Bank Transfers (Cross-Border)
by Jan von Hein
Despite the introduction of the euro and the guarantee of freedom of payments anchored in primary legislation (Art 63 TFEU/56 EC), until recently cross-border payments (bank transfers, debits, card payments) had been characterized by a broad legal and technological fragmentation of the Member States’ general requirements. After various steps of harmonization had been judged unfavourably, Directive 2007/64 of 13 November 2007 on Payment Services in the Internal Market was passed and now establishes a uniform euro payment area (Single Euro Payments Area) (Payment Services Directive; in the ensuing text, articles without legal specification relate to this directive). The directive provides a harmonized legal basis for bank transfers and other payment services in the European internal market, regardless of whether the payment crosses a Member State’s border. The Payment Services Directive constitutes, apart from an enumerated list of exceptions, a measure of full harmonization (Art 86).
2. Stages of the harmonization process
The earlier harmonization in the area of cross-border payments was characterized by a fragmentation concerning the regulatory objects and the chosen form of regulation. The law of cross-border bank transfers had been harmonized by Dir 97/5, which the German legislature had also extended to domestic bank transfers (§§ 676a ff Bürgerliches Gesetzbuch (BGB) in the version of the Bank Transfer Act 1999). The Bank Transfer Directive had been influenced by the UNCITRAL Model Law of 1992. In addition to this, Reg 2560/2001 on cross-border payments in euros was adopted, under which card payments and transfers not amounting to more than €50,000 may not be charged higher fees than those imposed on comparable domestic payments. However, the recommendations by the European Commission (COM (88) 590 final, COM (97) 489 final) only relate to card payments. In the face of the commercial and functional equivalence of the different payment services, such fragmentation was doctrinally and practically unsatisfactory.
Now, however, Art 4(3) of the Payment Services Directive creates a Single Euro Payments Area covering all payment services listed in the annex (particularly bank transfers, debits, card payments). This constitutes, regardless of arguable weaknesses in detail—bills and cheques are not included because of the existing Geneva Conventions (Art 3(g))—a welcome step towards the development of a coherent European doctrine concerning cashless payments. While the Bank Transfer Directive has thus been repealed and the recommendations concerning card payments have been replaced by the more recent Payment Services Directive, the regulation on cross-border payments remained untouched at first. However, in this regard the provisions of Reg 2560/2001 have in the meantime been repealed and replaced by Reg 924/2009, whereby the notion of a single payment area is promoted further. Beyond the regulation of card payments and transfers, the new regulation also addresses debits, but it does not extend to paper-based payment instruments. Related to the substantial expansion is the creation of new procedural remedies: supervision is consolidated, and out-of court complaint and redress bodies are established. The ambitious project of a single-payment area is, therefore, expected to entail further EU regulation adapting to ever evolving technologies and filling the existing regulatory gaps.
3. Spatial scope of the Payment Services Directive
The directive applies to all payment services in the sense of Art 4(3) which are provided within the Union (Art 2(1)(1)). A narrower definition applies to the scope of Titles III and IV, which harmonize the contract law of payment services. Title III concerns the transparency of contract conditions and information requirements for payment services; Title IV regulates the rights and obligations on the provision and use of payment services. Both titles only apply (with the exception of Art 73, which determines the value date and the availability of funds) if both the payer’s payment service provider and the payee’s payment service provider are located in the Union or, if only one payment service provider is involved in the payment, the provider is located in the Union (Art 2(1)(2)). Furthermore, the application of Titles III and IV requires that the respective payment services are performed in euros or the currency of a Member State outside the euro area (Art 2(2)). Contrary to the original proposal of the Commission, payment service providers of third countries (eg the United States) are not included. In particular, in relation to the United States, the US regulatory authority regarding dollar bank transfers abroad is problematic. The application of the directive to payment service providers of the EEA countries and Switzerland follows from the EEA Final Act and the corresponding bilateral Euro-Helvetic contracts.
4. Providers (payment institutions)
The Payment Services Directive allows payment services to be provided not only by credit institutions, which also engage in deposit banking, but also by each of the ‘payment service providers’ determined by Art 1(1). These include not only common credit and e-money institutions, but also ‘payment institutions’, ie every legal person which has received an authorization according to Art 10 allowing the provision and execution of payment services throughout the Union. This approach, which is frequently criticized in Germany, is consistent with the British Banking Act 2009, which provides that only the deposit business is subject to classification as banking business, the payment business thus not being subject to its provisions. Moreover, according to Art 26(1) a certificate of exemption for the provision of payment services can be granted to natural persons and small businesses. This step is intended to lead to an improvement of the supervision of the existing grey-market in the area of financial transfers.
5. Regulations of supervisory law
The Payment Services Directive contains detailed rules on the supervision of payment institutions (Arts 5–27), while other payment service providers are subject to rudimentary regulation only (ban on discrimination, Art 28; reservation of interdiction, Art 29). This can be attributed to the fact that credit and e-money institutions, in contrast to mere payment institutions, are already subject to the requirements of the supervisory law of the directives which are relevant in this respect (financial supervision). The Payment Services Directive is based upon the principles of the European passport and of home country control. The Payment Services Directive regulates the general admission requirements (Art 5), in particular the required initial capital and the corresponding own funds (Arts 7, 8). The differentiation of the business fields of payment institutions from those of credit and e-money institutions is crucial. Mere payment institutions are not allowed to engage in deposit banking or the credit business nor may they issue e-money (Art 16). The practical suitability of the distinguishing criteria contained in the directive remains to be seen.
6. Regulations of contract law
a) Distinction between single payment transactions and framework contracts
The Payment Services Directive covers single payment transactions which are not subject to a framework contract (in the sense of Art 4(12); Art 35) as well as payment transactions which are subject to a framework contract (Art 40). The latter dominate in practice (recital 24). The cash transfer to be executed without a current account agreement (§ 675(1) Bürgerliches Gesetzbuch (BGB)) qualifies as an individual payment. However, in the event of transfers from one account to another, a current account agreement is underlying as a framework contract. The term ‘payment transaction’ is legally defined as ‘an act, initiated by the payer or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee’ (Art 4(5)). This needs to be distinguished from the underlying ‘payment order’ in the sense of Art 4(16), ie every ‘instruction by a payer or payee to his payment service provider requesting the execution of a payment transaction’. Moreover, payment transactions executed due to a framework contract require a payment order, which follows from the duty to provide information concerning a ‘payment order to be properly executed’ which is applicable to framework contracts (Art 42(2) lit a, b).
The Payment Services Directive gives no explicit answer to the question as to whether the payment order itself has a contractual character (see § 675(1) BGB) or if it is consistent with the directive to characterize the payment order—as in German law prior to the implementation of the Bank Transfer Directive—as a mere instruction within the scope of the contractual relationship of the current account. The uniform application of the term ‘payment order’ both concerning single payment transactions, which require a specific conclusion of a contract (Art 36), and as a basis for payment transactions under a framework contract, indicates a retention of the present legislative conception, which considers the current account contract as a mixed type contract which also contains executing elements of the bank transfer contract.
b) Obligations to inform
With reference to the nature and scope of the obligations to inform, one must distinguish between single payment transactions and payments on the basis of a framework contract (§ 675(2) BGB). A current account contract as a framework contract has to fulfil the requirements of Art 42 of the Payment Services Directive, ie it must contain detailed information about the payment service provider, the use of the payment service, charges, interest and exchange rates, the communication between the parties, protective and remedial measures, conditions of the change and termination of the framework contract, the contact period, the law applicable to the framework contract and the competent courts as well as other dispute settlement procedures (Arts 44, 45). Articles 46–48 Payment Services Directive concern the information to be communicated in cases of individual payment transactions.
According to Art 67(1), payment service providers are principally obliged to transfer the full amount of the payment and to refrain from deducting any charges from the amount transferred. This is justified by the interest in a fully automated processing of payments and the interest in legal certainty (recital 40). Differing agreements are possible within limits, but it must be ensured that the payee receives the full amount of the payment transaction or that he is appropriately informed (Art 67(2), (3)). Charges for fulfilling obligations to inform and secondary obligations may only be raised within the scope of Art 52; they have to be appropriate and aligned to the actual costs.
d) Authorizations of payment transactions
A payment transaction is only considered to be authorized by the payer if he has given consent (Art 54(1)(1)). This consent has to be given in the form agreed between the parties (Art 54(2)). It can be given prior to or—if agreed—after the execution of the payment transaction (Art 54 (1)(2)). Article 59 imposes the burden of proof for the authorization and the proper execution of the payment transaction upon the payment service provider. In the event of an unauthorized payment transaction, Art 60 imposes a duty to refund on the payment service provider. However, the payer is liable for compensation in the case of intentional or gross negligence (eg concerning the safekeeping of a Maestro card which is later utilized to execute a bank transfer at a terminal); Art 61 regulates details.
e) Execution of payment transactions
Furthermore, the Payment Services Directive contains detailed provisions about the receipt, the refusal and the irrevocability of payment orders (Arts 64–66). The payment service provider has to ensure, concerning payment transactions in euros (Art 68(1) lit a; with reference to currencies of a Member State outside the euro zone the requirements determined in lit b and c apply) that from the receipt of the payment order the amount which is subject to the payment transaction is credited to the payee’s payment service provider’s account at the latest by the end of the next business day (Art 69(1)(1)). This so-called d+1 rule is a significant reduction of the previously applicable execution period of five (Germany to foreign countries) or three (inland Germany) days; therefore, for a transitional period lasting until 1 January 2012, a payer and his payment service provider may agree on a longer period of three business days at the most (Art 69 (1)(2)). If a payment transaction is initiated in paper form, the permitted periods may be extended by a further day (Art 69(1)(3)). For intra-Union payment transactions mentioned in Art 68(1) lit b, a period no longer than four days can be stipulated (Art 68(2)(2)).
f) Liability in the event of incorrect or unexecuted payment transactions
Subject to the requirements regulated in detail in Art 75, the payment service provider is liable for the non-execution or incorrect execution of the payment order. Article 75(1) applies to bank transfers; it concerns payment orders initiated by the payer. Contrary to the original proposal of the Commission, liability is not imposed irrespective of fault. In this regard, the payment service provider’s possibilities of exculpation are very limited. On this point, recital 46 states: ‘The smooth and efficient functioning of the payment system depends on the user being able to rely on the payment service provider executing the payment transaction correctly and within the agreed time. Usually, the provider is in the position to assess the risks involved in the payment transaction. It is the provider that provides the payments system, makes arrangements to recall misplaced or wrongly allocated funds and decides in most cases on the intermediaries involved in the execution of a payment transaction. In view of all those considerations, it is entirely appropriate, except under abnormal and unforeseeable circumstances, to impose liability on the payment service provider in respect of execution of a payment transaction accepted from the user, except for the payee’s payment service provider’s acts and omissions for whose selection solely the payee is responsible.’ Article 78 contains an exclusion of liability in the event of unforeseeable circumstances.
Although at first sight the liability seems strict, a considerably privileged status of the payment service provider is created by the rule about incorrect ‘unique identifiers’ (Art 74). This means the combination of letters, numbers or symbols specified by the payment service user to identify the payee and/or his payment account (Art 4(21)). If a payment order is executed in accordance with the ‘unique identifier’, it is deemed to have been executed correctly with regard to the payee (Art 74(1)). If the unique identifier provided by the payment service user is incorrect, the payment service provider’s liability is excluded (Art 74(2)(1)); however, he shall make reasonable efforts to recover the funds involved in the payment transaction. Taking into account that the common unique identifiers, the International Banking Account Number (IBAN) and the Bank Identifier Code (BIC) have 22 and 11 digits respectively, it is unfortunate with regard to consumer protection to release the payment service providers from any liability resulting from failing to investigate discrepancies concerning the personal identification of the payee.
In a temporal aspect, the liability of the payment service provider is limited by the time limit laid down in Art 58 (notification of unauthorized or incorrectly executed payment transactions without undue delay, but no later than 13 months after the debit date). The national law may provide an additional financial compensation (Art 76). The payment service provider liable to the customer has a right of recourse against other payment service providers or intermediaries according to Art 77.
7. Private international law
Because the Payment Services Directive basically constitutes a measure of full harmonization (Art 86), the determination of the applicable Member State law within the scope of the directive is rapidly losing practical importance. However, there remain margins for the exceptions mentioned in Art 86. In addition, the directive is without prejudice to provisions relating to the consequences as regards liability for inaccuracy in the expression or transmission of a statement (recital 53). With reference to the financial compensation of non-authorized or incorrect payment transactions, the domestic law can additionally provide more generous rules (Arts 60 (2), 76). The importance of the determination of the applicable law is also illustrated by Art 42(7) lit a, which prescribes that the contract clauses have to indicate the law applicable to the framework contract.
However the directive itself does not contain—apart from the determination of its regional scope in Art 2—any particular conflict of law rules. Thus, concerning contractual claims, the general rules of the Rome I Regulation (Reg 593/2008) apply, which is also underlined by the reference to the consumer-protection conflict of law rules of the Rome Convention on the law applicable to contractual obligations in recital 51. Bank transfer contracts, both in the case of individual payments and payments due to a framework contract, involve service contracts, which are subject to the law of the country where the service provider has his habitual residence (Art 4(1) lit b Rome I Reg). The habitual residence of legal persons is either the place of central administration or of the branch involved at the time the contract is concluded (Art 19 Rome I Reg). A choice of law has priority (Art 3 Rome I Reg), but in relation to consumers it must not curtail the protection which they enjoy under the law of their habitual residence if the provider has directed his activity to that country (Art 6 Rome I Reg).
The applicable law has to be determined separately for each legal relationship. Non-contractual claims, particularly those belonging to the law of unjust enrichment, are subject to the Rome II Regulation (Reg 864/2007) (non-contractual obligations (PIL)). In this regard, a separate connection within the respective performance relationship is necessary. Within the context of the Rome Regulations, direct rights of action of the payer against intermediary banks, which are in German law partly derived from the legal concept of contracts with protective effect towards third parties, are, at best, conceivable as non-contractual claims.
Ulrich Burgard, ‘Der Vorschlag der Kommission für eine Richtlinie über Zahlungsdienste im Binnenmarkt’ (2006) WM 2065; Michael Gruson, ‘Die Regelungszuständigkeit der Vereinigten Staaten für ausländische Dollar-Überweisungen und Dollar-Konten’ (2006) RIW 241; Christian Hofmann, ‘Das Haftungsregime für Kartenzahlungssysteme im europäischen Rechtsvergleich—Eine Bestandsaufnahme vor dem Hintergrund des Vorschlags für eine Richtlinie über Zahlungsdienste im Binnenmarkt’ (2007) 106 Zeitschrift für Vergleichende Rechtswissenschaft 174; Cornelia Manger-Nestler, ‘Der einheitliche europäische Zahlungsverkehrsraum vor dem Hintergrund der Payment Service Directive’  Europäische Zeitschrift für Wirtschaftsrecht 332; Martijn van Empel, ‘Retail Payments in the EU’ in Martijn van Empel (ed), Financial Services in Europe (2008) 215; Rhys Bollen, ‘Harmonisation of International Payment Law: A Survey of the UNCITRAL Model Law on Credit Transfers (Parts I and II)’  Journal of International Banking Law and Regulation 44, 105 ff; Sideek M Seyad, ‘A Critical Assessment of the Payment Services Directive’  Journal of International Banking Law and Regulation 218; Stefan Grundmann, ‘Das neue Recht des Zahlungsverkehrs’ (2009) WM 1117, 1157 ff; Reinhard Steennot, ‘Legal Aspects of Credit Transfers and Electronic Payments: A Belgian Perspective’ (2009) 24 BFLR 499; Dorothee Einsele, Bank- und Kapitalmarktrecht —Nationale und Internationale Bankgeschäfte (2nd edn, 2010) § 6.