Securing transactions: funds segregation in marketplaces

26 February 2024

Business Insight

As the volume of transactions on marketplaces continues to surge, with a notable increase of +29% between 2019 and 2023, as reported by the latest Fevad study, guaranteeing the security of funds becomes a crucial concern.

This article aims to present the concept of funds segregation and the pivotal role of a segregated account in the collection of funds on behalf of third parties within a marketplace.


Understanding funds segregation

The segregation of funds is a system that mandates the strict isolation of funds held by a financial institution from those of account holders. In the case of payment institutions like Lemonway, this separation isn’t just a best practice but a legal obligation, ensuring the comprehensive protection of funds received from third parties during their operational activities.


Specific features of payment institutions

Payment institutions are mandated to safeguard funds received from third parties, and two primary methods are employed for this purpose:

  1. Taking out insurance or a comparable guarantee, or
  2. Protecting the funds in one or more segregated accounts.

The second method, which is often preferred by payment institutions as it is less costly, involves rigorous internal controls. Under article L.522-17 of the French Monetary and Financial Code, funds collected on behalf of third parties must be transferred to a “segregation account” at the end of the business day following the day on which they were collected.


Funds segregation for a marketplace

In the marketplace model, the amounts paid by buyers are deposited in segregation account. This bank account is opened by the payment service provider (PSP) with a third-party credit institution authorised to receive funds on demand from the public. This enables the PSP to secure the funds collected from third parties by keeping them separate from its own funds.

The segregation account acts as a shield, ensuring a clear separation between the PSP’s funds and those belonging to users of the PSP’s marketplace and payment services (merchants, project sponsors, investors, etc.). This demarcation offers protection against inappropriate use of the latter’s funds and protects them against the PSP’s creditors.


Protection of funds under the French Monetary and Financial Code

The segregation account offers strict protection of funds in accordance with article L. 613-30-1 of the French Monetary and Financial Code. In scenarios like the bankruptcy of the payment institution, the funds of the marketplace’s customers are neither lost nor available to the payment institution’s creditors, as they are held separately with a credit institution.

Additionally, if the bank hosting the segregation account were to disappear, the payment institution customers concerned would be guaranteed to get their money back up to €100,000 thanks to the deposit guarantee and resolution fund (also called “FGDR” in France).


How the segregation account works and misconceptions about it

It’s crucial to differentiate the segregation account from an escrow account, often misconstrued as a transactional guarantee. The PSP cannot withhold the funds pending receipt of the order, for example, and cannot oppose a request from the beneficiary (the merchant, for example) to make the funds available, except in cases of suspected fraud or risk of money laundering or terrorist financing.

Funds received by the PSP must be diligently transferred to a segregated account on the day following their receipt, unless the beneficiary exercises their right of free disposal by requesting fund transfer to a designated bank account.


Segregation account agreement

In the case of segregation accounts, the agreement between the payment institution and the credit institution with which the account is opened must explicitly detail several crucial elements:

  • the purpose of the account
  • its characteristics (in particular that the funds are not to be combined with the funds of natural or legal persons other than the payment service users on whose behalf the funds are held)
  • its operation (clear identification of debit and credit transactions, absence of fees charged directly to the account, etc.)
  • its name indicating the purpose for which the funds are deposited


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