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"'
Date: 1998-01-28
Institutions: European Economic and Social Committee
Subjects: EC recommendation, European Monetary Institute, electronic money, single market, trade policy

30.3.98

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Official Journal of the European Communities

C 95/15

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 becom-
ing 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 (1), 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.

In the specific field of applied techniques the
1.3.
Commission has published a highly important docu-
ment, the communication on ‘A European initiative in
electronic commerce’ (2), which sets out the strategic
and regulatory course of action to enable European
from the ‘new’ technologies.
commerce to benefit
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 (3).

Payments of whatever kind and type constitute
1.4.
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 pur-
poses, 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 pay-
ment. It concludes with a recommendation, which
updates and applies to new products the provisions
of an earlier recommendation (4) enshrining principles
which have stood the test of time.

2.

Introduction

Ten years have passed since the initial communi-
2.1.
cation of January 1987 (5): a relatively short period

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

(2) 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.

(3) See the communication mentioned in footnote 1, Summary,

para. II, and the communication cited in point 1.3.

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

(5) ‘Europe could play an ace: the new payment cards’,

COM(86) 754 final.

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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.

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

— ‘bank-account-access’

products:

category
includes instruments that provide for remote access
to accounts held at financial institutions; this catego-
ry includes home-banking and phone-banking appli-
cations (1), as well as the traditional payment cards;

this

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 gradu-
ally more economic as a result of competition not only
among financial operators but also among network
service providers.

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

3. Aim and contents

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
insti-
tutions’ (2). On all of the many occasions when the
subject is referred to subsequently, and the recommen-
dation 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 (3), clarifi-
cation 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

(1) ‘home-banking’: access to the account through a terminal
of the personal computer type (or Minitel in France);
‘phone-banking’: access by telephone.
(2) COM(97) 353 final, Introduction, p. 2.
(3) 1st and 2nd Banking Directives, 77/780/EEC and

89/646/EEC.

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 (4), 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.

The Commission then identifies four main areas
3.2.
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

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

22.1.1996.

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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 Com-
munity’s competition rules, so as to achieve an appropri-
ate 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.
arrangements

In its opinion on the Green Paper on the practical
the single
the introduction of

for

currency (1), 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 (2).

3.8.
The European Council in Amsterdam adopted
an action plan against organized crime (3), asking the
Commission and the Council to take initiatives — by
the end of 1998 — on means of payment, including
electronic means (4); 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 con-
sideration is being given to a possible revision of an
earlier recommendation (5) 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 obli-
gations 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 develop-
ment, from 1988 up to now, of the new generation of
‘electronic money products’, meaning prepaid cards and

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

22.1.1996.

(2) 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.

(3) OJ C 97, 28.4.1997; OJ C 251, 15.8.1997.
(4) OJ C 97, 28.4.1997; OJ C 251, 15.8.1997, Chapter VI.
(5) 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.

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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 pay-
ment 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
transferability (no PIN
event, anonymity in use,
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 disadvan-
tages 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.

ments 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 (1), 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 trans-
actions 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

The communication ends with an invitation to
4.6.
issuers to comply with the recommendation’s require-

(1) OJ L 208, 2.8.1997.

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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 instru-
ments, 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.

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.

5.6. Article 1(2)

5.9. Article 4(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

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 techni-
cally 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

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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).

considered. It should also be borne in mind that
electronic money instruments, with their potential for
transferring value ‘from card to card’ without intermedi-
aries, 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.

5.11. Article 6

5.13. Article 11

This article lays down — as in the earlier recommen-
dation — 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

Brussels, 28 January 1998.

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 Com-
mission’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 instru-
ments, remote access instruments, electronic money
instruments. The existing products are sometimes diffi-
cult 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.

The President

of the Economic and Social Committee

Tom JENKINS