Additional Research To Assess The Impact of Potentially Changing The Scope (Art. 3) of The Regulation On Information Accompanying Transfers of Funds

European Commission
DG Internal Market and Services

(DG MARKT)
Additional research to assess the

impact of potentially changing the
scope (Art. 3) of the Regulation on
information accompanying
transfers of funds
28th February 2013

FINAL REPORT
Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information
accompanying transfer of funds (Regulation EC No. 1781/2006)
Matrix Insight Ltd. & Transcrime | 28th February 2013 2

Contents
1.0 Introduction 6
2.0 Study Scope and Methodology 7
2.1 Study Objectives and Design 7
2.2 Study Methodology 7
2.2.1 Desk Research 7
2.2.2 Telephone Interviews 8
2.3 Risks and challenges 8
3.0 Problem Identification 9

3.1 Typology of E-money and New Payment Methods 9
3.1.1 Card-based Payment Services 10
3.1.2 Internet-based Payment Services 11
3.1.3 Mobile Payment Services 11
3.1.4 Size and Trends of the E-money Market 12
3.2 The Fund Transfers Regulation and E-money 13
3.2.1 Recent Changes to the FATF Recommendations related to Transfers of E-
Money 14
4.0 Analysis of the Findings 15

4.1 Impacts of a potential change to Article 3 FTR 15
4.2 Differentiation between Intra-EU and Extra-EU Transfers 16
4.3 Unique Transaction Reference Number 17
4.4 Person to Person Transfers 18
4.5 Technical Means to Ensure Compliance 19
5.0 Conclusions and Recommendations 20

6.0 Annexes 21
6.1 Bibliography 22
6.2 Discussion Guide for Interviews 23

List of Tables
Table 1: E-money Typology by Platform. ................................................................................................ 9
Table 2: Member States which have applied the derogation foreseen in Article 3(3) of the FTR ........ 13

Abbreviations
Abbreviation Legislative Acts

3rd EMD The Third E-Money Directive
FTR Fund Transfers Regulation
PSD Payment Services Directive
rd
3 AMLD Third Anti Money Laundering Directive
4th AMLD Fourth Anti Money Laundering Directive
SRVII Special Recommendation VII
RXVI FATF Recommendation 16
Abbreviation Technical Terms
AML Anti-Money Laundering
CTF Counter Terrorist Financing
CDD Customer Due Diligence
FATF Financial Action Task Force
NPM New Payment Methods
P2P Person to Person

1.0 Introduction
This document contains the Final Report of the additional research to assess the impact of
potentially changing the scope of Art. 3 of the Regulation on information accompanying
transfers of funds (Regulation EC No. 1781/2006), submitted by Matrix and Transcrime.
The aim of this study is to estimate the likely impact of a potential change to the Fund Transfers
Regulation’s (FTR) Article 3 with regard to products using e-money and new payment methods
(NPM).
The Final Report consists of the following main sections:
• Section 2 summarises the study scope and methodology. It presents the study objectives
and design, including an overview of the different methods and tools applied as well as the
main risks and challenges.
• Section 3 presents the problem identification, outlining a typology for e-money products and
recent developments in the context of the European Union and the FATF’s anti-money
laundering / counter terrorist financing (AML/CTF) framework.
• Section 4 presents the findings of the study in response to the five key research questions.
This includes an assessment of the likely impact of the suggested changes to Article 3 of the
FTR to its suppliers and users.
• Section 5 presents the conclusions and recommendations of the study.

2.0 Study Scope and Methodology
The following section provides an outline of the study objectives and design as well as the
methodological tools used in the study.
2.1 Study Objectives and Design
It is our understanding that DG MARKT seeks answers to the following research questions:
1. What are the likely impacts of a potential change to the Fund Transfers Regulation’s
(EC/1781/2006) Article 3 in the light of the recent changes to the FATF recommendations with
respect to any new payment products which currently do not identify the payer or the payee of
the transaction?
2. For payment products using e-money and NPM which can be used for P2P transfers, or
where no card or unique transaction reference number accompanies the transaction, would it
be possible to differentiate in practice between intra-EU and extra-EU transfers?
3. Would all transfers using e-money or NPM carry unique information which would at least
allow identification of the specific transaction (e.g. a card number, a unique transaction
reference number) e.g. so as to allow monitoring of all transactions within the system?
4. Which are the products (using e-money and new payment technologies) which allow Person-
to-Person fund transfers? Can such products function across borders (either intra EU or to
outside the EU)? If so, are they common?
5. Is it possible to prevent new payment methods from being used as a means to effect a
person-to-person transfer of funds? Do technical means exist to ensure such compliance, and
if so, is it possible to estimate their costs?
2.2 Study Methodology
In order to provide answers to the research questions as well as to make meaningful conclusions and
recommendations, this study used a range of tools and methods which are described in detail below.
2.2.1 Desk Research
The research team dedicated the first phase of the project to undertaking desk research in order to
better understand the services that are covered by this study as well as to identify the most relevant
actors in the field of e-money and other NPMs. This included the identification and assessment of,
where possible, the relevance (if any) of the wire-transfer activity in the e-money sector (including
mobile telephony).
The study team conducted a review of the main available documentation with regard to the existing
evidence on the market for products using e-money and NPMs. The studies reviewed included the
following:

• Joint Committee (EBA, ESMA, EIOPA) December 2012. Report on the application of
AML/CTF obligations to, and the AML/CTF supervision of e-money issuers, agents and
distributors in Europe.
• Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.
• FATF-GAFI. 2010. Money Laundering using New Payment Methods
• ECB. 2008. Electronic Money Institutions, current trends, regulatory issues and future
prospects. Legal Working Paper Series No 7 / July 2008
• FATF-GAFI. 2006. Report on New Payment Methods
2.2.2 Telephone Interviews
Telephone interviews were conducted with seven stakeholders, each representing a different
segment of the market. The interview with the European E-Money Association (EMA) was used as a
pilot and provided a background understanding of the subject matter, which then informed the focus
and approach of the subsequent interviews. The interview with EMA was also used to validate the
reasoning for our choice of consulted stakeholders. EMA also circulated the questions among their
members to ensure maximum level of input.
In order to ensure a balanced response to this research, the study team also consulted stakeholders
from the policy and regulation side. Italy was chosen for this purpose based on the leading role it has
in the use of prepaid cards in Europe (see section 3.2.1) and because of the criticalities already
expressed and reported in a recent study on the application of the FTR conducted by Matrix and
Transcrime (see page 117 of the Final Study Report)1. This choice was further supported by the
interview with EMA, which pointed to the existence of a particular prepaid card type in Italy, which
could be affected by the potential revision of the FTR’s Art. 3.
2.3 Risks and challenges
The main challenge of this study was to ensure representativeness of the main segments of the e-
money market, given the relatively small sample of interviewees. While a wide range of products are
represented by the stakeholders interviewed, there is a risk that unidentified products have not been
fully covered. Related to this was the challenge of the limited timeframe for the desk research, which
means a full literature review was not possible. This challenge was addressed by using EMA as the
starting point for our interview programme, as it represents several different types of businesses
offering e-money products.
Finally, it was challenging to retrieve meaningful answers from stakeholders regarding the impacts of
a potential change to the scope of the Regulation, which could not be disclosed in its entirety. In this
study the research team therefore first of all focused on the potential impact of making the distinction
between products with person-to-person (P2P) capabilities (i.e. transfers between natural persons2)
and products used for the purchase of goods and services as the basis for determining applicability of
the FTR. Secondly, the focus was set on the relevance of the existing € 1,000 threshold in relation to
e-money products provided in Article 3(3) of the FTR. Thirdly, the interviews focused on the existence
of unique identifiers and the possibilities for cross-border transfers.
1
Matrix. 2012. Study on the application of the Regulation on information accompanying transfers of funds. Research conducted
for the European Commission DG MARKT
2
A precise definition of this concept is not provided in the FATF recommendations.

3.0 Problem Identification

The following section provides a definition of e-money and an outline of the main growth trends within
different platforms (i.e. internet-based, card-based, and mobile-based). The last section provides a
short overview of the relevance of e-money to the FTR and the FATF Recommendation 16.
3.1 Typology of E-money and New Payment Methods
The following section sets out a definition of e-money. Electronic money (e-money) can be described
as a digital equivalent of cash, stored on an electronic device or remotely on a server. The E-money
Directive (2009/110/EC) uses three criteria to distinguish e-money from other financial payment
systems:
1. Stored on an electronic device;

2. Issued on receipt of funds of an amount not less in value than the monetary value issued;
3. Accepted as means of payment by other parties than the issuer3.
However, for the purpose of this study it is useful to draw on the typology established in an FATF
report from 20064. E-money and NPMs are concepts which can be used interchangeably referring to
the same type of products. It is important to note here that many seemingly “new” payment products
are mere extensions of the “traditional” and already regulated banking system. This includes for
example the ability to make wire transfers from one bank account to another using a computer or a
mobile phone. Many other products such as internet payments not directly based on a bank account
are linked to accounts or payment cards in the banking sector, thus constituting little more than a
digital version of a prepaid card. The table below illustrates the main distinctions for e-money between
i) card-based, ii) mobile-based, and iii) internet-based.
Table 1: E-money Typology by Platform.

New non-traditional Retail
Electronic Payment Systems
Card-based Payment
Prepaid payment cards
Services
Mobile phone or device-
Mobile payments not based directly on bank account
based payment services
Internet-based Payment Internet payments not based directly on bank account
Services Digital Currency
Source: FATF 2006 adapted by Matrix.
The following sections outline the different types of NPM products by platform, i.e. card, mobile,
internet, based on a 2006 FATF report5. It is, however, important to stress that this distinction is
becoming increasingly unclear with mobile phones potentially acting as credit cards (the so-called
NFC technology used in Google Wallettm, where smartphones can be used to make credit or debit
3
Article 2, EC Directive 2009/110/EC
4
FATF-GAFI. 2006. Report on New Payment Methods
5
FATF-GAFI. 2006. Report on New Payment Methods

card payments in shops) or platforms for internet payments. Some payment card providers are also
beginning to offer wire transfers between payment cards executed by means of mobile phones.6
3.1.1 Card-based Payment Services
Prepaid payment cards provide access to monetary funds that are paid in advance by the cardholder.
There may be an account for each card that is issued or, alternatively, there may be a pooled account
that holds the funds prepaid for all cards issued.
Prepaid cards can be divided into two main groups:
• Limited purpose or closed-system cards;

• Multiple purposes or open-system cards.
Limited-purpose or closed system prepaid cards can be used for only a limited number of well-defined
purposes and their use is often restricted to specific points of sale or for specific services. Examples
include merchant-issued gift cards, prepaid long distance service, and mass transit system cards,
such as the Oyster Card in London or the Navigo in Paris. The issuer of the card or its service
provider typically operates the network on which the cards can be used. The value on the cards is
generally linked to a prepaid account established by the issuer or service provider. Transactions are
processed in a similar fashion to transactions involving debit or credit cards.
Multipurpose or open-system prepaid cards can be used across a broader range of locations for a
wider range of purposes. Such cards may be used on a national or international scale but may
sometimes be restricted to a certain geographical area. Multipurpose cards may be used by the
person who purchased the card or by someone else. Examples include payroll cards and general
purpose “cash cards” for individuals without bank accounts or a credit card. These cards are usually
associated with a card payment network, such as Visa, Maestro, or MasterCard, which permits them
to be used in the same manner as a debit card to make purchases or to get cash from an automated
teller machine (ATM).
The US market size for prepaid cards was estimated to be $ 120.2bn in 2009, in a study
commissioned by MasterCard Inc. and conducted by Boston Consulting Group (BCG)7. The BCG
study also forecast that the US will account for 53% of the global prepaid card market in 2017, and
that UK and Italy will remain the largest markets for prepaid cards in Europe. The BCG study largely
supported the findings of a 2009 survey sponsored by the international payments processing firm First
Data, which found that Italy was the “most advanced prepaid market in Europe”, while the UK market
was described as “established”, and the markets in Germany and Austria were described as
“embryonic”.8 However, the use and spread of prepaid cards have grown in recent years. According to
the Basel Committee on Payment and Settlement Services9, the number of issued cards with an e-
money function has grown from 107,6 million in 2004 to 275,28 million in 2008 in selected countries10.
6
E.g. Visa Personal Payment and Mastercard Moneysend
http://www.visa.co.uk/en/products/contactless/visa_personal_payments.aspx and
http://www.mastercard.com/in/personal/en/moneysend/faq.html
7
FATF-GAFI. 2010. Money Laundering using New Payment Methods
8
9
2012 Moneyval
10
Belgium, France, Germany, Italy, Japan, Netherlands, Singapore and Switzerland.

3.1.2 Internet-based Payment Services
Internet payment services generally cover the following two product types:
• Prepaid internet payment products;

• Digital currencies.
The prepaid internet payment products are provided by firms who may not be credit institutions. They
allow customers to send or receive funds through a virtual prepaid account, accessed via the Internet
(i.e. PayPal).
Digital currency or precious metals can either be exchanged between account holders of the same
service or exchanged against real currencies and withdrawn.
According to a new report published by Innopay, a consultancy specialised in payments and related
services, virtual goods have been driving revenues for the online gaming industry in Asia and Europe
for years. These include items bought in virtual gaming worlds but they also include items bought on
popular Facebook games11. Virtual goods are characterised by very low prices which lead to the need
for other payment methods than credit and debit cards. For micro-transactions, a pricing model with a
base fixed fee would result in a too high cost for merchants. For this reason, many start-ups in the
area of micro-transactions attempted to tackle the problem by providing a variable fee-pricing
scheme. Examples of these start-ups include the successful case of Zong (now acquired by
PayPal)12.
3.1.3 Mobile Payment Services
The final category includes mobile payment services:
• Mobile payment services;

• Mobile money services.
Mobile payment services allow non-bank and non-securities account holders to make payments with
mobile phones.
Mobile money service subscribers are able to store actual value on their mobile phone. They may use
phone credits or airtime as tender for payment.
Despite a predicted increase in the use and spread of mobile payments, only a few providers have
managed to run a successful and profitable business model in the long term so far13. According to the
2011 VISA Annual Report, one of the key components of the future of payments is a new
infrastructure which supports both contactless payment cards and Near Field Communication (NFC)-
enabled mobile devices. By the end of 2011, around 50 European members of VISA had issued more
than 26 million contactless Visa cards, and 175,000 acceptance terminals had been installed –
11
Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.
12
Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.
13

enabling quick, secure electronic payments in locations where cash-use is deeply entrenched14.
Google has also engaged in a partnership with Mastercard to provide NFC payment services to its
user. The Google.Wallet offer appears, however, not to have taken off yet15 and there are
disagreements in the industry over how this technology will develop in the coming years. In a blog
post entitled "Looking Ahead to 2013", PayPal president David Marcus sets out his predictions for
2013 and at the top of the four-point list he states that "NFC will fail to gain mass adoption"16. The fact
that the new Iphone5 did not contain the NFC technology is another indication that the technology
may not gain mass traction at least for the foreseeable future17.
3.1.4 Size and Trends of the E-money Market
Although Italy cannot be representative for all other EU Member States, taking it as an example is
useful as an indicator of the size and trend of the e-money market as a whole. In the section below, a
general overview of the market for e-money products in Italy is provided.
In Italy the number of payments executed in 2011 by means of e-money constituted 3.7% of the total
amount of non-cash transactions18. At the same time this only constituted 0.1% of the amount of non-
cash transaction measured in value19. This indicates that e-money transactions are on average
significantly lower than transactions with other non-cash means of payments.
In 2011, the growth of transactions using e-money payment instruments was 28.4%, compared to a
3.9% increase in transactions using non-cash payment instruments as a whole. This indicates that e-
money is growing rapidly in proportion not only to cash-based transactions, but also to traditional
payment products such as debit and credit cards.
14
VISA Europe. 2011. 2011 Annual Report. available at: http://www.visaeurope.com/en/about_us/idoc.ashx?docid=cc90977a-
d192-46ca-b9a6-1f697808da3e&version=-1
15
http://www.digitaltrends.com/mobile/389778/
16
https://www.thePayPalblog.com/2012/12/looking-ahead-to-2013/
17
http://www.guardian.co.uk/technology/2012/sep/14/apple-iphone-5-near-field-communication-nfc
18
This amounts to a total of 151,895,000. Based on a survey carried out for the Bank of Italy:
http://www.bancaditalia.it/pubblicazioni/relann/rel11/rel11it/appendice/app11_21_servizi_pagamento_dettaglio.pdf.
19
€ 97,140,000,000

3.2 The Fund Transfers Regulation and E-money
E-money is currently mentioned in Article 3(3) of the FTR. According to this Article: “Where a Member
State chooses to apply the derogation set out in Article 11(5)(d) of Directive 2005/60/EC, this
Regulation shall not apply to transfers of funds using electronic money covered by that derogation,
except where the amount transferred exceeds EUR 1,000.”20
This article entails that money or value transfers made in all Member States, which have not made
use of the derogation, are included within the scope of the Regulation. The same is the case for all
transfers exceeding € 1,000.
The mentioned Article 11(5)(d) in the 3rd AMLD provides for a derogation from customer due diligence
(CDD) requirements: the obligation to identify, and verify the identity of the customer and, where
applicable, the customer’s beneficial owner. It also includes obtaining information on the purpose and
intended nature of the business relationship and to monitor the business relationship – in certain
situations, including where the product is e-money as defined by the 2nd E-Money Directive (2nd EMD).
This Article provides for the exemption from CDD of e-money products that are either21:
• Non-reloadable and whose total purse limit does not exceed €250 (or €500 for domestic
transactions); or
• Reloadable, cannot transact more than €2500 in a calendar year and be used to redeem
more than €1000 in that same calendar year.
As demonstrated in a recent study on the application of the FTR undertaken by Matrix and
Transcrime, not all EU Member States have taken advantage of this derogation22.
Table 2: Member States which have applied the derogation foreseen in Article 3(3) of the FTR
Member States have applied the derogation

Total of 16: AT, BE, CY, CZ, DE, FR, EL, HU, IE, IT, LT, NL, PT, SK, SE, and UK
Member States have not applied the derogation
Total of 6: BG, EE, FI, DE, SI, and ES
20
Funds Transfer Regulation
21
Joint Committee (EBA, ESMA, EIOPA) December 2012. Report on the application of AML/CTF obligations to, and the
AML/CTF supervision of e-money issuers, agents and distributors in Europe.
22
Matrix. 2012. Study on the application of the Regulation on information accompanying transfers of funds. Research
conducted for the European Commission DG MARKT

3.2.1 Recent Changes to the FATF Recommendations related to Transfers of E-

Money
The European Commission is currently reviewing the FTR in the light of the recent changes to the
international AML/CTF standards set by FATF. The provisions covering wire transfers of the former
Special Recommendation VII have now been revised in the new Recommendation 16. The main
changes with relevance to this study are the following.
The applicable exemptions have been clarified in the new Recommendation 16. The former
Recommendation VII allowed for the exemption of transactions carried out using credit or debit cards
as long as the credit or debit card number accompanied all transfers flowing from the transaction. In
the new Recommendation 16 this has been specified to include prepaid cards but only to be the case
when the transaction is conducted for the purchase of goods and services. When such cards are used
to carry out P2P wire transfers they now fall within the scope of the recommendation.
The de-minimis threshold of USD/EUR 1,000 has been retained in the new Recommendation;
however, the new Recommendation spells out clearly what information is still required for international
wire transfers under this threshold. This includes the names of the originator and the beneficiary as
well as the account number of both parties. The latter can be replaced by a unique transaction
reference number. The address/national ID number/customer ID number/date and place of birth are
no longer required. The accuracy of the information need only be verified in the case of suspicion of
money laundering.
The objective of recommendation 16 remains the prevention of terrorist and other criminals from
having unfettered access to wire transfers for moving their funds as was the case for the former
Recommendation VII. A direct reference to United Nationals Security Council resolutions 1267 (1999)
and its successor resolution 1373 (2001) relating to the prevention and suppression of terrorism and
terrorist financing has been included in the new Recommendation 16. This constitutes a clarification
of the requirements in relation to the former recommendation SRVII.

4.0 Analysis of the Findings
The following section is based on information and feedback received during the telephone interviews
carried out as part of this study.
4.1 Impacts of a potential change to Article 3 FTR
Q1: What are the likely impacts of a potential change to the Fund Transfers Regulation’s
(EC/1781/2006) Article 3 in the light of the recent changes to the FATF recommendations with respect
to any new payment products which currently do not identify the payer or the payee of the
transaction?
It appears from the interviews conducted for this study that only niche products such as 4-party
payment card systems are likely to be affected by the majority of suggested changes. However, a
change to the € 1,000 transaction threshold for e-money in Article 3(3) should, according to one
stakeholder, take into account potential implications for the related Article 11(5)(d) of the 3rd AMLD. In
addition, products offering card2card payment facilities could also be affected by a potential change.
A large online prepaid payment facility provider interviewed expects to remain unaffected by the
potential changes to Article 3 of the FTR. The company interviewed offers one single product which
can be used for P2P transactions (although only 98% is currently used for the purchase of goods and
services). To take part in a transaction, a customer must sign up by providing name, account or credit
card details, place of residence and in some cases date of birth. A verification process of this
information is required if a user transacts more the € 2,500 in one year or if more than € 1,000 is
redeemed from the account. This is in accordance with Article 11(5)(d) of the 3rd AMLD.
Members of the European E-Money Association (EMA) stressed the importance of the € 1,000
threshold for e-money transfers which is currently provided for in Article 3(3) of the FTR. If this
threshold is removed, members of EMA see a risk that the provisions of the FTR could conflict with
those of the 3rd AMLD (and potentially the 4th AMLD). In particular, a potential conflict could be
envisaged between Article 11 of the 3rd AMLD (Simplified Customer Due Diligence) and Article 5(2) of
the FTR (verification of information on the payer). In the current legislation, both the FTR and the 3rd
AMLD provide for monetary thresholds23 under which e-money products are exempted from including
and verifying customer information. These thresholds are, according to EMA members, important in
order to maintain a risk-based approach to the system of transfers.
Wire transfers falling within the scope of the FTR must be accompanied by information about the
payer (Article 4 of the FTR). This information must, according to its Article 5, as a general rule, be
verified. In the context of an ordinary wire transfer between two bank accounts, this obligation is
straightforward as credit institutions are obliged as per Article 8 of the 3rd AMLD to conduct CDD on
their customers, which according to Article 5(3) of the FTR qualifies as verification. However,
customers of e-money providers who are exempted from CDD requirements in accordance with the
above mentioned Article (11(5)(d) of the 3rd AMLD, are not by law subject to full CDD. This means
that for them to collect verified information on the payer they would need to request documentation
about the identity of the payer. In that sense it would weaken the derogation for e-money providers in
23 rd
The exemptions for E-money in the 3 AMLD are discussed in section 3.3.

the 3rd AMLD as the providers would need to conduct CDD-like verification24 of the customer’s identity
for them to execute any transaction.
Members of EMA and an Italian public authority representative highlighted the difference between 3-
party and 4-party prepaid cards. In the case of 3-party pre-paid cards, both payer and payee are
known to the e-money provider whereby identification becomes straightforward. In the case of 4-party
payment system, two cards are issued for the same account (bank account or e-money account). One
card will be kept by the account holder, while the other card can be given to another individual who
remains anonymous to the card issuer. The anonymous third party will be able to make purchases
from a fourth party. Interviewees therefore argued that the status of this product would need to be
clarified for a revision of the FTR. An Italian provider of this card stressed that it is currently a niche
product. It has been introduced in Italy just a few years ago and the largest provider is estimated to
have just 100,000 cards on offer.
Two large payment card providers interviewed for this study offer wire transfer services between
payment cards among other things through the use of mobile phones. This capability is intended for
P2P transactions, so the products may be affected by a revision of Article 3 of the FTR. One of these
products takes the form of an ‘app’, which can be downloaded to a smart phone. The product is not
distributed by the card provider itself but by retail banks to their account holders. By means of this
‘app’, payments can be made with a card to a holder of another card of the same provider. All
payments are associated with specific transaction codes which can trace whether the transaction was
P2P or made for the purchase of a good or a service. An Italian retail bank distributing this kind of
prepaid card was interviewed for this study. In their case the prepaid card is linked to an online
account. Payments can be made to all other cards distributed by the bank either online (mobile or
internet) or by means of cash or payment card in a branch of the bank. Whenever a person purchases
such a card, KYC checks are carried out. If a third party wishes to make a cash payment onto a card
of another person, (s)he can do so in any branch subject to the provision of identity documentation.
4.2 Differentiation between Intra-EU and Extra-EU Transfers
Q2: For payment products using e-money and NPM which can be used for P2P transfers, or where no
card or unique transaction reference number accompanies the transaction, would it be possible to
differentiate in practice between intra-EU and extra-EU transfers?
It appears from the interviews conducted for this study that such a differentiation is possible for all
products based on the location of the customer.
For the online prepaid payment provider interviewed for this study, it is possible to differentiate
between domestic e-money transfers, intra-EU and extra-EU transfers. As all of the offered accounts
are linked to a payment card or a bank account registered in a country, the interviewed provider will
automatically register the country of payee and payer.
For P2P capable products offered by two payment card companies it is also possible to trace
whether payments go to other countries or remain within a jurisdiction. An Italian retail bank
24
Although there are similarities between Verification of the information of the payer (article 5 of the FTR) and verification of
rd
the identity of the customer within (article 8 of the 3 AMLD) in the sense that both require the provision of documents, data or
information obtained from a reliable and independent source to allow verification, the two concepts are not identical. In the
rd
context of the FTR it concerns verification of the information attached to a fund transfer. In the context of the 3 AMLD it
concerns the verification of the identity of the customer, and assumes a particular importance especially when the customer is a
company or a legal person. In this latter case, when applicable and on a risk-based approach, the verification would entail also
the identification of the beneficial owner of the customer as set by Art. 8 of the Directive.

interviewed for this study distributes such cards, however, stated that it is only possible to carry out
transfers to other payment cards issued by that bank. As all cardholders currently are Italian
residents, the transfer option is effectively limited to domestic transactions. As of December 2012, the
bank is licensed to offer the product to non-Italian residents. The feasibility of this option is currently
being considered. Still, payments for goods and services as well as cash withdrawals are possible in
all countries. Under any circumstances the bank is able to trace the destination of all transfers and
payments made with these cards.
EMA members, too, believe that such a distinction is possible for its members based on the location
of the customer.
4-party payment card products offered by a bank interviewed for this study can be used in ATMs
around the world. The bank issuing the card can geographically trace all the uses of the card. The
stakeholder interviewed indicated that it may be technically possible to restrict ATM use and/or match
it only to merchants registered in one country. This, however, would be in contrast with the very logic
of a card issued on an international basis.
4.3 Unique Transaction Reference Number
Q3: Would all transfers using e-money or NPM carry unique information which would at least allow
identification of the specific transaction (e.g. a card number, a unique transaction reference number)
e.g. so as to allow monitoring of all transactions within the system?
Based on the interviews conducted for this study it appears that all products falling under the scope of
the FTR would carry unique information which would allow identification of the specific transaction.
However, stakeholders disagree whether to adopt a flexible approach as to the specifics of a unique
identifier to avoid unnecessary administrative burdens or to introduce a common standard in order to
ensure consistency and accuracy of information.
For an online prepaid payment provider interviewed for this study, all payments are linked to
membership accounts which in turn link back to registered payment cards and bank accounts. There
would in addition also be an identification number for the specific transaction.
According to EMA members, transactions may be recorded according to amount, time and parties
involved for 3-party payment systems, rather than having a unique identification number.
Introducing an identification number where this is not part of the system may be problematic and
costly. Contrary to this view, the Italian supervisory authority25 recommended a standardisation of
transaction numbers. Alternatively it saw a risk that inaccurate or misleading information could
accompany the transfers. A consulted retail bank argued that this would only be needed if e-money
transfers were to become possible between different providers.
With 4-party models, a unique ID is, according to EMA, likely to be attached. This is further
confirmed by an Italian bank offering this product.
Both industry stakeholders issuing and distributing payment cards stated during the interviews
for this study that payments from their products will always be associated with a unique identifier. One
payment card provider stressed that the collection and administration of this data lies with the
25
Representatives from Banca d’Italia were interviewed for this study. Banca d’Italia is the financial supervisory authority of
Italy. The Italian FIU is also established within Banca d’Italia.

financial institutions which distribute the cards. So in practice the card provider does not have the
means to monitor to which extent it is being done. An Italian bank issuing cards with a card2card
payment capability stated that all payments are associated with a unique identifier.
4.4 Person to Person Transfers
Q4: Which are the products (using e-money and new payment technologies) which allow Person-to-
Person fund transfers? Can such products function across borders (either intra EU or to outside the
EU)? If so, are they common?
According to EMA, there are four types of relevant products. This was further confirmed in the
subsequent interviews:
1. Internet-based
a. PayPal is a case in point here, as they offer a three-party pre-paid payment system
where all payers and payees are customers of the provider.
2. Card-based
a. Prepaid cards (3-party systems) can always be passed on to anonymous third
persons. As these products are comparable to (albeit more traceable than) cash, they
are considered by EMA members to be outside the scope of the Recommendation.
b. Prepaid cards (4-party systems) are prepaid cards designed to be passed on to a
person anonymous to the card provider.
3. Card-based combined with mobile or internet
a. Some card providers offer money transfers between payment cards. These cards are
distributed by retail banks.
According to an online prepaid payment provider interviewed for this study, 2% of all its
payments are P2P. The company currently has a 30% annual growth in transaction value.
One interviewed card provider reported offering a product which enables money transfers between
payment cards. For one of the companies this product dates back to 2003. The other company
reported the product to be used at a very limited rate in Europe at the moment. One of the payment
card providers stated that it is anticipated that these products may fall within the scope of the FATF
Recommendation 16 and thus a potential revised version of the FTR. This provider also reported that
the use of the product is growing although the exact figures are kept confidential for competition
reasons. Among some EMA members this technology is under development although not currently
offered. One Italian bank consulted reported to offer this kind of card; however, in this case the
transfer capability was restricted to other cards issued by that bank. This effectively ensured that the
retail bank always has full information on both payer and payee. One stakeholder also reported that in
Italy there are more than 10 million of these cards in circulation. However, the P2P capability of the
product does not seem to be the main driver behind the growth in prepaid cards.

4.5 Technical Means to Ensure Compliance
Q5: Is it possible to prevent new payment methods from being used as a means to effect a person-to-
person transfer of funds? Do technical means exist to ensure such compliance, and if so, is it possible
to estimate their costs?
Based on the interviews conducted for this study, it appears that some products are aimed at P2P
transactions and would be the same products if P2P was restricted (transfers between payment
cards). However, the only concrete example of such a card identified in this study only allowed person
to person transfer between cardholders of the same provider. Other products (such as 4-party
payment card system) ensure financial inclusion of individuals who would otherwise be transacting in
cash. The status of 4-party payment cards after a potential change in scope of the FTR remains
unclear. The online payment service provider interviewed for this study has a clear distinction in its
offer between payments made on a merchant’s website and payments made as P2P.
The one risk identified by an Italian bank is if a person sets up a “fake” merchant. In that case it would
be impossible for a payment service provider to distinguish between a payment for goods and
services and a P2P payment.
In the case of 4-party payment card systems it is important to understand what kind of market the
product is designed for. The product was identified by EMA members as mainly existing in Italy, which
was confirmed by an Italian public authority representative. Users are often individuals without access
to bank accounts, for example irregular migrant workers who use it as a means to receive
remuneration for work. Other users include allowances for children or other family members.
The alternative for the user of this product would therefore typically be cash payments. Cash is
characterised by the lowest possible level of traceability. It is therefore from a regulatory perspective
not desirable to prohibit payment products only to see them being replaced by cash. In Italy, for
example, as a part of the combat against tax fraud, interviewees confirmed that the Monti government
had further reduced the legal threshold for cash transactions to just € 1,000 (only three years ago the
permitted threshold was € 12,500)26. This limits the cash payment option in Italy. It should also be
considered that nothing prevents an individual from opening a second account with a limited sum of
money and passing on the associated debit card to an anonymous third party.
It should therefore be stressed that this product serves the purpose of financial inclusion and would
probably be replaced by cash if prohibited.
The products offered by the two interviewed payment card companies are specifically aimed at
P2P transfers. For that reason they are also equipped with data fields for enabling to carry the
information required for wire transfers and generally carry the information required under the FTR.
The online prepaid payment provider interviewed for this study stated that it imposes restrictions
on P2P transactions but only in jurisdictions outside the EU. It confirms that this would be possible
also within the EU jurisdictions, but at a very high cost.
26
http://www.businessweek.com/magazine/italys-cap-on-cash-payments-12082011.html

5.0 Conclusions and Recommendations
This study examined a range of products using e-money and NPM. These included:
• an online prepaid payment facility;

• a mobile product transferring value between payment cards; and
• 4-party and 3-party prepaid payment cards.
It can be concluded that:
• removing the € 1,000 transaction threshold for e-money in Article 3(3) would have
consequences for payments below € 1,000. Such e-money payments, where they are used to
make person to person transfers, have been included into the scope of the new international
standards with respect to wire transfers. A number of stakeholders have expressed concerns
about how this change, if implemented into the revised EU Regulation, would articulate with
Article 11(5)(d) of the 3rd AMLD which allows simplified due diligence measures to be applied
to E-money products below a threshold of €2,500 for devices that can be recharged;
• for payments below € 1,000 which are not made from an account the identity of the customer
would need to be provided, but not verified. For payments above € 1,000, verification of the
customer information would still be necessary.
• a differentiation of domestic intra and extra EU payments was found to be possible for all the
products based on the location of the customer;
• all products falling under the scope of the Regulation appear to carry unique information
which would allow identification of the specific transaction. In some cases, this would also
allow the identification of the payer and the payee involved in the transaction. In all cases, this
ability to identify the transaction would allow monitoring for AML/CFT purposes;
• industry stakeholders are in favour of a flexible approach to the specifics of a unique identifier.
An Italian regulator argues that standardisation will become necessary;
• it appears that some e-money and NPM products are aimed specifically at P2P transfers and
would be impacted by new rules stemming from the revision of FATF Recommendation 16.
This would in particular imply identification of both the payer and the payee in the case of P2P
transfers;
• the status of other products (such as 4-party payment card system) is uncertain after a
potential revision of the FTR. This however, is a relatively rare niche product. A policy
stakeholder argued that the product helps ensure financial inclusion and would otherwise be
replaced by cash;
• online payment products are often characterised by 3-party systems where the provider
collects information on both the payer and the payee. In this situation all relevant information
about the payer and the payee is already being collected; and
• the market for e-money is growing but P2P remains a very small proportion. A bank consulted
for this study argued that the P2P feature was not a central driver for growth of e-money
products.

6.0 Annexes

6.1 Bibliography
• Joint Committee (EBA, ESMA, EIOPA) December 2012. Report on the application of
AML/CTF obligations to, and the AML/CTF supervision of e-money issuers, agents and
distributors in Europe.
• Matrix. 2012. Study on the application of the Regulation on information accompanying
transfers of funds. Research conducted for the European Commission DG MARKT
• Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.
• VISA Europe. 2011. 2011 Annual Report. available at:
http://www.visaeurope.com/en/about_us/idoc.ashx?docid=cc90977a-d192-46ca-b9a6-
1f697808da3e&version=-1
• FATF-GAFI. 2010. Money Laundering using New Payment Methods
• ECB. 2008. Electronic Money Institutions, current trends, regulatory issues and future
prospects. Legal Working Paper Series No 7 / July 2008
• FATF-GAFI. 2006. Report on New Payment Methods

6.2 Discussion Guide for Interviews
DISCUSSION GUIDE FOR INTERVIEWS
Date and location of interview

Interviewee name(s),
organisation and position
Interviewer name
Introduction E-money and new payment methods (NPM) are a digital equivalent of cash,
stored on an electronic device or remotely at a server. One common type of e-money is the
'electronic purse', where users store relatively small amounts of money on their payment card or
other smart card, to use for making small payments. But e-money can also be stored on (and
used via) mobile phones or in a payment account on the internet.
The aim of this study is to get an understanding of the use of products using e-money and NPM
and to analyse the extent to which the inclusion of some of these products within the scope of
the Funds Transfer Regulation could become necessary and feasible, and to understand the
possible impacts.
1. Please briefly summarise your position and role within your organisation.
2. Please indicate the types of products using e-money or NPM, which you offer:
Products used for the Products which could be

purchases of goods and used for person2person
services exclusively transfers
Description of the product(s)
What is the amount of
transactions of your current
offer (in % compared to total
transactions) for...?
What is the growth trend in
comparison to “traditional
products” (e.g. credit cards
bank drafts etc)
Is the payer identified for
transactions using these
products?
Is the payee identified for
transactions using these
products?
Do transfers from these
products carry unique
information which allow the
identification of the specific
transaction (e.g. a card

number, a unique transaction

reference number)?
Which are the typical users of
these products(e.g. low/high
income groups, remitters)?
3. With regard to products using e-money or NPM, which cannot be used for person-to-
person transactions27:
a. Are there examples of such products, which currently do not carry a transaction
number?
b. If a transaction number were to become mandatory, what would be the impact

on users and providers of these products,? Can you identify any costs /benefits
for such a case?
c. What safeguards/technical means exist to prevent/detect possible

circumvention (e.g. in case possibilities exist with the payment product to
purchase other payment products which can then be sent to other natural
persons)?
d. What would be the costs of such means for users and suppliers of these
products?
4. With regard to products using e-money or NPM which can be used for person-to-person
transactions:
a. Are there currently examples of such products where the payee and/or payer is
not identified for transactions using such products?
b. What would be the impact on users and providers of these products if the
identification of the payer and the payee were to become mandatory? Can you
identify any impacts/ costs / benefits for such a case?
5. With regard to products using e-money and NPM, which allow for person2person transfers:
a. Are there examples of such products that do not carry unique information which
would at least allow identification of the specific transaction (e.g. a card
number, a unique transaction reference number)?
b. Which of these products (if any) function across borders (intra-EU, extra-EU)?
6. If the identification of the payer and the payee were to become mandatory, would it be
possible for those products using e-money and new payment technologies which can be
used for person2person transfers as well as those products using e-money and NPM
where no card number or unique transaction reference number accompanies the
transaction :
27
For person to person, this should be understood as "natural person" to "natural person".

a. to differentiate between intra-EU and extra-EU transfers? (intra-EU the

information requirements are lower)
b. What would be the impact of doing so for users and suppliers of these
products?
7. In your opinion, how has the e-money and NPM market developed in recent years? Has it
been growing? If so, why? What benefits is it bringing?
8. Are you aware of any industry reports outlining the current market size and trends of
different types of NPM and e-money?
Thank you very much for your help.

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European Commission

DG Internal Market and Services

Additional research to assess the

28th February 2013

Matrix Insight Ltd. & Transcrime | 28th February 2013 2

3.0 Problem Identification 9

4.0 Analysis of the Findings 15

5.0 Conclusions and Recommendations 20

Matrix Insight Ltd. & Transcrime | 28th February 2013 3

Matrix Insight Ltd. & Transcrime | 28th February 2013 4

Abbreviation Legislative Acts

Matrix Insight Ltd. & Transcrime | 28th February 2013 5

The Final Report consists of the following main sections:

• Section 5 presents the conclusions and recommendations of the study.

Matrix Insight Ltd. & Transcrime | 28th February 2013 6

2.0 Study Scope and Methodology

2.1 Study Objectives and Design

2.2 Study Methodology

2.2.1 Desk Research

Matrix Insight Ltd. & Transcrime | 28th February 2013 7

2.2.2 Telephone Interviews

2.3 Risks and challenges

Matrix Insight Ltd. & Transcrime | 28th February 2013 8

3.0 Problem Identification

3.1 Typology of E-money and New Payment Methods

1. Stored on an electronic device;

Table 1: E-money Typology by Platform.

Matrix Insight Ltd. & Transcrime | 28th February 2013 9

3.1.1 Card-based Payment Services

Prepaid cards can be divided into two main groups:

• Limited purpose or closed-system cards;

Matrix Insight Ltd. & Transcrime | 28th February 2013 10

3.1.2 Internet-based Payment Services

• Prepaid internet payment products;

3.1.3 Mobile Payment Services

The final category includes mobile payment services:

• Mobile payment services;

Matrix Insight Ltd. & Transcrime | 28th February 2013 11

3.1.4 Size and Trends of the E-money Market

Matrix Insight Ltd. & Transcrime | 28th February 2013 12

3.2 The Fund Transfers Regulation and E-money

Member States have applied the derogation

Matrix Insight Ltd. & Transcrime | 28th February 2013 13

3.2.1 Recent Changes to the FATF Recommendations related to Transfers of E-

Matrix Insight Ltd. & Transcrime | 28th February 2013 14

4.0 Analysis of the Findings

4.1 Impacts of a potential change to Article 3 FTR

Matrix Insight Ltd. & Transcrime | 28th February 2013 15

4.2 Differentiation between Intra-EU and Extra-EU Transfers

Matrix Insight Ltd. & Transcrime | 28th February 2013 16

4.3 Unique Transaction Reference Number

Matrix Insight Ltd. & Transcrime | 28th February 2013 17

4.4 Person to Person Transfers

Matrix Insight Ltd. & Transcrime | 28th February 2013 18

4.5 Technical Means to Ensure Compliance

Matrix Insight Ltd. & Transcrime | 28th February 2013 19

5.0 Conclusions and Recommendations

• an online prepaid payment facility;

It can be concluded that:

Matrix Insight Ltd. & Transcrime | 28th February 2013 20

Matrix Insight Ltd. & Transcrime | 28th February 2013 21

Matrix Insight Ltd. & Transcrime | 28th February 2013 22

6.2 Discussion Guide for Interviews