The EBA ruled that non-bank PSPs cannot use central-bank settlement accounts to meet PSD2 safeguarding requirements, eliminating a potential cost-saving alternative and locking in capital drag for scaling fintechs.
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The European Banking Authority has closed a door that many non-bank payment service providers had hoped to walk through. Central-bank settlement accounts, including the ECB's TARGET platform, cannot satisfy the safeguarding requirements under PSD2, the EBA ruled. The decision eliminates a potential cost-saving alternative to commercial bank deposits.
The safeguarding rules require client funds to be ring-fenced from the firm's own creditors in an insolvency. A TARGET settlement account, while held at the central bank, sits on the firm's balance sheet without the structural separation the regime demands. The ECB, the EBA said, acts as a settlement counterparty, not a custodian.
For a scaling payment institution, the ruling locks in a capital drag. When user balances grow, the firm must park a meaningful portion of its equity at an approved credit institution. Several established challengers have noted that capital raised after Series C is effectively warehoused for this purpose, not deployed into product or distribution. The ECB route would have removed that dependency.
The EBA did preserve one operational flexibility. The safeguarding obligation applies only to amounts still held at the end of the business day following receipt. Funds actively in transit and used intraday on the TARGET account to settle payments are not in breach, provided the remaining balance is swept into a proper safeguarding arrangement by the deadline. That helps high-volume, same-day payment flows.
The wider market problem remains unresolved. Insurance has found the risk profile unattractive, and lenders have shown limited appetite for bridging credit facilities. A cooperative pooling model has been floated but does not exist at scale. No such structure currently operates anywhere in the EEA.
The ruling lands during a period of active reform. The UK is reviewing its Payment Services Regulations, with the FCA expected to consult on updated safeguarding rules. The EU's PSD3 and the accompanying Payment Services Regulation will update the Article 10 regime and are expected to codify clearer rules around acceptable safeguarding assets, potentially opening the door to low-risk sovereign instruments beyond the current approved list.
Until those frameworks arrive, non-bank PSPs across the EEA and the UK remain structurally dependent on commercial banking partners for safeguarding. The ECB ruling forecloses the most plausible near-term alternative.
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