A borderless Guide for Navigating European Regulatory Changes
Introduction to PSD2
The new European payments law, the second Payment Services Directive (PSD2), has introduced significant changes affecting multi-sided platforms or marketplace businesses in Europe. Many of these businesses can no longer rely on the licensing exemption they previously used.
In a typical marketplace setup, where a platform acts as an intermediary for both buyers and sellers without selling the product or service itself, the platform can no longer receive payments owed by buyers to sellers. If it does, it will need to obtain a payments license from a regulator and become a regulated business.
Understanding Marketplace Operations
Multi-sided platforms, or marketplace businesses, are revolutionizing how we buy and sell. From on-demand services to B2B platforms, crowdfunding to the sharing economy, and e-commerce to booking platforms, marketplace businesses are expanding global customer bases, increasing consumer choice, and enabling sellers to scale their businesses beyond previous limitations. borderless supports many of these platforms through borderless multi-currency FBO accounts and payouts API, a compliant solution for platform payments.
Online platforms serve as central hubs enabling transactions between buyers and sellers. From early pioneers like eBay and Amazon to recent successes like Shopify, Etsy, and Kickstarter, the platform industry has grown globally, providing new markets and choices for both customers and suppliers. Europe has been the birthplace of many innovative platforms, such as Deliveroo, Catawiki, and ManoMano.
Navigating PSD2 Regulatory Changes
This guide shares insights on how platforms in Europe can navigate the regulatory changes brought by PSD2, which significantly impact how platforms manage payments. Many platforms receiving payments in Europe have relied on the “commercial agent” exemption from payments licensing. We explore how this exemption has changed from January 2018 and its impact on the regulatory position of platforms in Europe. While this is not legal advice (platforms should independently assess their setups), our views are based on our experience in the complex payments regulatory landscape that our platform payments product is built on.
The key change for platforms is that if they act on behalf of both buyers and sellers, as most platforms do, they can only avoid becoming licensed and regulated businesses if they do not possess or control funds and instead rely on a licensed payment service provider.
Operational and Payment Structures of Platforms
Contractual Setup
Most online platforms facilitate sales from the seller (Seller) to the customer (Buyer) without acting as a seller or reseller. The Seller makes the sale to the Buyer, who owes payment to the Seller. The Platform generally passes economic risk to the Seller, who takes on financial, legal, and tax obligations associated with the sale of products or services to the Buyer. Obligations may include liability for products delivered to consumers, returns, local VAT requirements, and licensing or mandatory insurance requirements for licensed or insurable products or services.
This setup is often essential to the economic success of Platforms. Platforms typically ensure their role is merely to facilitate sales by including specific language in their contracts with Sellers, such as: “the contract for the supply of the service will be between you and the customer,” “the platform only plays a facilitation or supporting role,” or “the platform’s responsibility is limited to facilitating the availability of the site, application, and services.” Platforms often do not contract with the Buyer, and instead, the Seller contracts with both the Buyer and the Platform.
Payments Setup
Even though the Buyer owes payment to the Seller, many Platforms manage payments themselves, acting as intermediaries between Buyers and Sellers. When the Buyer makes a payment, it is often received by the Platform and then paid out to the Seller.
This flow of payments is not always aligned with contractual liability. The Platform often receives the payment from the Buyer, which is owed to the Seller. However, the Buyer’s debt to the Seller is not settled when the Platform receives the funds.
Regulated Payment Services and Exemptions
Regulated Payment Services in the EU
The following activities are considered regulated payment services in the EU:
- Operating a payment account and enabling cash to be placed on and withdrawn from a payment account (e.g., holding funds for a specific merchant in a bank account before releasing the funds per the merchant’s instructions)
- Executing payment transactions (e.g., processing payments from customers to merchants)
- Issuing and/or acquiring “payment instruments” under PSD1 or “payment transactions” under PSD2 (e.g., acquiring and processing credit card transactions through card networks)
- Money remittance (e.g., transferring funds on behalf of a payer to a payee)
- Payment initiation services (new under PSD2, e.g., initiating a bank transfer from a customer’s online bank account to a merchant)
- Account information services (new under PSD2, e.g., providing consolidated or aggregated information regarding payment accounts held with payment service providers)
borderless has partnerships with multiple financial institutions that are regulated payment services in Europe as an Electronic Money Institution that provide a For Benefit Of (FBO) accounts.
Where a Platform enters into possession or control of funds owed by a Buyer to a Seller and later settles them to the Seller, the platform would be considered to be providing regulated payment services unless it falls within an exemption, such as the commercial agent exemption.
The Commercial Agent Exemption
Platforms have used the commercial agent exemption by claiming they act as a commercial agent authorized to negotiate or conclude the sale of products or services on behalf of the Seller. In this setup, the Buyer is considered to be paying the Seller through its commercial agent (the Platform), and the Seller is treated as receiving payment as soon as the Platform receives the payment.
Many regulators in Europe view Platforms aggregating market supply with market demand as acting for both the payer (receiving orders and payments from the Buyer and offering benefits like member discounts) and the payee (sending orders and payments received to the Seller). Pre-PSD2, some countries allowed a commercial agent to act on behalf of both payer and payee, while others applied the exemption strictly, only permitting the agent to act on behalf of either the payer or the payee, not both. This inconsistent application was problematic, as an exemption in one country cannot be passported across Europe.
PSD2 and the Commercial Agent Exemption
PSD2 clarifies that the commercial agent exemption is only available when an agent acts on behalf of either the payer or the payee but not both. If acting for both, a Platform can only avoid licensing if it does not possess or control funds, relying on a licensed payment service provider. Regulators widely agree that Platforms managing their own payments can no longer rely on the commercial agent exemption from licensing.
Other PSD2 Considerations for Platforms
Regular Occupation or Business Activity Test
Platforms should consider whether their payment services are a “regular occupation or business activity.” Licensing is “confined to service providers who provide payment services as a regular occupation or business activity.” According to the FCA, services must be provided as a regular occupation or business activity in their own right and not merely ancillary to another business activity.
Limited Network Exemption
This exemption applies to a very limited range of activities, such as “closed loop” payments. However, Platforms falling within the limited network exemption must notify the relevant regulator if their payment transactions exceed €1 million over the preceding 12 months, potentially requiring them to obtain a payments license.
borderless’ Approach to Platform Payments
borderless’ FBO account and payout solution can help alleviate the regulatory burden in Europe. Along with the payment processor and merchant account, borderless’ solutions has the burden falling on financial partners with e-money licenses rather than Platforms.
Most Platforms prefer to facilitate sales rather than make sales. Acting on behalf of both Buyers and Sellers, it is critical that Platforms do not possess or control funds. This principle is central to the development of FBO accounts and a primary reason many Platforms in Europe choose borderless.
Additional Benefits of borderless
- Onboarding and KYC identity verification: borderless onboards Sellers per applicable anti-money laundering obligations.
- Customizing the Seller’s experience: Sellers can allow the Platform to manage their experience, including the UI, reporting, payouts management, and API communication.
- Innovative payment functionality: Supports various business models, including One-to-Many, Many-to-Many, Holding Funds, Account Debits, Instant Payouts, and more.
- Local transaction routing: better acceptance rates and lower-cost payments to sellers in 135+ currencies and payment types, including SEPA, Faster Payment and more.
- Local payouts to sellers in local currencies: Enables Platforms to internationalize their businesses without local entities or bank partners.
- Flexible yet central payouts: Enables Platforms to payout to banks, cards, PayPal and other e-wallets all from one place.
Closing
PSD2 has introduced significant changes to the European payments landscape, directly impacting multi-sided platforms and marketplaces. With borderless payouts, Platforms can navigate better these regulatory changes.
For more information, visit our website or contact our support team.