On 24th of July 2013 the European Commission published a proposal for a new Directive on payment services in the internal market (PSD2), repealing the previous payment services Directive from 13th of November 2007 (2007/64/EC – PSD1). PSD1 obliged the Commission to present a report on the review of the Directive before November 2012. The current proposal addresses the deficits discovered in the practice of implementation and application. It is currently undergoing the legislative process.
Changes made to limited networks by PSD2
Within the framework of PSD2 the Commission has closely reviewed the exception for limited networks. This was considered necessary due to the increasing application of the exception to large networks with high payment volumes and a broad spectrum of goods and services extending beyond the purpose of the exception, and thus leading to large payment volumes being outside of regulation and creating a disadvantage in competition for players in regulated markets. The new definition is intended to limit these risks.
Consequently the Commission has extensively revised the wording of the exception. It does no longer apply to services based on instruments, but requires the instruments to be “specific”. Furthermore, these instruments need to be “designed to address precise needs” and “used only in a limited way”. Apart from that the wording is reorganised, but is not changed substantially; i.e. there are still three exceptions available: (i) instruments to be used in the premises of the issuer, (ii) instruments to be used within a limited network of service providers and (iii) instruments to be used only to acquire a limited range of goods or services. The unpublished preliminary draft had intended to limit the exception to those instruments to be used in the premises of the issuer or chain store – explicitly not depending on geographic scope.
The previous practice in the application of the exception has proven difficult in Germany. The German Federal Financial Supervisory Authority (BaFin) had – contrary to other supervisory authorities, namely the British Financial Conduct Authority (FCA) or the French Autorité de contrôle prudential (ACP) – repeatedly attempted to geographically limit the application. Cards for local public transport could be issued without prior authorisation even when used for the purchase of travel supplies; petrol cards however only when issued by local petrol stations. Where the choice of products was particularly limited (i.e. one product: transport service), BaFin has shown willingness to accept a nationwide scope. Department store cards usable in multiple stores (e.g. Arcandor) belonging to one concern were considered to require authorisation by BaFin. Discount cards may thus only be issued without authorisation where their application is regionally limited.
France has taken a different approach: according to the French implementation laws, franchise chains are explicitly exempt from authorisation. The French Conseil d’Etat has applied this exception to the department store chain Printemps for a present list service for three affiliates and a cooperating department store which also included the collection of payments for the presents. The Conseil d’Etat did however require Printemps to secure the client moneys in a separate bank account.
The practice of the British FCA has been similarly wide.
Impact of the PSD2 proposal
The Commission is evidently attempting to limit the scope of the limited network exception. It is, however, not clear what impact the new limiting elements “specific instruments”, “addressing precise needs” and “to be used in a limited way” will have in the future. It is apparent that the Commission’s intention is to limit the universal usage of such instruments.
A department store card usable for payment for all goods in the department store itself as well as boutiques, ticket shops, shoe repair services etc. on the premises will probably not be covered by the exception in the future as it does not comply with the requirement of a limited use. Discount cards – issued by department store chains or franchise chains – could be seen to be limited adequately by “addressing precise needs”. The same will probably apply to petrol cards, payment instruments used in local public transport for the purchase of tickets and travel supplies as well as stadium cards. These instruments also address precise needs, namely the purchase of public local transport tickets and travel supplies or the consumption in the stadium, they are used in a limited way, i.e. in stations or the stadium, and they are specific instruments, as opposed to e.g. universal credit cards.
Still, the regulation appears somewhat questionable even in the new proposal. This is particularly illustrated by the comparison between a card issued by a large department store with nationwide presence for acceptance in its own stores and one issued by a chain of department stores (i.e. a group of companies). While the latter is likely to fall within the regulation, thus requiring compliance with antimoney laundering provisions, the former probably will not require authorisation – despite payment volumes potentially being similar.
A department store chain (with several subsidiaries) or franchise chain will thus only be able to issue such cards in cooperation with a bank or a payment institution. When applying for their own authorisation, such chains need to be aware of timescales: the application process can take up to 9 to 12 months. Additionally, such authorisation will impose costumer identification requirements under anti money laundering provisions.
The Commission’s declared aim of the new proposal, which is to secure client moneys in a better way, could also be reached by a different means. An interim solution could be considered whereby the aforementioned payment instruments would not fall within the full regulation, but still be subject to security requirements. The Printemps decision of the Conseil d’Etat could provide useful guidance for such compromise.