriate balance between interoperability and sound and vigorous competition. Interoperability between different means of payment depends on their technical and operational compatibility, which in turn depends on agreements between operators. The Commission will present a document in 1998, which will be a guide for financial institutions, acceptors and consumers. The ESC would draw attention to Article 85(3) of the Treaty, which especially in this matter must be a guide to the approach to be adopted: every agreement must be assessed according to the benefit which the market gains from it, whether in terms of technical progress or in terms of lower costs and greater security for the consumer.

3.5. A further field of action consists of the means to be used to tackle the risks of fraudulent use and counterfeiting, by improving security. The Commission draws attention to the need for electronic means of payment to be as secure as possible. No incentives to this end are needed, since fraud is the most worrying problem for issuers. Despite the sizeable investments in research and in practical solutions, revealed by the balance-sheets, their annual losses amount to hundreds of millions of dollars. Although issuers must not lower their guard, the solution should be looked for elsewhere.

3.6. The ESC has given its views on the subject in the past: intrinsic security is limited by cost and by the fact that criminal organizations have effective ways of getting round security measures; their aim is not only to profit from fraud, but also to recycle the money derived from illegal activities. The objective is therefore not intrinsic security - which is already adequate - but rather combating criminal organizations.

3.7. In its opinion on the Green Paper on the practical arrangements for the introduction of the single currency (), the ESC stressed the need for fraud carried out through hard money and through its alternatives to be the subject of a 'completely new approach`: not so much the fight against counterfeiting or fraud as the fight against organized crime. The same idea - and the same suggestion to the Commission - were repeated in a later opinion ().

3.8. The European Council in Amsterdam adopted an action plan against organized crime (), asking the Commission and the Council to take initiatives - by the end of 1998 - on means of payment, including electronic means (); the ESC is pleased to note that the approach it suggested is the one adopted by the Council, but wonders whether a year and a half is really needed to draw up a draft proposal. The Commission accepted the Council's request, saying that it would ascertain the need for initiatives in this area: too cautious a tone, which hardly suits the obvious - and urgent - need for adequate legislation.

3.9. Finally, the Commission announces that consideration is being given to a possible revision of an earlier recommendation () concerning mainly relations between issuers and acceptors of means of payment. A revision could become necessary in the light of recent and likely future trends.

4. A guide for issuers and users

4.1. The Commission has felt it necessary to review the 1988 recommendation in order to take account of the new situation. It bases its review on the principle of boosting the confidence of the consumer in electronic means of payment through a fair distribution of obligations between issuers and users. The aspects of most interest to consumers are first and foremost liability in the event of theft or loss, the burden of proof, full provision of information and redress procedures.

4.2. The Communication also refers to the development, from 1988 up to now, of the new generation of 'electronic money products`, meaning prepaid cards and electronic value stored in a computer memory. It is, however, pointed out that in the present stage of relatively recent development of these products it is necessary to avoid imposing excessive bureaucratic burdens, so as not to create barriers to growth and innovation in this field. The 1988 recommendation (which already covered traditional and electronic payment cards, home banking and phone banking - the latter not mentioned explicitly) has therefore been extended to reloadable electronic money products which may be linked with the account: in practice, at least up to now, bank-type prepaid cards. The recommendation's scope therefore excludes single-use and non-reloadable prepaid cards such as telephone cards, motorway toll cards etc.

4.3. Bearing in mind the explicit need to allow the development of prepaid cards without any red tape, the Commission preferred to limit the scope of the rules to those of direct interest to consumers, especially prior information, certain (limited) obligations as regards issuer's liability, and redress procedures. An invitation is also extended to issuers to decide voluntarily to adopt in addition the rules from which they are exempted.

4.4. The ESC agrees with the approach described in points 4.2 and 4.3 above. However, it feels that it would be of some interest to the consumer to know more about the possible reasons - in addition to those given - for excluding from the scope of the recommendation non-reloadable prepaid cards. Such cards are very popular with consumers; their features are low unit value, which makes loss or theft a financially tolerable event, anonymity in use, transferability (no PIN required), and low cost, made possible by the use of off-line devices. Even when possible disadvantages (e.g. demagnetization of the strip) or certain abuses (e.g. date of expiry of the card and non-reimbursability) are taken into account, the Commission clearly considers that the practicality of the instrument and the low values involved mean that no regulation is required.

4.5. The ESC accepts this approach, but calls upon the European and national authorities and consumers' organizations to take care to ensure that any disadvantages and abuses are eliminated on a case-by-case basis. It calls upon the Commission to monitor the development of the market, deciding in good time whether or not to intervene with regulatory provisions.

4.6. The communication ends with an invitation to issuers to comply with the recommendation's requirements by 31 December 1998, and to the Member States to monitor the setting up of appropriate redress procedures to regulate disputes between users and issuers. However, the recommendation (Articles 10 and 11 - see point 5.13 below) adopts a different approach.

5. The Recommendation

5.1. Since the recommendation has already been adopted by the Commission, on 30 July 1997 (), the ESC will confine its comments to the problems which in its view are worth reconsidering with a view to possible future revision of the document. Special attention is also given to the rules governing the new products included in the recommendation, namely electronic money products.

5.2. Article 1(1)(a)

According to the text, the recommendation applies to 'transfers of funds, other than those ordered and executed by financial institutions, effected by means of an electronic payment instrument`. This appears to include bank transfers, which in their cross-frontier applications are covered by a specific directive; but they could also include transfers arranged by a customer with his own bank by electronic means. The ESC takes the view that the definition is not clear enough.

5.3. As its stands, the definition includes all the financial transfers carried out using any electronic payment instrument: payment cards, prepaid cards, home banking and phone banking. In the case of the transfers mentioned in the previous point, given that such payments are ordered but not effected, one should conclude that they are excluded from the scope of the recommendation, and in any case these operations are covered by the relevant directive on bank transfers. However, this aspect should be better clarified to avoid problems of interpretation.

5.4. The ESC would also point out that in the same article there is an inconsistency in terms and meanings: in accordance with the title of the recommendation ('Commission Recommendation concerning transactions by electronic payment instruments ...`), the only transactions covered are transfers of funds effected by means of 'an electronic payment instrument`; in contrast, the third recital in the preamble notes that the scope covers non-electronic payment by means of a payment card. Neither the article in question nor the rest of the text mentions transactions other than electronic transactions. Thus there remains a doubt as to whether the rules applicable to 'paper` transactions are the current ones or those of the earlier Recommendation 88/590/EEC.

5.5. The Commission goes on to make it clear that the recommendation mentioned in point 5.4 above is to be replaced by the present one; the ESC notes this, but must point out that, if this is the case, the inconsistency becomes a serious omission. Making an effort at interpretation, one can allow that payment cards with access to the account are implicitly included. But, however one reads it, the text of Article 1(1), combined with the definitions in Article 2(a) and (b), excludes traditional non-bank-type cards, for which 'access to the account` does not exist, and those (whether electronic or not) issued by commercial bodies. In the last case, the consumer's possible advance amounts may constitute a 'deposit`, but not an 'account` in the technical sense of the term.

5.5.1. The conclusion to be drawn from the above is that the definition of the recommendation's scope should be revised as soon as possible in order to fill the gaps which have been unintentionally created. The recommendation should include all payment instruments, whether electronic or not, no matter who issues them [without prejudice to the exclusions laid down in the last sentence of the third recital and the derogations under Article 1(2)]. If this is the Commission's intentions, a different, clearer wording for Article 1(1) will be needed.

5.6. Article 1(2)

By way of derogation from the article's paragraph 1, electronic money instruments (prepaid cards) are excluded from a number of provisions:

- Article 4(1): obligation to supply the holder with information on the transactions effected;

- Article 5(b), second and third indents: holder's obligation to notify the issuer of unauthorized transactions, errors or irregularities;

- Article 6: liabilities of the holder, and particularly the limitation of loss to ECU 150;

- Article 7(2)(c),(d) and (e)(first indent): obligation of the issuer to keep a record of transactions, and burden of proof upon the issuer;

- Article 8(1),(2) and (3): liability of the issuer for the non-execution or defective execution of the holder's transactions;

- Article 9(2): obligation of the issuer to take all reasonable action open to him to stop any further use of the instrument in the event of its theft, loss or fraudulent use.

5.6.1. Bearing in mind the operational characteristics of electronic money instruments, the ESC feels that these rules are realistically acceptable, subject to the reservations expressed in point 5.10 below.

5.7. The second sentence of Article 1(2) is somewhat baffling: it lays down that 'where the electronic money instrument [prepaid card] is used to load (and unload) value through remote access to the holder's account, this Recommendation is applicable in its entirety`. The first and second part of the paragraph both refer to the same instrument, the prepaid bank card, which always has access to the account: first it is exempted from certain obligations (first sentence - see point 5.5) then it is made subject to them (second sentence). The contradiction is obvious, but is probably due to incorrect drafting of a correct idea.

5.8. The principle which the Commission has explicitly followed is that protection of access to the account is important (recital (3) of the recommendation's preamble). However, as mentioned in point 2.3 above, the link with the account exists only in the loading (or unloading) phase of the card, whereas its subsequent use is free of any further link: at this point operation is identical for all types of prepaid cards, whether bank cards, phone cards or other types. The ESC agrees with this approach adopted in the recommendation.

5.9. Article 4(2)

This article lays down that the issuer of a prepaid card provides the holder with the possibility of verifying the last five transactions and the outstanding value stored on the card. Whereas this requirement causes no problems, indicating the last five transactions is technically impossible for most cards, which are used off-line without being authenticated with a code (PIN). The Committee suggests that the paragraph in question be worded more realistically, to limit the requirement to cases where the technical features of the system permit this. Systems of this type already exist or are being studied: they are based on more sophisticated, probably costlier, solutions, but through competition they allow for conscious choices by consumers.

5.10. Article 5(b)

The first indent lays down that the holder of an electronic payment instrument or of the authentication code (PIN) notifies the issuer of loss or theft, but it exempts prepaid cards (electronic money instruments) from the rules set out in the second and third indents, covering the notification of unauthorized transactions and of errors or irregularities in the maintaining of the account. The technical features of prepaid cards have therefore been taken into account: further evidence of the need for better wording (see point 5.7) of the last part of Article 1(2).

5.11. Article 6

This article lays down - as in the earlier recommendation - the liabilities of the holder in the event of loss or theft of an electronic payment instrument. These rules do not apply to prepaid cards: the practical effect of this exemption is that the consumer will have to bear the consequences of their loss or theft. However, given the low maximum loadable value, in the worst case the loss will be limited to the amount still on the card, i.e. usually below ECU 150. The consumer is at all events protected against further attempts to reload the card from his account, on the basis of the combined provisions of Articles 7 and 8. To sum up, prepaid cards have advantages but also possible disadvantages: it is therefore necessary for the consumer to be clearly and fully informed of them in writing.

5.12. Article 8(4)

This article, specifically covering prepaid cards, lays down that the issuer is liable for the loss of the existing amount or for the defective execution of a transaction. It is impossible to apply for the versions - now predominant - which use off-line systems without an identification code, but remains valid for those systems (see point 5.9) whose technical features allow of it.

5.12.1. From the above follows, in the ESC's view, the need to lay down a maximum limit for the value which can be loaded onto a prepaid card, so as to avoid its loss causing its owner to be seriously out of pocket. The ECU 150 limit, already regarded as a reasonably acceptable loss for the consumer, should be seriously considered. It should also be borne in mind that electronic money instruments, with their potential for transferring value 'from card to card` without intermediaries, can be used to launder money. Such illegal use would be hindered by the limit on loadable value: thus defence against crime is added to consumer protection as a further valid justification.

5.13. Article 11

Contrary to what is stated in the communication (see point 4.6), the recommendation is addressed only to the Member States, inviting them to take the necessary measures to ensure that the issuers of electronic payment instruments comply with the provisions. The ESC warns the Commission against this type of approach, which could lead to diverging solutions in the various countries - a not unlikely outcome, given some significant uncertainties of interpretation.

5.14. The ESC feels the need to draw the Commission's attention to the fact that nowhere in the communication or the recommendation is it explained whether the previous Recommendation 88/590/EEC remains valid for non-electronic payment instruments, which are never mentioned in the document under consideration.

5.15. Finally, the ESC notes that the recommendation is based on classifications: electronic payment instruments, remote access instruments, electronic money instruments. The existing products are sometimes difficult to classify, but their differing characteristics require such - and so many - distinctions, exemptions and inclusions that a common regulation would be difficult to consult. The ESC wonders whether it would not be desirable to give greater cohesion and clarity to the whole matter, taking account of the specific nature of each type of instrument and drawing up separate rules for each of them. Given that each product has a name, it would be better to use it to identify it: the rules would thereby gain in clarity, to the advantage especially of the consumer, for whom technical terminology has very little meaning.

Brussels, 28 January 1998.

The President of the Economic and Social Committee

Tom JENKINS

() See Commission communication on 'The competitiveness of the European information and communications technologies (ICT) industries`, COM(97) 152 final of 16 April 1997, and ESC opinion OJ C 19, 21.1.1998, p. 1.

() COM(97) 157 of 16 April 1997, OJ L 208, 2.8.1997, points 47-49 and ESC opinion of 29 October 1997, OJ C 19, 21.1.1998.

() See the communication mentioned in footnote 1, Summary, para. II, and the communication cited in point 1.3.

() Commission Recommendation 88/590/EEC of 17 November 1988 concerning payment systems, and in particular the relationship between card-holder and card issuer, OJ L 317, 24.11.1988.

() 'Europe could play an ace: the new payment cards`, COM(86) 754 final.

() 'home-banking`: access to the account through a terminal of the personal computer type (or Minitel in France); 'phone-banking`: access by telephone.

() COM(97) 353 final, Introduction, p. 2.

() 1st and 2nd Banking Directives, 77/780/EEC and 89/646/EEC.

() Opinion of 26 October 1995, point 5.4.3.3, OJ C 18, 22.1.1996.

() Opinion of 26 October 1995, points 7.11 to 7.14, OJ C 18, 22.1.1996.

() Opinion of 31 October 1996 on 'Market implications of the legislation and regulations required for the transition to the single currency`, OJ C 56, 24.2.1997, points 5.2.1 to 5.2.5.

() OJ C 97, 28.4.1997; OJ C 251, 15.8.1997.

() OJ C 97, 28.4.1997; OJ C 251, 15.8.1997, Chapter VI.

() Commission Recommendation 87/598/EEC of 8 December 1987 on a European code of conduct relating to electronic payment (relations between financial institutions, traders and service establishments, and consumers), OJ L 365, 24.12.1987.

() OJ L 208, 2.8.1997.