“How safe is my money?” Safeguarding of customer funds held by payment and e-money institutions

Since 2020 at the latest, many customers of payment and e-money institutions (PSPs) have been concerned with one question: How is my money safeguarded if the PSP gets into economic difficulties? First of all, we have good news for all interested and affected parties: If all acting persons have complied with the legal rules, then the money at PSPs is very safe even if the PSPs become insolvent. This is because there are precise specifications on how PSPs have to safeguard customer funds in the European Area. Therefore, the following explanations apply throughout the EU as well as in Iceland, Liechtenstein, and Norway although they refer to the legal situation in Germany.

Different ways of safeguarding customer funds held by PSPs

PSPs have various options for safeguarding customer funds. They can either set them aside and keep them separate from their own assets. This solution is called a “segregation solution”. They can also obtain an insurance or guarantee that compensates the customers if the institution becomes insolvent. We call this solution a “guarantee solution”.

How the segregation solution works

With the segregation solution, PSPs keep customer funds separate from their own assets. Figuratively speaking, the customer funds are fenced in. For this reason, this type of safeguarding is also called “ringfencing”. The segregation solution works like a one hundred percent minimum reserve. A PSP that chooses this type of safeguarding must observe the following rules.

1. The PSP may not commingle customer funds with its own funds or with funds of third parties who are not payment service users or e-money holders. Thus, the segregation solution prohibits in particular that customer funds are held on an account that also contains the PSP’s own assets.
2. The PSP must either deposit the customer funds in a trust account or invest them in certain assets that are safe and liquid. Due to the current interest rate situation, investing in safe and liquid assets hardly plays a role in practice currently. In other member states of the European Economic Area, the “Treuhandkonten” commonly used in Germany are sometimes called something else (e. g., trust account or segregated account).
3. The PSP must ensure that the customer funds are insolvency-proof. For this purpose, it must conclude a trust agreement with the customers. In addition, it must fulfil certain requirements under insolvency law. For example, customer funds may not be temporarily booked to accounts that are no trust accounts.

If the PSP becomes insolvent, the customer can assert a so-called “Aussonderungsrecht”. This means that the customer funds do not fall into the insolvency estate but can be paid directly to the customers. In this respect, the customers are given priority in this case.

How the guarantee solution works

With the guarantee solution, the PSPs secure the customer funds with an insurance policy or a guarantee, which must come from an insurance company or a credit institution. These companies must not belong to the same group as the PSP and must be licensed in the European Economic Area. If the PSP becomes insolvent, customers can directly assert their claims to customer funds against the insurance company or credit institution. The guarantee solution usually costs the PSPs more money than the trustee solution. For this reason, the guarantee solution is rather rare in Germany.

Remaining risks

As long as all parties involved adhere to the legal requirements, customer funds are fairly safe with both the segregation solution and the guarantee solution. However, risks remain: In the case of the segregation solution, there is essentially the risk that the responsible persons at the PSP do not comply with the legal requirements and misappropriate the customer funds (for example, by transferring the funds to their own business account or the private account of third parties). In this case, however, the persons acting would usually be liable to prosecution. Affected customers could assert their claims directly against the acting persons. If one assumes that not everyone has good contacts with various secret services, the acting person will not be able to escape so easily. With both the segregation solution and the guarantee solution, however, there is also the risk that the account-holding bank, the insurance company or the guarantee-providing credit institution itself becomes insolvent.

Are customer funds safer with credit institutions?

Also, concerning the risks we have described above, the question remains whether customer funds are safer with a credit institution. Unfortunately, this question cannot be answered in a general way because customer money protection works differently at credit institutions than at PSPs. There, the state or other credit institutions step in up to certain amounts in the event of the credit institution’s insolvency. However, this only works in full if three conditions are met:

1. The customers are covered by the deposit guarantee. Some customers of Greensill Bank had to learn that this is not always the case.
2. Existing thresholds must not be exceeded. For example, the statutory deposit guarantee only covers deposits up to 100,000 euros.
3. In the case of voluntary deposit guarantees (e. g., the deposit guarantee fund of the German Banking Association), the other banks must be willing and able to reimburse the missing deposits. Customers do not have a legally enforceable

In this respect, there are also risks when customers use payment services or e-money from credit institutions. Fortunately, these risks have hardly materialized in the past. Incidentally, this also applies to customer money protection at PSPs.

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