Safeguarding compared — how EMI and payment institution safeguarding actually differs across the EU

EU law gives a payment institution two safeguarding methods and lets each member state decide which one you may actually use — which is why safeguarding is the least harmonised part of a passported payments business. Article 10 of Directive (EU) 2015/2366 sets the segregation-or-insurance choice for payment institutions. Article 7 of Directive 2009/110/EC applies it to e-money and adds a five-business-day deadline. Everything else — eligible assets, reconciliation frequency, who owns the control — is national. This walks through the common core, the D+1 and D+5 rules, and where the national divergence actually bites.

1. The two methods, and what each requires

Article 10(1) of PSD2 requires member states or competent authorities to make a payment institution providing the services in points (1) to (6) of Annex I safeguard all funds received from payment service users or through another payment service provider for the execution of payment transactions, in one of two ways.

The segregation method under Article 10(1)(a) has three limbs, and all three have to hold. Funds must not be commingled at any time with the funds of any natural or legal person other than the payment service users on whose behalf they are held. Where they are still held by the institution and have not been delivered to the payee or transferred to another provider by the end of the business day following the day of receipt, they must be deposited in a separate account at a credit institution or invested in secure, liquid, low-risk assets as defined by the competent authorities of the home member state. And they must be insulated in accordance with national law in the interest of the payment service users against the claims of other creditors of the institution, in particular on insolvency.

The insurance method under Article 10(1)(b) requires an insurance policy or comparable guarantee from an insurance company or credit institution which does not belong to the same group as the payment institution, for an amount equivalent to what would have been segregated, payable in the event that the payment institution is unable to meet its financial obligations.

2. Mixed-purpose funds and the representative portion

Article 10(2) deals with the case where only part of the funds held will be used for future payment transactions and the rest relates to non-payment services. That portion used for future payment transactions is also subject to the safeguarding requirement.

Where the portion is variable or not known in advance, member states must allow institutions to apply the requirement on the basis of a representative portion assumed to be used for payment services — provided that portion can be reasonably estimated from historical data to the satisfaction of the competent authorities.

Two consequences follow. The representative-portion approach is a permission that depends on evidence, so the historical data set is part of the compliance artefact rather than an internal input. And because it is assessed by the home authority, a group running the same mixed product in several member states can end up with different accepted percentages for identical economics.

3. E-money: the same rules plus D+5

Article 7(1) of Directive 2009/110/EC requires an electronic money institution to safeguard funds received in exchange for electronic money that has been issued, applying the PSD safeguarding provision. It then adds two things the payment-institution regime does not have.

First, a timing rule for funds received by payment instrument: those need not be safeguarded until they are credited to the institution’s payment account or otherwise made available to it in accordance with the applicable execution-time requirements — but in any event they must be safeguarded no later than five business days after the issuance of the electronic money. This is the D+5 rule, and it sits alongside rather than replacing the D+1 logic that governs funds received for payment transactions.

Second, the directive defines secure, low-risk assets for e-money purposes by reference to asset items in a specified category with a specific-risk capital charge no higher than 1.6%, excluding other qualifying items — and also includes units in a UCITS investing solely in such assets. Competent authorities may, in exceptional circumstances and with adequate justification, determine on an assessment of security, maturity, value or other risk elements that particular assets do not qualify.

Article 7(3) then applies the payment-institution safeguarding rule to an EMI’s payment services that are not linked to issuing e-money — which is why a hybrid EMI runs two safeguarding populations under two timing rules rather than one pooled arrangement.

4. Where the divergence comes from

Article 7(4) of the e-money directive is the single provision that explains most of the practical variation: for the purposes of paragraphs 1 and 3, member states or their competent authorities may determine, in accordance with national legislation, which method shall be used by electronic money institutions to safeguard funds. The choice between segregation and insurance is not necessarily the firm’s.

Add the two explicit delegations in PSD2 Article 10 — eligible secure, liquid, low-risk assets are defined by the home competent authority, and insulation operates in accordance with national law — and the harmonised core turns out to be narrow: what must be safeguarded, the two available methods, D+1 for payment funds, D+5 for e-money issuance, and the non-group requirement for insurance. Almost everything an implementation team needs to decide is national.

Luxembourg is a useful illustration of how far a national regime goes beyond the directive text. Circular CSSF 26/906 requires daily controls and reconciliations of safeguarded funds given the volume or complexity of transactions, with weekly available only on a documented risk analysis validated by both the management and supervisory bodies; requires a named member of the management body to own oversight of the safeguarding controls; and requires the institution to be able to identify funds that are not protected at any time and without delay. None of that is in Article 10 or Article 7 — and none of it is unusual.

Facts: a group holds an EMI licence in one member state and passports into three others. It runs one safeguarding account structure, one eligible-asset policy and one reconciliation cadence across the whole book.

What the rule says: the safeguarding regime is set by the home member state, so a single structure is correct as a starting point — but the eligible-asset definition, any national determination of the permitted method, and the reconciliation and governance expectations layered on top are all home-state rules that a group standard may not meet.

What the practitioner does: keeps the single structure and documents it against the home regime specifically, rather than against the directive. The failure mode is not running four regimes; it is running a group standard that satisfies none of them because it was written from the directive text.

5. The common core, side by side

6. What this means for the build

Three design consequences follow from the text rather than from any particular national regime.

The end-of-next-business-day rule is a reconciliation requirement in disguise. To know whether funds are still held at that point, the firm has to be able to age receipts and match them against onward delivery to the payee or transfer to another provider. A daily balance comparison against the safeguarding account does not answer that question; it answers a different one.

The no-commingling limb is absolute in time — funds must not be commingled “at any time” with the funds of anyone other than the users on whose behalf they are held. That reaches the treatment of the firm’s own fees and commissions inside a collection flow, which is where commingling most often occurs by accident rather than by design.

And the insurance route is not lighter, it is differently shaped. The cover has to equal what would otherwise have been segregated, which means it has to track a moving balance; it must come from outside the group; and it has to be payable on the institution’s inability to meet its financial obligations, which is a defined trigger the policy wording has to actually deliver.

Facts: a payment institution runs a collection product where merchant settlement happens weekly. Its finance team deducts the firm’s commission from the collected balance at the point of settlement, inside the safeguarding account, and transfers it out afterwards.

What the rule says: Article 10(1)(a) prohibits commingling at any time with the funds of any person other than the payment service users on whose behalf funds are held. The firm’s own commission is its money, so from the moment it is treated as earned inside the safeguarded balance there is commingling — even though the net position reconciles and the money leaves promptly.

What the practitioner does: moves the commission out of the safeguarded population by design, either by never routing it in or by settling it from a separate operating account, and treats “the reconciliation balances” as the wrong test. Firms holding both a payments and an investment permission should also keep this analysis separate from client-asset rules, which come from a different regime — see our note on where to base an EMI.

7. FAQ

8. What to do, today

• Write the safeguarding policy against your home regime, not against Article 10. The directive is the floor; the eligible-asset definition and the method determination are national.
• Build receipt ageing, not just balance reconciliation — the end-of-next-business-day test is about individual funds, not about totals.
• Audit the fee and commission flow for commingling. “At any time” leaves no window for netting your own revenue inside safeguarded balances.
• If you are a hybrid EMI, confirm you are running two safeguarding populations — e-money issuance on D+5 and unrelated payment services on the PSD timing.
• If you rely on insurance, check the cover tracks the moving safeguarded balance, comes from outside the group, and pays on inability to meet financial obligations as drafted.
• If you use a representative portion, keep the historical data set that justifies it current and be ready to show it — the permission depends on the evidence, not the policy.

Related: Safeguarding controls under Circular CSSF 26/906 · Where to base your EMI · Branch versus freedom of services · Own funds and initial capital for PIs and EMIs · E-money tokens under MiCA · Payment Accounts Directive — fees and switching