PSD2: A changed world for online marketplaces in Europe

Michael Cocoman, International Regulatory Lead at Stripe, considers the impact of PSD2 on marketplace platforms in Europe and Stripe’s solution to shoulder the regulatory burden so platforms can focus on running their online businesses.

Multi-sided platforms, or marketplaces, are among the most exciting internet businesses transforming how we buy and sell today. From ecommerce platforms like Catawiki to fashion websites like ASOS Marketplace, European platforms are broadening consumer choice and enabling sellers to scale their businesses far beyond what was possible before.

As platforms become increasingly important drivers of digital commerce in Europe, their role has attracted heightened regulatory scrutiny to protect consumers and prevent money laundering. PSD2, which comes into force from January 2018, clarifies existing grey areas regarding the flow of payments from buyers to sellers via marketplaces and requires marketplaces to take action to ensure they are compliant.

Many online platforms are set up so that the buyer owes a payment for the product or service purchased to the seller and not to the platform, with the platform merely facilitating the sale. Despite this, many platforms look to manage payments themselves by acting as intermediaries between buyers and sellers. As these platforms are coming into possession of funds that are beneficially owned by the seller, this would be considered regulated payments activity, which requires a payments license unless it falls within an exemption.

PSD2 reforms the so-called ‘commercial agent’ exemption, which many platforms operating in Europe avail of, by strictly limiting the circumstances in which this exemption applies. In light of the changes to the ‘commercial agent’ exemption, many marketplaces are re-evaluating their business models and regulatory positions and taking action to ensure they are not providing regulated services.

One way that platforms who currently rely on the ‘commercial agent’ exemption can continue to operate, both without disrupting their business model and remaining outside the scope of PSD2, is to outsource the regulated payment activity to a licensed payment service provider, such as Stripe. Stripe supports many such platforms on Connect, a uniquely compliant product for platform payments.

What is the commercial agent exemption?

The commercial agent exemption applies to “payment transactions from the payer to the payee through a commercial agent authorised to negotiate or conclude the sale or purchase of goods or services on behalf of the payer or the payee”.

Platforms have invoked this exemption on the basis that they are acting as a commercial agent authorised to negotiate or conclude the sale or purchase of goods or services on behalf of the payer (the buyer) or the payee (the seller). Under a construct used by many online marketplaces, the buyer is considered not to be paying the platform but instead to be paying the seller, via its commercial agent (the platform). Many platforms have chosen to rely on this exemption in lieu of becoming a licensed provider of regulated payment services.

Many hold the view that platforms, in aggregating market supply with market demand, are acting as an agent for both the payer (receiving orders and payments from the buyer that are owed to the seller) and the payee (sending orders and payments received from the buyer to the seller). However, this poses problems for platforms as the commercial agent exemption has been applied quite differently throughout Europe under PSD1. Different interpretations by regulators have made it very difficult for platforms to make use of this exemption in a consistently compliant manner as, unlike a payments license, an exemption cannot be passported across Europe.

PSD2 seeks to clarify the uncertainty regarding the use of the commercial agent exemption in order to protect European consumers and, from a competition perspective, to level the playing field across Europe with regard to how individual Member States apply the commercial agent exemption.

How does PSD2 impact platforms?

A widely-held view throughout Europe is that after PSD2 is implemented, platforms managing their own payments will no longer be able to rely on the commercial agent exemption from licensing. PSD2 restates the commercial agent exemption as including:

“payment transactions from the payer to the payee through a commercial agent authorised via an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of only the payer or only the payee”

This change is explained in the preamble to PSD2 which states that the commercial agent exemption: “is applied very differently across the Member States. Certain Member States allow the use of the exclusion by e-commerce platforms that act as an intermediary on behalf of both individual buyers and sellers without a real margin to negotiate or conclude the sale or purchase of goods or services. Such application of the exclusion goes beyond the intended scope set out in that Directive and has the potential to increase risks for consumers, as those providers remain outside the protection of the legal framework. Differing application practices also distort competition in the payment market. To address those concerns, the exclusion should therefore apply when agents act only on behalf of the payer or only on behalf of the payee, regardless of whether or not they are in possession of client funds. Where agents act on behalf of both the payer and the payee (such as certain e-commerce platform), they should be excluded only if they do not, at any time enter into possession or control of client funds”.

Therefore, from the final implementation date of January 13, 2018, the commercial agent exemption will only be available when a commercial agent very clearly acts on behalf of either the payer or the payee, but not when acting for both the payer and the payee. If acting for both, a platform will only be able to avoid a licensing requirement if it does not possess or control funds (i.e., relies on a licensed payment service provider to do this).

To illustrate this, the Financial Conduct Authority (FCA) in the UK has stated:

“An example where a platform will be acting for both the payer and the payee would be where the platform allows a payer to transfer funds into an account that it controls or manages, but this does not constitute settlement of the payer’s debt to the payee, and then the platform transfers corresponding amounts to the payee, pursuant to an agreement with the payee.”

The FCA has also stated, by way of further example, that an online fundraising platform, which accepts donations before transmitting them to the intended recipient, would not be able to rely on the commercial agent exemption.

The preamble to PSD2 reveals that a primary objective behind narrowing the commercial agent exemption is to protect consumers. Where a platform is managing the payments, the seller providing the product or service is not only taking on the contractual obligation to the customer, but also the additional credit risk of default by the platform. For example, if the platform goes insolvent before paying out, the seller has provided their product or service without receiving payment.

Another factor that platforms should consider in determining whether PSD2 applies to them, is whether their payment services are a “regular occupation or business activity”. While this is not defined, the preamble to PSD2 states that licensing is “confined to service providers who provide payment services as a regular occupation or business activity”. The FCA’s understanding of this is informative. It has stated that “the services must be provided as a regular occupation or business activity in their own right and not merely as ancillary to another business activity” but also that “the fact that a service is provided as part of a package with other services does not, however, necessarily make it ancillary to those services.” It’s very difficult to imagine that receiving payments and paying sellers for all transactions conducted through a platform would merely be considered ancillary and not a regular occupation or business activity of such a platform.

Finally, PSD2 will also impact other set-ups that European platforms have historically relied upon. For instance, even if platforms fall within the extremely narrow scope of the “limited network exemption” (a possible alternative to the commercial agent exemption), the platform will be forced to notify the relevant regulator if their payment volume over the preceding 12 months exceeded €1 million, upon which the regulator may require them to obtain a payments license.

Faced with these potentially business altering regulatory changes, many hundreds of platforms with sellers across Europe have already chosen to rely on a licensed payment service provider, such as Stripe, rather than having to obtain their own payments license or fit within a narrow exemption.

How does Stripe approach payments for platforms?

When we designed Stripe Connect, we wanted the payments regulatory burden in Europe to fall on Stripe and our e-money license, rather than on platforms. To do this, we created an entirely new product, designing payment flows to ensure that platforms do not come into possession or control of funds. The preamble to PSD2 provides guidance on this:

“Where agents act on behalf of both the payer and the payee (such as certain e-commerce platform), they should be excluded only if they do not, at any time enter into possession or control of client funds.”

Commercial realities mean most platforms don’t have an option to deviate from their contractual design, where the buyer owes a payment to the seller with the platform merely facilitating the sale, and so it is business critical that these platforms do not come into possession or control of funds. This is the central regulatory pillar behind Stripe’s development of Connect, and one of the primary reasons many platforms in Europe have chosen Stripe.

With Connect, Stripe has direct contractual relationships with both the seller and the platform to settle payments to the seller and fees to the platform. Funds that are owed to the seller are never in the possession or control of the platform. Instead, these funds are held in Stripe’s regulated client money bank account for the benefit of the seller, before being paid out to the seller by Stripe. The regulated payment services are rendered by Stripe instead of the platform, so the platform does not incur the significant regulatory and compliance overhead of getting a payments license or exemption.

Connect provides platforms in Europe with a sophisticated and compliant payments flow that enables platforms to design their agreements with their sellers in compliance with local payments regulation, without having to pursue their own payments licenses. Stripe shoulders this regulatory burden so that platforms can focus their energies on running their businesses.

This is not legal advice and platforms should independently assess their own unique regulatory positions.

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