Do portal providers have to become payment institutions to authorise payments? A German perspective

08 February 2013

Introduction

Providers of online platforms for the sale of goods and services (Sales Portals) sometimes also offer the retailers on Sales Portals the opportunity to have payments for their goods and services processed through a single payment interface operated by the platform provider (Portal Payment Services).

In these situations, a customer wanting to use a payment card to purchase goods from a retailer on the Sales Portal will present his/her card details through the payment interface and the transaction will then be processed by the platform provider (and in particular by the platform provider’s “merchant acquirer”) as though it was for a sale by the platform provider and not by the underlying retailer. When the platform provider receives the proceeds of these sales (as it will do in due course from its merchant acquirer), it will pass on those proceeds to the relevant retailer, less any charges due to the platform provider for the provision of the Sales Portal and the payment arrangements under it.

The same applies if customers use other payment methods such as PayPal, Payment Network, direct debit, wire transfer, prepayment etc. In any case the customer transfers a certain amount of funds to the platform provider who will transfer a corresponding amount to the retailer.

Under Directive 2007/64/EC of the European Parliament and of the Council of November 13, 2007 (the PSD), it was determined that all EU countries should implement a regulatory regime controlling the provision of “payment services”. In particular, this regime required that anyone providing a payment service who did not fall within one of the available exclusions (in Article 3 of the PSD – the “PSD Exclusions”) should be required to become authorised as a payment institution and to comply with certain conduct of business rules regarding the way in which they run their business. All EU countries were required to implement the PSD into their local law by 1 November 2009, although not all countries met this deadline.

The determination of what activities constitute a “payment service” is handled within the PSD by a listing of such activities in an Annex (the PSD Annex). 

A recent German case has considered whether a Sales Portal platform provider who also provides Portal Payment Services is providing “payment services” requiring authorisation as a payment institution under the regulations implementing the PSD in Germany.  The particular payment service which it was suggested that the relevant platform provider was providing was “money remittance”.

The act of money remittance and the view of BaFin

Under Article 4(13) of the PSD, a “money remittance” service is defined so that it is provided where:

• an amount of money belonging to the paying party

• is received or made available to the recipient of the payment

• solely for the purposes of transmitting a respective amount to the recipient of payment

• without setting up a payment account in the name of the paying party or a recipient of the payment

There is also a description of a money remittance service in Recital (7) of the PSD as:

“….a simple payment service that is usually based on cash provided by a payer to a payment service provider, which remits the corresponding amount, for example via communication network, to a payee or to another payment service provider acting on behalf of the payee.”

This recital goes on to make clear that the bill-paying services which are common in some Member States may constitute “money remittance” services. It says “In some Member States, supermarkets, merchants and other retailers provide to the public a corresponding service enabling the payment of utility and other regular household bills. Those bill-paying services should be treated as money remittance as defined in this Directive, unless the competent authorities consider the activity to fall under another payment service listed in the Annex”.

The application of the PSD in German falls within the regulatory control of German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (well known as BaFin). In a guidance notice dated 22 December, 2011, BaFin referred to “escrow services”.

These were referred to as situations where a trusted third party stands in between a buyer and a seller on the basis that it will receive from the buyer the purchase price of goods or services and release that purchase price to the seller only against confirmation that the relevant goods/services have been delivered as contractually required. BaFin expressed the view in the guidance note that such escrow services could involve “money remittance”. 

Importantly, this made clear that BaFin was taking the view that “money remittance” was not limited to services with the main purpose of transferring funds from a payer to a payee using the service provider as intermediary.  This was particularly interesting because it could certainly be argued that it was an approach which was inconsistent with Recital (6) of the PSD according to which the application of the legislation on payment services should be confined to payment service providers whose main activity consists in the provision of a payment service to payment service users. Whether this applies to escrow services is questionable.

Decision of the Regional Court of Cologne

The relevant decision of the Regional Court of Cologne was given in a preliminary injunction proceeding. The case involved a company (the Sales Portal Company) that processed food orders from all over Germany via a single website. Although all sales were made through the one website, customers were aware that they were buying products from individual retailers and did not believe that they were buying from the Sales Portal Company. For the purposes of payments, however, customers could pay online by making payment to the Sales Portal Company for onward transmission to the relevant retailers. This approach was applied to payments made by various credit cards and also other online payment systems such as PayPal. The amounts collected by the Sales Portal Company were then passed on to the respective retailers on a monthly basis, minus a charge made by the Sales Portal Company for the use of the website including the online payment service.

The Regional Court of Cologne decided as follows:

• The business model of the Sales Portal Company did involve the provision of a Finanztransfergeschäft (the German law equivalent to "money remittance" within the meaning of the PSD). In the view of the Court, the Sales Portal Company performed services in which an amount of money was received by it solely for the purposes of transferring the relevant amount to a recipient of payment (the retailer) without setting up a payment account.

• It was not an essential feature of a money remittance service that the “payment in” should be in cash. Implicitly, it was also determined that money remittance could also exist where the payment being transferred was the sale price of goods or services. 

• The Sales Portal Company’s business model did not fall within any of the PSD Exclusions.

Counter-arguments

Whether or not the conclusions of the Regional Court of Cologne will continue to stand remains to be seen.   It can certainly be argued that the decision sets the definition of “money remittance” too broadly, particularly in view of the contents of Recital (6). 

However, it should be noted that under German law the Finanztransfergeschäft is set up as a catchall element which shall be applicable to any payment service where no payment account relationship between the service provider and the service user is established.

A key difficulty is that, Portal Payment Services do involve a credit risk on the platform provider – namely the risk that the platform provider will receive the proceeds of transactions it has processed but will not pass those amounts on to the retailers once they are received. That risk will fall either on the customer or on the retailer according to whether the law applicable to the retailer/customer contract treats payment to the platform provider as good discharge of the customer’s payment obligations. It can therefore be argued that it is within the spirit of the PSD to treat the arrangements as involving a payment service unless one of the specific PSD Exclusions applies.

Perhaps then of greater concern in relation to the Regional Court’s determination was its conclusion the Sales Portal Company’s business model did not fall within such a PSD Exclusion.  In particular, there is a PSD Exclusion which can be argued to apply to a Sales Portal where, although the platform provider is providing a payment service, the platform provider is acting as “a commercial agent authorised to negotiate or conclude the sale or purchase of goods or services on behalf of” the retailer (Commercial Agents). The basis on which the Regional Court reached the conclusion that this PSD Exclusion was not available is not clear from the judgment and this may represent a stronger ground of challenge. According to the PSD, only payment service providers having their main activity in providing payment services should be regulated. This was the main reason for having Commercial Agents exempted from regulations on payment services. Therefore the applicability of this PSD Exclusion should be almost self evident.

Practical ramifications

The decision of the Regional Court has considerable significance for any platform provider in respect of a Sales Portal who wants to provide Portal Payment Services. For all EU countries, even if it is reversed on appeal, it represents a potentially significant broad interpretation of one of the activities in the PSD Annex. Given that the provision of payment services without authorisation will involve the commission of a criminal offence punishable by a fine or imprisonment, the decision underlines that it is very important for any provider of Portal Payment Services in any EU jurisdiction to structure its activities to fall within a PSD Exclusion rather than hoping that those activities will not be construed as a payment service in the first place. 

For more information please contact:

Dr Michael Jünemann´s Image                                     Trystan Tether's Image


Michael Jünemann                                    Trystan Tether
Partner                                                    Partner
michael.junemann@twobirds.com               trystan.tether@twobirds.com