The European Banking Authority has dealt a significant blow to non-bank payment service providers hoping to use central bank accounts as a substitute for commercial safeguarding arrangements. In a ruling that closes off one of the more widely anticipated regulatory workarounds, the EBA confirmed that funds held in a European Central Bank TARGET settlement account “cannot be considered by itself a safeguarding measure” under Article 10(1) of PSD2.
The question arose after the ECB opened direct access to its TARGET payment rails for non-bank PSPs, including payment institutions and e-money institutions. Many in the industry had assumed that if the settlement account sat at the central bank rather than a commercial bank, it would offer a superior safeguarding option. Central banks, after all, are where commercial banks themselves park reserves. The logic was intuitive but, as the EBA has now clarified, legally incorrect.
Why the ruling matters
The core of PSD2 safeguarding is insolvency protection: client funds must be ring-fenced so that they cannot be claimed by the firm’s own creditors if it fails. A TARGET settlement account does not provide that ring-fence. The account sits on the firm’s balance sheet in the same way a commercial bank account would, without the structural separation that the safeguarding regime demands. The ECB, the EBA has effectively said, is a settlement counterparty, not a custodian.
The ruling has direct capital implications for scaling fintechs. As a payment institution’s user base grows, its safeguarding obligation grows with it, and the requirement to hold ring-fenced funds at an approved credit institution becomes an increasingly significant drag on equity. Several established challengers have noted publicly that a meaningful portion of capital raised after Series C is effectively warehoused to meet this obligation rather than deployed into product or distribution. The ECB route, had it worked, would have removed that dependency on commercial banks entirely.
The intraday window
The EBA did preserve one narrow flexibility. The obligation to place funds into a qualifying safeguarding account only applies to amounts still held at the end of the business day following receipt. Funds actively in transit and used intraday on the TARGET settlement account to settle payment transactions are not in breach, provided any remaining balance is swept into a proper safeguarding arrangement by the deadline. This is a limited but operationally useful clarification for PSPs running high-volume, same-day payment flows.
The broader market problem, however, remains unresolved. Insurance has explored the space as an alternative safeguarding mechanism and found the risk profile unattractive. Revolving credit facilities could in theory bridge liquidity spikes, but lenders have shown limited appetite at current risk-free rates. Some analysts have floated the idea of a cooperative pooling model, where multiple non-bank PSPs with different seasonal demand profiles combine resources to manage collective safeguarding capacity, though no such structure currently exists at scale.
Regulatory path ahead
The ruling lands during a period of active reform. The UK is conducting its own review of the Payment Services Regulations, with the FCA expected to consult on updated safeguarding rules as part of the broader consolidation of the UK payments framework following Brexit divergence. 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, regardless of their own regulatory status or size. The ECB ruling forecloses the most plausible near-term alternative.
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